High costs for careless drafting of clauses

For the benefit of foreign investors, we would like to draw attention to a recent judgment in the case of Venture Global Engineering v Satyam Computer Services Ltd & Anr by the Supreme Court of India, which highlights the importance of careful drafting in relation to arbitration within the joint venture/shareholders agreement.

In the shareholders agreement between the parties, the relevant clauses were clauses 11.05 (b) and (c) which state: “(b) This agreement shall be construed in accordance with and governed by the laws of the State of Michigan, United States, without regard to the conflicts of law rules of such jurisdiction. Disputes between the parties that cannot be resolved via negotiations shall be submitted for final, binding arbitration to the London Court of Arbitration. (c) Notwithstanding anything to the contrary in this agreement, the shareholders shall at all times act in accordance with the Companies Act and other applicable Acts/Rules being in force, in India at any time.”

Disputes which arose between Satyam and Venture Global Engineering (VGE) were ultimately referred to the London Court of International Arbitration.

After the sole arbitrator passed his award, Satyam filed a petition to recognize and enforce the award before a US District Court in Michigan. VGE entered to defend this proceeding before the US court and objected to the enforcement of the award on the grounds that it was a violation of Indian laws and regulations, specifically the Foreign Exchange Management Act.

VGE also filed a suit in the City Civil Court in Secunderabad, seeking a declaration to set aside the award and a permanent injunction on the transfer of shares in the award. The district court passed an ad interim ex parte order of injunction restraining Satyam from seeking or effecting the transfer of shares either under the terms of the award or otherwise.

Satyam then filed an appeal before the High Court of Andhra Pradesh, which admitted the appeal and directed the interim suspension of the order of the district court, but made it clear that Satyam would not effect the transfer of shares until further orders.

In the trial proceedings, the plaint of VGE in the Supreme Court was rejected, and when the matter reached the high court, it dismissed the appeal stating that the award could not be challenged even if it were against public policy and in contravention of statutory provisions. Against the said order, VGE filed an appeal in the Supreme Court.

The Supreme Court held that the overriding clause 11.05(c) of the shareholders agreement could not be ignored. The non-obstante clause would override the entirety of the agreement including sub-clause (b); clause (c) would apply to the enforcement of the award, which declares that shareholders shall at all times act in accordance with the applicable act/rules in force in India at any time.

The enforcement would thus have to be in India as declared by this very section which overrides every other section in the shareholders agreement.

Satyam therefore violated the agreement between the parties by seeking the enforcement of the transfer of shares by approaching the district court in the US.

This legal position had not been properly referred to and considered by the trial court as well as the high court and accordingly, the orders passed by the city civil court and the high court were set aside.

This judgment illustrates that clause 11.05 (c) of the shareholders agreement was not properly drafted. The opening line in the clause should have been “Subject to section 11.05 (b)” instead of “Notwithstanding anything to the contrary in this agreement”.

As the clause stands, clause 11.05 (c) completely negated the provisions of the first sentence in clause 11.05 (b).

Another aspect of the judgment relates to the applicability of Part-I of the Arbitration & Conciliation Act, 1996, to international commercial arbitration.

Section 2 (2) of the act states: “This part shall apply where the place of arbitration is in India.” In an earlier judgment in Bhatia International v Bulk Trading SA & Anr 2002, the Supreme Court held that Part-I of the act would also apply to arbitrations held outside India unless that section was excluded, either expressly or implicitly, by agreement between the parties. In this case, the parties had not made any express agreement to exclude Part-I.

It would have been advisable therefore, for the parties to insert in clause 11.05 (b) that “It is agreed between the parties that Part-I of the act shall not apply to this arbitration held out of India.”

In this case, the Supreme Court did not decide on the merits of the claim but transferred the case to the appropriate court to decide whether the award could be upheld or set aside under section 34 of the act.

Krrishan Singhania is the managing partner of Singhania & Co, a Mumbai-based law firm. He has 20 years of experience in his firm’s practice areas which include arbitration, litigation and dispute resolution, aviation, and intellectual property.