An award can be set aside if it shocks the conscience of the court. (Bombay High Court)

    Update by Shruti Mishra

Jackie Kukubhai Shroff v. Ratnam Sudesh Iyer

Court: Bombay High Court | Case Number: ARB.P. 167/2015 | Citation: Currently not available| Judge: SC Gupte  J| Date: 19 May 2020 | Available at: https://www.livelaw.in/pdf_upload/pdf_upload-375326.pdf 

 

A. THE BACKGROUND

  1. Jackie and Ratnam were shareholders in Atlas. Atlas was a shareholder in MSM. Dispute arose concerning the sale of Atlas’ shares in MSM

Jackie Shroff and Sudesh Iyer (a Singaporean citizen) were shareholders in a company called Atlas. Atlas partnered with the Sony group in 1995 and formed a joint venture company called Sony Entertainment Television India Pvt. Ltd., (to set up the Sony TV channel in India named SET). This company was later renamed Multi Screen Media Pvt. Ltd. (“MSM“).

Sudesh was associated with another company, Grandway, which had borrowed money from Standard Chartered Bank (“SCB”) and owed the bank USD 93 million.

Around 2002, it was decided to sell Atlas’ shares in MSM. During the discussions, Sudesh requested Jackie to sign a document authorising SCB to conduct the sale and keep USD 93 million out of the sale proceeds. Jackie refused since he had nothing to do with Grandway.

In 2010, Jackie got to know (through SCB’s lawyers) of a Placement Instruction of November 2005 which contained his signature. The instructions were concerning the loan between SCB and Grandway.[1]

  1. Criminal complaint by Jackie and a Settlement Deed alleging forgery by Sudesh

Jackie lodged a criminal complaint with the Economic Offices Wing (“EOW”) alleging that his signature was forged on the Placement Instruction. However, the matter was settled and a deed of settlement was drawn in January 2011 (“Settlement Deed”).

Jackie had several obligations under the deed[2]. Clause 3 of the deed also obligated Jackie not to make any communication or reference to the subject matter of the settlement deed.[3]

In return, a sum of USD 1,500,000 was kept in escrow to be released to Jackie upon closure or withdrawal of the EOW complaint. An additional amount of USD 2,000,000 was also held in escrow to be paid to Jackie once the sale of Atlas’s share in MSM was completed.

  1. Ayesha’s email calling Sudesh a “forger”, and arbitration proceedings on the basis that the emails breached the Settlement Deed

Jackie complied with all his obligations, and the first escrow cheque was released. However, before the release of the second tranche, Ayesha, wrote two emails to Sudesh copying a few other people.

She said: “… I must say, that once again you are not being straight with us, and I’m concerned about this”. This email alluded to the fact that under the settlement deed, Jackie was to receive regular updates concerning the sale of Atlas’ shares in MSM, but he had not been told about some events.

And: “… I have no wish to continue to fraternize with a forger”.

On the basis that these emails were in breach of the Settlement Deed, Sudesh applied for an injunction against the release of the second tranche. By parties’ consent, the court referred the matter to arbitration.

  1. The Award (international commercial)

The arbitrator passed an award in favour of Sudesh. He directed Jackie to return USD 1.5 Million and declared that USD 2,000,000 lying in escrow should instead be released in the favour of Sudesh. The arbitrator concluded that:

  • Ayesha was Jackie’s agent. The settlement deed forbade the kind of emails she wrote. Therefore, there was a breach of the deed.
  • The sum referred in the deed (USD 150,000 plus USD 200,000) was a sum named by the parties as liquidated damages for breach of the deed.
  • Sudesh, the party aggrieved by the breach, was entitled to receive the entire sum.

B. JACKIES’ CHALLENGE AND THE COURT’S DECISION

SC Gupte J began by noting that “each of the above conclusions is not just plainly wrong, but exhibits an unmitigated perversity and is shocking to the conscience of the court, to say the least ..”. He explained his reasons for every issue in turn.

  1. Ayesha’s emails in itself did not amount to a breach of Settlement Deed

First, he took up the “the so-called breach, without even considering whether [Jackie] was in any way responsible for it”. He meticulously analysed the Ayesha’s emails vis-à-vis Clause 3 and concluded that: –

  1. Clause 3 of the deed of settlement was a restriction on Jackie in complaining about the subject matter of the Settlement Deed , that is, the alleged forgery of placement instruction of 15 November 2005. Ayesha’s email complained about Sudesh’s subsequent conduct. There is no way the emails could be termed as a complaint about the deed’s subject matter.
  2. No reasonable man, duly instructed in the law, would say that that the emails complain about the placement instruction.
  3. The expression “forger” is by way of calling names; it may even be defamatory and actionable as such, but to say that it offends Clause 3 is neither possible nor reasonable.
  1. Ayesha was neither the agent not the authorised representative of Jackie

Second, Gupte J focused on Jackie’s involvement in the emails (assuming not admitting that they breached Clause 3). The arbitrator had concluded that Ayesha was Jackie’s authorised representative. He had relied on Ayesha’s involvement in the matter.[4] Gupte J said those materials did not establish that Ayesha had written the emails as his authorised representative.

He considered the law of agency under the Indian Contract Act, 1872 and observed that the provisions (Sections 182, 186, 187, 196 and 198) “give rise to a whole lot of questions, particularly in the light of the facts of our case”.[5]

He then examined each of the circumstances relied upon by the arbitrator. He concluded that none of them gave Ayesha an authority to deal with Sudesh “in pursuance of or in matters arising out of the settlement or involving others to whom the two subject emails were copied”.

He then addressed the issue of ratification. Despite knowledge of the emails, Jackie had not repudiated them, a fact which was considered by the arbitrator. Gupte J said  “the law does not put the burden of repudiation on the principal, when the agent acts beyond his authority. The law requires a positive act of ratification on his part so as to fasten him with the consequences of that act”.

  1. The sum named in the Settlement Deed was not by way of liquidated damages

 

The arbitrator’s had awarded damages of USD 3,500,000 to Sudesh treating that sum as liquidated damages for breach of the deed of settlement. Gupte J concluded that “there is a fundamental fallacy in this assessment and the award based thereon”. He explained them as follows:

  1. The sum of USD 3,500,000 was a consideration for the settlement, which was to come to Jackie against his reciprocal promises. Those promises were fulfilled by him in full.
  2. There was a termination clause in the Settlement Deed. If the deed terminated, Jackie was bound to return the amount of USD 1,500,000, if already paid, and would not have received the balance USD 2,000,000.
  3. But, this right can be availed of by the promisee only so long as the contract remains “executory” and not when the contract is “executed”. So long as Jackie was yet to perform any of his obligations, Sudesh retained his right to terminate. Jackie, however, performed all his obligations.
  4. No doubt, there was a further assurance under Clause 3 but the essence of this term was that the matter of Jackie’s original complaint was finally closed and not reopened. It could hardly be said this matter was reopened by Ayesha’s emails.
  5. The emails were, assuming that it could at all be called a breach, no fundamental breach or failure to perform an essential obligation or make good an essential representation or assurance, entitling Sudesh to treat the contract of settlement as having come to an end. Sudesh did not treat the deed of settlement as having come to an end nor did the arbitrator make his award on that footing.
  6. Treating the clause as a stipulation of liquidated damages is, thus, a fundamental error which goes to the root of the matter and undermines the whole basis of the award.
  7. Referring to Jackie’s pleadings the arbitrator had concluded that Jackie himself understood the claim for USD 3.5 million is by way of liquidated damages being the pre-determined /estimated amount to be paid on default. But, no fair or judiciously minded person could have concluded so from the pleadings.
  1. Even if the sum named was by way of liquidated damages, the grant of damages could not be sustained

Lastly, Gupte J said that even if the sum named was treated as a stipulation of liquidated damages, the award could not be sustained because:-

  1. The law on damages is that wherever it is possible to prove actual damage or loss, the party complaining of the breach must tender its proof. If such proof is impossible or difficult to produce, the aggrieved party must make out such case and after that, call upon the court to award the liquidated amount named in the contract as reasonable damages, and the court may do so in the exercise of its discretion. [citing to Punj Lloyd Ltd. IOT Infrastructure and Energy Services Ltd., Arbitration Petition No.1332 of 2012 decided on 14.12.2018 and Kailash Nath Associates v. DDA, (2015) 4 SCC 136].
  2. There is no proof here whatsoever that Sudesh suffered any loss or damage as a result of the alleged breach.
  3. It may, however, be possible for the tribunal, in the facts of the present case, to hold that the loss of reputation, which the two subject emails had caused, would be obvious and its actual measure could be said to be either incapable of proof or difficult to prove.
  4. But, it is too much to say that what the parties contemplated was that any such private communication would entail a loss of reputation and the measure of damages of USD 3,500,000 was a genuine pre-estimate made towards such loss of reputation.
  1. Travesty of justice summarised

Gupte J noted, “when we see the bizarre outcome it has brought about in the matter, the extent of the fallacy can be realised better”. He then very eloquently summited up the matter. Sudesh got practically everything that he wanted from Jackie (see fn number 2). And after all, that was done, Sudesh even got back his entire money of USD 3,500,000 in the award because Ayesha called him a ‘forger’ in a private communication made to a couple of acquaintances or associates.

Gupte J asked rhetorically, can such award be ever sustained as something a fair and judiciously minded person could have made? He said, “in my humble opinion, it is the very opposite of justice; it would be a travesty of justice to uphold such award”.

  1. New law or old law? Doesn’t matter

Sudesh had referred to Ssangyong Construction and Engineering Co. Ltd. vs. National Highways Authority of India to argue that post-2015 Amendments “only grounds left for the interference with arbitral awards by courts are those comprised within the fundamental policy of Indian law”, and the ground of patent illegality is not available. Gupte J did not delve into the question of applicability of 2015 Amendments. He said that award both rendered and challenged under the unamended Act, but he also added that he was setting aside the award “on the grounds that it is an impossible award; it is an award based on conclusions which no fair or judiciously minded person could have arrived at; and it shocks the conscience of the court”.

Each of these grounds, he said, bears on the fundamental policy of Indian law in making of an award[6].

 

[1] A placement instruction is an instruction for conducting the sale of shares. No further details are set out in the judgement concerning the placement instruction as to what it exactly said, and how it resurfaced in 2010.

[2] Withdrawing the EOW complaint; ratifying the Placement Instruction; signing an irrevocable power of attorney for sale of shares of Atlas; releasing all claims against Sudesh, Atlas, Grandway etc; resigning from the board of Directors of Atlas and similar obligations.

[3] Jackie had written several letters to people and clause 3 required that in future Jackie shall not write “any letter or communication or complain to any police authority/ies and/or any other judicial, quasi-judicial authority or statutory authority or any person or entity complaining about the subject matter of the present deed”. (emphasis added)

[4] Making enquiries about the transfer of shares; attending a shareholders meeting as an invitee, and also a board meeting, both in 2010; writing an email saying “we should try to get whatever we possibly can at this point”; the draft of the settlement deed was sent to her not Jackie; the chartered accountant and the advocates of Jackie dealing with her rather than Jackie. 

[5] For instance, “Was the Petitioner’s wife acting for him in the particular act, namely, addressing of the two subject mails, or was she generally representing him in his dealings with the Respondent or involving the others to whom the emails were copied? Was her authority to do so express or was it to be implied from the circumstances of the case (including words spoken or written by the Petitioner)? Was calling the Respondent a “forger”, which may be a criminal act involving an offence under Section 499 of IPC, a matter within or without her authority? If without her authority, did the Petitioner ratify the act? Did he do so expressly or by implication? If he might be said to have ratified it, did he have the full knowledge so as to make the ratification valid?”. These and other pertinent questions Gupte J noted: “other pertinent questions either appear to have escaped the arbitrator’s attention altogether or to have been considered by him only in an unacceptably tentative manner”.

[6] This is a slightly erroneous application of the categories. An award which shocks the conscience of the court is included within the remit of the ground “most basic notions of morality or justice”. [see paragraph 34 of Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 read with paragraphs 18 and 27 of Associate Builders v. DDA, (2015) 3 SCC 49].

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Categories: Agent |  Fundamental policy of Indian law |  Liquidated damages |  Most basic notions of morality and justice |  Patent Illegality |  Public Policy of India |  Section 34 |  Setting aside arbitral award  

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