Global arbitration gets a leg up with Tata-Docomo PDF Print E-mail
Monday, 01 May 2017 04:10
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Along with CruzCity-Unitech, Delhi High Court votes for honouring awards, seeks to redefine FEMA violation


Subject to the Supreme Court taking a contrary view, two judgments by the Delhi High Court have given a big leg up to global arbitration. The two cases, CruzCity-Unitech and Tata-DOCOMO, were different to the extent Unitech had argued against implementing the arbitration award in CruzCity’s favour while Tata wanted to honour the award that had gone in favour of DOCOMO. Both were, however, similar to the extent they involved Tata/Unitech giving repayment guarantees to their partners if certain performance pre-conditions were not met, both involved alleged FEMA violations and, to that extent, it was argued they could not be implemented in the country. In both judgments, the Tata one given fairly soon after the Unitech one, the Delhi High Court was clear that contractual obligations between parties were sacrosanct and had to be honoured, as did the global arbitration awards that flowed from these agreements. That decided, the court went about examining the impediments to honouring the awards—the two judgments come as a shot in the arm to the investor community which has always been worried about the implementation of contracts in India and even global arbitration awards that sought to reinforce the contracts. In the Unitech case, the judgment stated that even if FEMA was to be violated in implementing the award, this had to be honoured—Unitech could deal with the FEMA issue separately.

In both cases, contrary to the view that the guarantees contravened FEMA, different judges in the same court said they did not. While FEMA ruled out giving open-ended repayment guarantees, the court ruled in both cases, these were not open-ended. In the Unitech case, the deal involved paying a guaranteed amount—with a 15% return—only in case the project got delayed beyond a point; there was to be no guaranteed payment if the project took off on time or was a commercial failure thereafter. And, in the DOCOMO case, the guarantee—of getting back half the initial investment—was only to be invoked in case the project was unable to meet certain performance criteria and, in addition, the Tatas were unable to find a buyer for DOCOMO’s shares at even half their original value. Given this obvious fact, it is amazing that Unitech sought to invoke FEMA to not honour the award and, in the case of DOCOMO, it was unfortunate that both the government and RBI used FEMA to argue against the award. Moreover, since DOCOMO was asking for only half of its original investment to be refunded, it was always obvious this was not debt disguised as equity that RBI sought to proscribe through FEMA—in such a case, the guaranteed return was effectively an interest rate.

In the DOCOMO case, the court pointed out even more serious problems while dismissing RBI’s plea against allowing the award to be honoured. It pointed out that there was a damages-clause in the Tata-DOCOMO contract and it was this clause that the London arbitration court had used. In the event that Tata had to pay damages to DOCOMO, it is quite amazing that the central bank even thought it fit to intercede and argue that this violated FEMA provisions. While Unitech may challenge the verdict that has gone against it, it is to be hoped that RBI does not challenge the Tata verdict in order to reassure foreign investors that their interests are safe.



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