Cruz City-Unitech case may help Tata-Docomo PDF Print E-mail
Wednesday, 19 April 2017 04:44
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Delhi High Court rules violation of FEMA no reason to overturn London arbitral award against Unitech

The central bank’s position on Tata-DOCOMO, it is well known, is that even if the Tata group had agreed to buy back DOCOMO’s investment at half the investment price if their joint venture did not meet agreed performance standards, the Indian FEMA law proscribes this—so when the London arbitration award went against the Tatas and said the group had to fulfil its contractual obligations, RBI told the Delhi High Court that the law did not allow this. While the court is yet to rule on the matter, a recent judgment involving real estate firm Unitech, as BloombergQuint reported, offers some hope.

In this case, Unitech had entered into an agreement with Cruz City 1 Mauritius Holdings to invest in a project and, as per the contract, if this got delayed beyond a point, Unitech would reimburse Cruz so that it earned a 15% return. When the project got delayed and Unitech didn’t honour the contract, Cruz City went in for arbitration and the London court ruled in its favour—a big difference is that, in the Tata case, the company was keen to pay DOCOMO but was prevented from doing so by RBI, which is when the Japanese firm went in for arbitration. Indeed, while Tata used the London arbitration award in favour of DOCOMO to, once again, petition RBI to allow it to make the payment, in Unitech’s case, the company argued the initial agreement violated Indian law and so the London arbitration award must not be enforced. The Delhi High Court has relooked the RBI rules and come to the conclusion that Unitech simply has to honour the award. Since India is a signatory to global arbitration conventions, the judgment says, the first attempt has to be to ensure the award is honoured. It then goes on to say that if an issue has been litigated already in the arbitration court, it cannot be re-litigated under the pretext of deciding whether the award can be enforced. So, Delhi high court says, Unitech should have brought up the issue of the Indian law in the London court. If Unitech didn’t, the court agrees with the opposing counsel, it was because this would have signalled its dishonest intentions—after all, why did it sign the agreement with Cruz if it was illegal?—and ensured the award was more unfavourable. It then argues that Unitech must honour the award even if this means it is, simultaneously, penalised for violating FEMA.

If this sounds like double jeopardy for Unitech, Delhi High Court argues that, unlike FERA, FEMA was legislated at a time when India didn’t face a forex crunch and so the law is less restrictive—it allows a Unitech to apply for RBI permission to pay and, also, the rules allow a company to issue guarantees in relation to its business; the Cruz deal was nothing but this. As for RBI rules proscribing assured returns, Delhi High Court says the Unitech-Cruz deal wasn’t an open-ended guarantee—it was to be invoked only if the project didn’t take off and, to that extent, wasn’t even covered by the RBI prohibition. While it is not clear how the court will rule in the Tata-DOCOMO matter, its interpretation should make it easier for RBI/government to reexamine its stand and give Tata permission to pay—in this case too, the guarantee was only to be used if the JV didn’t perform, it was not an underhand way to disguise debt as equity by giving it an assured return.


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