The Corporate & Commercial Law Society Blog, HNLU

Category: Contract Law

  • In Dissent Lies the Truth: A Critical Look at the Court’s Power to Modify an Arbitral Award

    In Dissent Lies the Truth: A Critical Look at the Court’s Power to Modify an Arbitral Award

    BY ANMOL TYAGI, THIRD-YEAR STUDENT AT RGNUL, PATIALA.

    INTRODUCTION

    With a 4:1 majority decision in Gayatri Balasamy vs. M/S ISG Novasoft Technologies Ltd. (2025), (‘Balasamy’) the Supreme Court fundamentally altered India’s arbitration landscape by recognizing courts’ power to modify arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (‘the Act’) to modify an arbitral award. This watershed judgment resolves a decade-long jurisprudential conflict sparked by the Court’s 2021 M. Hakeem ruling, which categorically denied modification powers. By permitting limited judicial corrections from computational errors to compensation adjustments, the majority attempts to balance arbitration’s finality with the practical need for efficient justice. However, Justice K.V. Viswanathan’s dissent warns that this “judicial innovation” risks reviving the very interventionist culture the 1996 Act sought to eradicate. This article, firstly, delves into the controversy and analyses the ratio in its pragmatic context; secondly, it analyses its implications and advocates for how what should have been a unanimous verdict is penned down as a dissenting opinion; and lastly, it tries to explore a way forward.

    THE MAJORITY ON THE POWER TO MODIFY

    The Apex Court, through judicial precedents, proffered minimal judicial intervention in arbitral awards, not extending to correction of errors of fact, reconsideration of costs, or engagement in the review of the arbitral awards.

    For modification of awards, the court held that a modification does not necessarily entail the examination of the merits of the case, thereby allowing limited power of modification within the confines of Section 34 without a merit-based evaluation under certain circumstances including; where severing invalid from the valid, correcting clerical, computational and typographical error, certain post award interest and under Article 142 of the Constitution of India, where it is required and necessary to end litigation.  Progressively, such a decision was held to prevent the hardship of re-filing an arbitration and a manifestation of the objects of the Act.

    To that end, the majority in Balasamy invoked the maxim omne majus continet in se minus (“the greater includes the lesser”) to justify modification as incidental to the power to set aside awards. This reasoning hinges on Section 34(2)(a)(iv), which permits partial annulment if an award exceeds the scope of submission. By framing severability as statutory intent, the Court positioned modification as a natural extension of existing powers rather than a novel judicial innovation.

    For severability of awards, the court held that the greater power to set aside an award under Section 34 also includes the lesser power to sever the invalid portion of an award from the valid portion under Section 34(2)(a)(iv) of the Act, whenever they are legally and practically separable. The court differentiated the power conferred under section 34(4) from the limited power to modify on the ground of flexibility. The court upheld the idea of remittal under Section 34(4) as a remedial mechanism enabling the arbitral tribunal to correct curable defects in the award upon court adjournment. On the other hand, modification involves the court directly changing the award, which is limited and requires certainty.

    ANALYSIS OF THE MAJORITY OPINION

    While the court may have tried to weave the principle of equity and justice without offending the judicial fabric of Section 34 and the legislative intent of the Act, certain shortcomings are still exposed. Justice K.V. Vishwanathan’s dissent helps explore these shortcomings.

    i) Theoretical tensions: Party Autonomy vs. Judicial Paternalism

    Justice K.V. Vishwanathan’s dissent concurs with the idea that the power to modify subsumes the power to set aside under section 34 of the Act is fallacious, since the power to set aside an arbitral award does not inherently include the power to modify it because the two functions serve distinct purposes within the arbitration framework. Similar was the rationale of the court in M. Hakeem. Setting aside an award under Section 34 of the Arbitration and Conciliation Act, 1996, is a corrective measure that allows courts to annul an award if it violates fundamental legal principles, such as public policy or procedural fairness. In contrast, modification implies an active intervention where the court alters the substance of the award, which contradicts the principle of minimal judicial interference in arbitration, as in the Mcdermott International Case.

    The proposition of limited modification of an award in the interest of expeditious dispute resolution may seem attractive at first instance, especially for commercial arbitrations involving public law, where the courts may modify the award to enhance compensation for the land acquisition. However, it points to vital concerns regarding its applicability by the courts in general and arguably, the power of remand under section 34(4), though different from the modification powers, acts as a safety valve and serves a similar purpose as it arrays wide powers upon the arbitral tribunal to modify an arbitral award for an effective enforceability.

    Theoretically, arbitration is a voluntary act of dispute resolution through a third party, different from courts and its legal procedures.  While the judgment provides for modification powers to remove the ‘invalid’ from the ‘valid’ and enforce complete justice under Article 142 of the Constitution, it not only raises concerns as to its applicability and limitation in determining what constitutes ‘invalid’ or complete justice, but also strikes at the core of arbitration. It does so by contradicting the fundamental characteristic and statutory intent of arbitration, i.e., the finality of the award through minimal judicial intervention, as was held in Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996, and the Indian Stamp Act, 1899.

    Justice K.V. Viswanathan’s dissent highlights a critical tension: the 1996 Act deliberately omitted modification powers present in its predecessor, the 1940 Arbitration Act. The legislature’s conscious choice to limit courts to setting aside or remitting awards reflects a policy decision to prioritize finality over granular corrections. Noting that the Parliament intentionally omitted the ‘powers to modify’ from the repealed Arbitration Act, 1940, the majority’s interpretation risks judicial overreach by reading into the Act what the Parliament excluded, a point underscored by the dissent’s warning that using Article 142 to modify awards subverts legislative authority.

    To that end, arbitration’s legitimacy stems from its contractual nature. By allowing courts to “improve” awards, Balasamy subtly shifts arbitration from a party-driven process to one subject to judicial paternalism. This contravenes the kompetenz-kompetenz principle, which reserves jurisdictional decisions for tribunals. Notably, the UNCITRAL Model Law emphasizes tribunal autonomy in rectifying awards (Article 33), a responsibility now partially appropriated by Indian courts

    ii. Impact on Arbitral decision making

    The threat of post-hoc judicial adjustments may incentivize arbitrators to over-explain conclusions or avoid innovative remedies. For instance, tribunals awarding compensation in land acquisition cases might default to conservative valuations to pre-empt judicial reduction. Conversely, the power to correct clerical errors (e.g., miscalculated interest rates) could save parties from unnecessary remands.

    iii. Enforcement Challenges

    While the Court envisions modification as a time-saving measure, practical realities suggest otherwise. District courts lacking commercial arbitration expertise may struggle to apply the “severability” test, leading to inconsistent rulings and appeals. The Madras High Court’s conflicting orders in Balasamy (first increasing compensation, then slashing it) illustrate how modification powers can prolong litigation.

    Arguably, with the possibility of modification, the judgment practically creates uncertainty and opens Pandora’s box, thereby exposing every arbitration being challenged under some pretext or other. The effect of the judgment might extend to various PSUs, companies, and individuals opting out of arbitration, fearing the non-finality of the award.

    The majority’s reliance on Article 142 to justify modifications creates a constitutional paradox.

    While the provision gives the Supreme Court the power to do “complete justice,” applying it to an arbitral mechanism of private dispute settlement blurs the line between public law exceptionalism and the enforcement of private contracts, which arguably would render Article 142 a “universal fix” for disenchanted arbitral awards.

    For land acquisition cases and corporate disputes both, this poses a paradox: courts acquire efficiency tools at the risk of sacrificing arbitration’s fundamental promise of expert-driven finality. As Justice Viswanathan warns, the distinction between “severance” and appellate review remains precariously thin. With ₹1.3 trillion in ongoing arbitrations at stake, Balasamy’s real test lies in whether lower courts use this power with the “great caution” prescribed inadvertently to revive India’s reputation for boundless arbitration litigation

    COMPARITIVE INTERNATIONAL PERSPECTIVES

    Leading arbitration hubs strictly reserve judicial modification. Singapore’s International Arbitration Act only allows setting aside on grounds of procedure and not on a substantive basis. The UK Arbitration Act 1996 can correct only clerical errors or clarifications (Section 57), whereas Hong Kong’s 2024 rules authorize tribunals-not courts-to correct awards. India’s new “limited modification” system varies by allowing courts to modify compensation values and interest rates, which amounts to re-introducing appellate-style review.

    The UNCITRAL Model Law that influenced the Act limits courts to setting aside awards (Article 34). More than 30 Model Law jurisdictions, such as Germany and Canada, allow modifications by way of tailormade legislative provisions. The Balasamy judgment establishes a hybrid model where there is judicial modification without an express statutory authority, raising concerns in enforcement under the New York Convention. As Gary Born observes, effective jurisdictions identify procedural predictability as a core value threatened by unfettered judicial discretion.

    THE WAY FORWARD: ENSURING EQUILIBRIUM

    The decision permitting limited alteration of the arbitral award represents a paradigm shift in the jurisprudence. The decision demonstrates a genuine effort to balance efficiency with fairness. However, its success depends on responsible judicial application. In the absence of strict adherence to the “limited circumstances” paradigm, India stands the risk of undermining arbitration’s essential strengths: speed, finality, and autonomy. As Justice Viswanathan warned, the distinction between correction and appellate review remains hair-thin. What is relevant here is how the courts apply the new interpretation to amend arbitral awards. Objectively, the courts have to be careful not to exercise the powers of amendment in exceptional situations to that extent, refraining from any impact on the finality of the arbitral award as well as the faith of the citizenry and other institutions within it.

    To avoid abuse, parliament has to enact modification grounds by amending Section 34, in line with Section 57 of the UK Arbitration Act, specifically allowing for corrections confined to reasons specified, promoting clarity and accountability. The Supreme Court would need to direct guidelines to the lower courts for arbitral award modification only when the errors are patent and indisputable, refrain from re-assessing evidence or re-iterating legal principles, and give preference to remission to tribunals under Section 34(4) where possible.

  • Extra Cover: The Case for Regulating Sports Agents in Cricket

    Extra Cover: The Case for Regulating Sports Agents in Cricket

    BY SIMONE AVINASH VAIDYA, SECOND-YEAR STUDENT AT MNLU, MUMBAI

    Introduction

    The past two decades have witnessed an unprecedented boom in the commercialisation and commodification of Indian sport. An athlete’s horizon is no longer limited to the playing field, with production sets, brand shoots and promotional appearances routinely featuring as aspects of their professional obligations. It is common for A-list athletes to engage the services of Sports Agents or Agencies to manage their commercial ventures, and it is becoming increasingly prominent for upcoming sportspersons to sign with agents for this purpose. This practice has especially permeated the cricket pitch. This agreement comprises endorsements, team affiliations, compliance with regulatory guidelines and other brand ventures, with the agent essentially becoming the athlete’s manager.

    Indian sports are largely unregulated by the State in the absence of a comprehensive sports law and agency contracts in cricket are especially ad-hoc in their functioning. While other jurisdictions or authorities generally have codified laws or regulations pertaining to sports agents, India and the Board of Control for Cricket in India (‘BCCI’) do not prescribe comprehensive or even adequate guidelines for the same. Documentation and registration are the first steps in such regulation, and the BCCI has yet to implement even an accreditation system.

    This article seeks to establish the case for the regulation of agency contracts in cricket. While the rationale is applicable to all sports in India, the researcher focuses on the cricket field, shedding light on the virtual free hand given to player agents and managers. This article is structured along the same lines as Aditya Sondhi’s 2010 paper arguing the need for cricket legislation.

    Prognosis

    In the context of the dearth of laws and regulations for such agency relations, the Indian Contract Act, 1872 (‘ICA’) serves as the governing statute. The enforceability of sports agency contracts flows from Chapters I, II and X of the ICA. The foundation of any sports agency contract is the agency-principal relationship, which is governed by Chapter X of the ICA, starting with Section 182. The multi-billion dollar valuation of the industry amplifies the high stakes as cricket agency contracts operate in a league of their own.  The ICA is a general law failing to meet the unique needs of these situations. It is insufficient to address every aspect of cricket agency contracts, and there are multiple reasons for the same.

    Firstly, the fervour around cricket in India is unparalleled, heightening financial and emotional stakes. Given this massive commercial landscape, sports agents wield significant power in managing business deals. With such high stakes, the potential for conflicts of interest becomes a serious concern. Agents often negotiate across multiple interests, including franchises, sponsors, and the athlete’s commercial rights, which may not always align with the player’s best interests. Cricketer Kamran Khan’s story garnered media attention, with reports of his agent demanding 25% of his IPL contract money. This was not the only instance of such exploitative practices coming to light- Zaheer Khan’s legal dispute with Percept D’Markr, a talent management agency, was decided by the Supreme Court in 2006. It was held that the agency’s Right of First Refusal clause was void on the grounds of restraint of trade, under Section 27 of the ICA.

    Similarly, there is a substantial risk of loss and hardship caused due to category locking. This refers to the practice of restricting an athlete’s ability to endorse products from competitors of their existing sponsors. While this practice is common in sports contracts, it can often lead to an unfair restriction on the athlete’s freedom to choose endorsements. This risk is prevalent in the light of an agent’s often unbridled authority to negotiate and enter into brand deals on behalf of the athlete.

    Secondly, the athlete’s personality rights stand the risk of being misused. Personality rights refer to the right of a person to control the commercial use of their identity, including their name, image, likeness, and other personal attributes In India, while there is no dedicated legislation governing personality rights, athletes increasingly face challenges in protecting these rights from unauthorized commercial exploitation. Sports agencies have substantial power in this regard since they facilitate such agreements and transactions.

    Thirdly, the Mudgal Committee, constituted by the Supreme Court after the 2013 IPL Fixing Scandal, acknowledged the nefarious role played by some agents in its 2014 Report. Although the Report didn’t comprise an in-depth investigation of the same, it addressed the unethical conduct of these agents, and how they often serve as the bridge between the athlete and the bookie. This concern was also reiterated in the Lodha Committee Report, wherein the unscrupulous backgrounds of player agents were brought into question. The agent shares a fiduciary relationship with the athlete and is in a position of power while influencing them. This poses the risk of athletes being pressured by agents to engage in illicit and illegal activities, with younger or less experienced sportspersons being especially vulnerable to such influences.

    Furthermore, the culture of nepotism, non-accountability and excessive discretion in the cricket industry makes athletes reluctant to approach the courts for the redressal of their rights. The observation of favouritism at multiple levels of the cricket set-up also exacerbates the disinclination of athletes to speak up against potentially powerful sports agencies. In light of these varied considerations and interwoven complexities, it is evident that unregulated sports agencies are likely to become the malaise of the commercial world of cricket. The ICA is insufficient to meet the needs of such a uniquely dynamic landscape, and there is a pressing need to introduce- legislation for sports law at large, and rules for agency contracts in particular.

    Global Best Practices- France and the US

    France and the United States have enacted statutory regulations for sports agents, recognizing the need to effectively respond to the various challenges and exploitative practices in the industry.

    France has enacted the Code du Sport for this purpose. Sports agents in France must be licensed by the relevant sports federation, such as the Fédération Française de Football (‘FFF’) for football agents. To obtain a license, agents must meet educational and professional criteria, pass an exam, and adhere to ethical standards set by the federations. One of the key features of French sports law is its focus on transparency and athlete protection. Agents are required to have a written contract with the athlete, which must clearly outline their duties and the financial terms. The Code du Sport also imposes limits on the commissions agents can charge, typically capping them at a percentage of the athlete’s earnings. This prevents exploitation and ensures that athletes are not overcharged for agent services. Additionally, French law includes strict provisions on conflicts of interest and agent conduct. Agents cannot represent conflicting parties in the same deal, such as both a player and a club. Violations of these regulations can result in penalties, including fines, suspension, or revocation of an agent’s license.

    In the US, the Sports Agent Responsibility and Trust Act of 2004 (‘SPARTA’) and the Uniform Athlete Agents Act of 2015 (‘UAAA’) are in force to protect the duties of student-athletes signing with sports agents, in addition to the various state-specific laws. SPARTA delineates the duties of the agent, revolving around truthfulness and transparency. This creates an additional layer of obligations for sports agents, with unfair or deceptive acts being treated as violations of the Federal Trade Commission Act, subject to civil penalties. The UAAA in turn, is a model state law that provides for standardization, registration and certification of agents representing student-athletes. It also mandates express written contracts which include specific clauses, as stipulated under S. 10. Violation of the UAAA results in civil, as well as criminal penalties. However, it is to be noted that the SPARTA and UAAA are solely applicable to student-athletes, thereby excluding other professionals from its purview. There is no doubt that the SPARTA and UAAA suffer from several deficiencies, including their limited applicability. However, it cannot be said that this weakens the case for the regulation of cricket agents in India, which is negligible at present- the flaws in the application of a certain law cannot overshadow the need for regulation in another jurisdiction. 

    The Way Forward and the BCCI’s Prerogative

    Since the need for separate regulation of cricket agents has been clearly established, it is important to devise an effective and sound implementation system. Such a structure must account for accreditation, conflict of interest complications, transparency and ethical conduct. Currently, the BCCI is recognised as a private body registered under the Tamil Nadu Societies Registration Act. In BCCI v. Cricket Association of Bihar, the Supreme Court asserted that while the BCCI might be a private body, it discharges public functions with the tacit recognition of the State. The Court also observed that it possesses “complete sway over the game of cricket”, making it incumbent upon the BCCI to operate in the interests of justice and fair play. Therefore, the onus of introducing such regulations is on the Board itself due to its monopoly status in the field and Court-imposed responsibility of transparency and probity. These rules must be in the best interests of cricketers and must include several core regulatory measures. 

    Firstly, agents should be accredited as per the Lodha Report. It would not be unsuitable to prescribe certain qualifications for such agents and require them to pass licensing examinations. Though the BCCI announced an agent accreditation scheme in 2014 to regulate agents in cricket, there is little evidence of its implementation. According to news reports, the BCCI has failed to enforce the scheme effectively, and there is no information available about its actual enforcement, leaving cricketers vulnerable to unregulated agents. A major concern in the sports agent industry is the risk of conflicts of interest. Rules must explicitly prohibit agents from representing multiple parties with conflicting interests in the same transaction. A mandatory code of ethics should govern all accredited sports agents.

    Secondly, incorporating the American and French mandates of express written contracts is also a viable solution to ensure standardisation. The role played by agents in Indian cricket is vastly different from that of American or French agents since negotiations with clubs or franchises generally do not feature as a part of the agent’s functions in Indian cricket. Such global practices are effective when they are adapted to Indian standards. Agency contracts should clearly outline the duties, services, duration and financial terms, including commission rates. This provision would protect both athletes and agents by providing a legal framework for disputes. 

    Thirdly, all financial dealings between agents and athletes should be documented and subject to regular audits by an independent authority such as a Committee constituted by the BCCI for this purpose. A European Commission Report on Sports Agents identified the pressing need to ensure transparency in all financial flows between athletes and their agents. The link between financial crimes such as money laundering, and sports leagues has also been well-established, therefore exacerbating the threat of mismanagement and unscrupulous conduct. External auditing is a suitable mechanism to deter such activities, and this has been pinpointed in a 2021 study that incorporated a law and economics approach. 

    By making such agreements compulsory, athletes, especially young or inexperienced ones, will have a clear understanding of their relationships with agents and avoid exploitation or ambiguous commitments. To ensure compliance, the law must incorporate strict penalties for violations by sports agents, including fines, suspension, and license revocation. The BCCI must also constitute a forum for the investigation and redressal of such complaints and disputes. Encouraging Alternate Dispute Resolution mechanisms is a more athlete-friendly measure, considering the fiduciary relationship between the principal and agent, as well as the surrounding pressures of the cricket world. 

    Conclusion

    The current reliance on the ICA is insufficient to address the complex and high-stakes nature of agency contracts in cricket. As sports agents wield significant power in managing an athlete’s endorsements, sponsorships, and other commercial ventures, the absence of regulatory safeguards leaves players vulnerable to exploitation, unfair contractual terms, and conflicts of interest. 

    Through proactive regulation, it is possible to safeguard the interests of its cricketers, promote ethical conduct among agents, and elevate the professionalism of sports management. This, in turn, will foster a fairer, more accountable system that protects the rights and careers of athletes, ultimately ensuring that the business of cricket aligns with the values of integrity and fairness.

  • Obsolescing Bargain: Do Ex-Ante Provisions Curb Opportunism In Public-Private Partnerships?

    Obsolescing Bargain: Do Ex-Ante Provisions Curb Opportunism In Public-Private Partnerships?

    BY SATCHITH SUBRAMANYAM, A FOURTH-YEAR STUDENT AT GNLU, GANDHINAGAR

    Introduction

    The primary objective of procurement is to source goods or services, at the right quality and price, at the right time. While ‘public procurement’ refers to broader exercise, public-private partnerships (‘PPP’) projects are a means to public procurement. The Government of India views this exercise as entering into a procurement function, as opposed to perceiving it as a mere partnership. This is apparent from the definition of PPP under the Public Procurement Bill, 2012. India is one of the leading markets for PPP projects. Nevertheless, data suggests that out of 1500 projects, that commenced two decades ago, only 48% of them are operational. Even those projects which are operational have left private developers in disdain, due to the lack of adequate financial returns resulting in reduced participation.

    The legal framework for such projects has been streamlined by the Department of Economic Affairs in the form of appraisal and approval mechanisms, which consist of separate guidelines to be followed. The responsibility to oversee such compliance is with the Public-Private Partnership Appraisal Committee (‘PPPAC’). Further, Concession Agreements (‘CA’) are sector-specific and define all the aspects related to the partnership, such as ownership, responsibilities, risk allocation, and contract management. It is essentially a standardized form of the concession agreement between a Government Contracting Authority (‘GCA’) and a private entity (‘Concessionaire’), wherein the GCA awards certain rights to the concessionaire for the implementation and execution of public services. For instance, an agreement is entered into between the National Highway Authority of India and a private operator. In the said agreement certain rights are granted and vested in the private entity for undertaking the operation, maintenance & management of a project highway.

    PPP contracts are intrinsically subject to reassessment, which may be attributed to the long duration of such contracts, spanning years. Decision-makers cannot foresee all the risks. Hence, a critical feature of a PPP transaction is the transfer of specified risks from the GCA to the concessionaire. From the standpoint of the government, this is one of the key methods for obtaining value for money in a PPP transaction by having the private sector take on some risks that would often be borne by the government in a conventional public works project. On the other hand, from the perspective of the private sector, the concessionaire is willing to accept various risks and earn profits by managing them efficiently.

    The downside of incompleteness in concession contracts is that it promotes opportunistic behavior on the part of the contracting parties who seek to interpret this vagueness to their advantage. It ensues in conflicting interpretations, with each party promoting its own agenda. The typical solution to this issue is renegotiation of the contract. It refers to the process of making modifications to the original contract, in order to address unforeseen events, which often entails significant changes to the core concession clauses. Almost 40% of the PPP projects in India are renegotiated. Nevertheless, there is no established legal or institutional framework which governs such renegotiation.

    One central issue associated with the renegotiation of concession contracts is that it can lead to retrospective distortion of the competitive tender procedure. The key attribute of awarding contracts through competitive tenders is that it provides the potential concessionaires with a fair chance to compete for the contract. Moreover, it also ensures that the GCA selects the most qualified concessionaire based on a competitive price while maintaining high standards of performance.

    Post renegotiation, it is doubtful whether the concessionaire chosen for the project delivers the best cost-effective option. This is due to the fact that the projects that were originally tendered and those that were renegotiated are literally two separate projects. Further, the GCA has to be cautious of opportunistic renegotiation initiated by the concessionaire. In the same vein, opportunistic renegotiation on the part of the GCA will not just jeopardize its relationship with the concessionaire but will also serve to be detrimental to the long-term interest of the private sector.

    Obsolescing Bargaining Theory-

    Obsolescing Bargain refers to a private player’s gradual loss in power of negotiation in PPP contracts. This phenomenon results in government opportunism, giving the government an upper hand over the concessionaire. The theory posits that the negotiating leverage shifts during the course of the project. At first, the government offers enticing terms because it needs private investors. Once the project is up and running, the investors need a long amortization period to realize their promised return while the government has already acquired the necessary resources, making the initial agreement no longer relevant. 

    Private entities see a lot of commercial & regulatory risks in infrastructure investment. As compensation for bearing these risks, they expect high returns, which the government is willing to concede ex-ante. Nevertheless, once investors sunk their capital, created jobs, utilized technology, and produced output, their bargaining power was reduced, and the private returns that the government thought were reasonable ex-ante, seemed excessive and superfluous ex-post. Projects like the GMR Ambala Chandigarh Expressway and L&T Halol Shamlaji Tollway, are quintessential to this aspect. In these projects, the issue was attributed to the unrealistic traffic projections before the agreement was entered into. During the operation stage there was lower-than-expected traffic growth which resulted in reduced toll fee collection and, hence lower returns.  

    Indian Contract Law-

    The contractual concept of undue influence, economic duress and the judicial dicta on renegotiation of contracts in general, are against the government engaging in such behavior. In, Atlas Express Ltd. v. Kafco ltd, the Queen’s bench held that, where a party to a contract was under economic pressure to the extent that he was compelled by the other party to renegotiate the terms of the contract to his detriment, his apparent acquiescence to the new terms was vitiated by economic duress. Further, in Mahavir Singh v. State of Haryana, there was a disparity in the bargaining power of the petitioner and the GCA. The court underscored that in such circumstances the private entities are expected to sign on dotted lines, which amounted to renegotiation vitiated by economic duress.

    In tune to these judicial pronouncements, a committee was constituted to formulate a policy on efficiently regulating renegotiation. 

    The Kelkar Committee-

    To curb phenomena such as obsolescing bargaining among others, the government formed the Kelkar committee. The committee report gave many recommendations to revitalize the PPP model in India. Among these, the committee recommendations on obsolescing bargaining was one based on incorporating safeguards in favor of the concessionaire in the CA. The key recommendation was the inclusion of ex-ante provisions in the renegotiation framework. The committee made a case for the ab initio inclusion of such contractual safeguards to ensure a certain level of bargaining power during the renegotiation of issues and prevent jeopardizing the sanctity of the bid award long after the project is finished. Further, the report posits the ex-ante establishment of critical assumptions, and only if the actuals deviate significantly from these assumptions can the renegotiation of the terms of the original contract be allowed.

    One critical prerequisite for the implementation of these recommendations is identifying the possible contingencies while drafting the CA. This usually involves front-end transaction costs which are the costs incurred on identifying possible future events and the efficient allocation of obligations, which are usually high. Concessionaires may protect themselves from these risks through such ex-ante contractual designs. Nevertheless, a major fallout of such measures is that they fail to redress the fundamental incentive for the government to renege. Additionally, a government that is motivated to renege may concoct justifications or look for legal loopholes to do so. Moreover, the government may renege even in cases where a scenario transpires that was anticipated in the original CA. For instance, the government reneges when the country witnesses a macroeconomic shock. Indeed, in such situations, the government indulges in “wholesale reneging” (across several agreements).

    It is understandable that ex-ante provisions in the context of renegotiation attempt to incorporate the flexibility required to promote efficiency. Nevertheless, the likelihood of renegotiation may jeopardize ex-ante efficiency. Consider a scenario where the parties to a CA renegotiate it to ensure effective performance. To do this, they must come to a new understanding of how to divide the surplus brought about by their trade. This surplus is inclusive of the gains from any particular investments, and the concessionaire who makes the investment will already have incurred the associated costs. Therefore non-investors (GCA) will benefit from a larger amount of the gains of investment, but will not incur a larger portion of the investment’s sunk costs (incurred on the investment which cannot be recovered) by participating in the redistribution of the surplus. Hence ex-ante efficiency is compromised since the initial investment is discouraged by the possibility of being “held-up” during renegotiation.

    Therefore, contract design can go some distance in safeguarding the concessionaire from the phenomenon of obsolescing bargaining, but only to a certain extent. At best they serve as an inception for renegotiation in cases where the GCA reneges. Therefore a more effective protection is to be found.

    Conclusion

    The issue of obsolescing bargaining yields a very peculiar state of affairs. While precluding government reneging by means of contract design has failed to hold up well in practice, it suggests that concessionaires can be safeguarded by building a business strategy that ensures equity in bargaining relations. The concessionaire must deliver the project benefits gradually over time. For instance, the concessionaires may intend to develop a project in stages, despite compromising on the economies of scale. The phased transfer of investment and technology will maintain the bargaining power with the GCA. Such a measure will not just protect the concessionaire from unforeseen changes beyond his control, but will also make sure that the recourse to renegotiation is not misused.

  • Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute 

    Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute 

    By Manan Mondal, An SLS, HYDERABAD law graduate

    In general a jurisdiction clause dictates the forum where parties want their disputes arising under the terms of the agreement to be determined before a Competent Court with necessary jurisdiction. However, with present day drafters of finance agreements containing a limited jurisdiction clause, termed asymmetric jurisdiction clause, have created an unnecessary stir in determining the competent jurisdiction. The present analysis sheds some light towards deciphering the jurisdictional turmoil.

    What is Asymmetric jurisdiction?

    Herein parties decide the jurisdiction of the Court or Courts to adjudicate the dispute, allowing one party, usually the lender, to sue the other party, generally the borrower, in any Court of law but preventing the borrower from proceeding in any Court except the one with exclusive jurisdiction.

    For instance, through the terms of the contractual arrangement, in an Asymmetric Jurisdiction Clause between X and Y, Y has limited authority over particular designated jurisdiction named A, while X has jurisdiction to sue in any Court under such a clause. Hence, the terms of an Asymmetric Jurisdiction can also be understood as an exclusive choice of Court or devolving a choice of jurisdiction upon a particular Court, as opposed to the essential factors followed in our domestic Civil Procedure Code, 1908.

    Now, this liberty of choosing any Court to refer the dispute by the party with broader jurisdiction casts a few fundamental questions, i.e., whether such a Court will be stricto sensu ‘any Court’ or a Court of ‘Competent Jurisdiction’? And whether there exist any judicial opinion to determine the competence of a ‘Court’ in a transnational dispute?

    Generally, a non-symmetric jurisdiction draws its sustenance from two primary legislation of the European Union- the Brussels Regulation (Recast) and the 2005 Hague Convention. However, following the Brexit, the Brussels regulation is no longer a valid authority post-December 2020 in the United Kingdom. Parties are constrained to find shelter under the 2005 Hague (Choice of Court Agreement), making it difficult for them to navigate through turbulent jurisdictional waters.

    The Dissonance between Exclusive jurisdiction and Asymmetric jurisdiction

    The Hague Convention relates to an ‘exclusive’ choice of Court arrangement under article 3(a). This exclusivity must be mutual, and a clause stipulating the parties to either sue in a limited jurisdiction or in any other Court will not be an exclusive choice of court, since it designates more than one Court as the venue for dispute resolution. However, different types of arrangements are still valid in determining the suitable jurisdiction, and the 2005 Hague Convention does not protest such domestic legislations towards determining of Court’s adjudicatory authority. Therefore, ‘Exclusive Jurisdiction’ is when the Court of one contracting party is designated to decide the dispute to the exclusion of other jurisdictions, provided the transaction is international. An asymmetrical clause makes this choice of Court a contractual agreement, with the chosen forum applying its laws and procedures, even if the proceedings are running concurrently in another jurisdiction. And the party resisting the choice of agreement needs to establish exceptional circumstances to save itself from this jurisdictional bargain.

    In the English case of Commerzbank AG v Liquimar Tankers Management Inc, (‘Commerzbank AG‘) the issue before the Hon’ble High Court was whether the asymmetric jurisdiction clause is akin to the exclusive jurisdiction clause within the Brussels Regulation (Recast). As per article 31(2) of the Brussels 1 Recast, the jurisdiction agreement confers exclusive jurisdiction on the Courts of an EU member state; but this notion is true when any EU member state has been granted a limited jurisdiction, as in the instant case. Furthermore, Etihad Airways PJSC v Flother [2020] confirmed that the agreements conferring jurisdiction on the Courts of member states through an asymmetric clause would be akin to an exclusive jurisdiction clause. Thus, dictums flowing through article 31(2) of the Brussels 1 Recast will render concurrent judicial processes in other destinations redundant, an absurdity under the 2005 Hague Convention.

    Hence, according to Justice Cranston in Commerzbank AG, the asymmetric jurisdiction is akin to the exclusive jurisdiction clause, and the parties can sue only in the agreed or designated Court, deriving the ratio from Mauritius Commercial Bank Ltd v. Hestia Holdings Ltd ], where it is rightly held the party with the broader jurisdiction can sue in any Court with ‘competent jurisdiction’ the term ‘any Court’ symbolizes a Court with the necessary authority to hear the same.

    Conferring Jurisdiction in Asymmetric Clauses

    An asymmetric choice of court agreements, where only limited freedom to determine the courts having jurisdiction is allowed, should be respected. The jurisdiction of any alternative court depends on whether that Court has personal or subject matter jurisdiction.

    In the seminal decision of Apple Sales International v eBizcuss: Cass. 1ere Civ, (‘Apple Case‘), a dispute between companies incorporated in France and   Ireland, respectively, arose. They entered into an agreement containing an asymmetric clause and agreed that disputes would be decided by the Courts of the Republic of Ireland. However, the clause also allowed the Irish company to resolve disputes before the Court of counterparty’s registered office or in ‘any country’ where it suffered loss caused by the counterparty. The Irish entity then argued that the French Commercial Court did not have the necessary jurisdiction vide the asymmetric clause, and Courts in Ireland had the sole jurisdiction. Under these circumstances, following the afore-established rule of jurisdiction and competency, Ireland must have had broader jurisdiction. In contrast, the French entity had limited jurisdiction over Courts in the Republic of Ireland.

    However, the French Supreme Court took a different stance on the issue of asymmetric jurisdiction in X v Banque Privée Edmond de Rothschild. It observed that the asymmetric clause would be upheld provided there is no unilateral jurisdiction clause, failing the core purpose of the clause. In the Apple Case, it was not open to the entities with the benefit clause to choose jurisdiction in any country; the flexibility of selecting jurisdiction is limited to the registered office or where any loss was caused, and the other party has suffered. The French Supreme Court made it clear that asymmetric clauses are to be avoided that allow a single party to apply to any jurisdiction of its choosing unless other possible forums with competent jurisdiction can be objectively determined and applied.

    These French dictums might appear contrary to the notable English decisions in the Commerzbank AG and the Hestia Holdings case. Still, we can establish a faint connection that the flexibility of wider jurisdiction in the hands of one party is not an infinite ray of jurisdiction. It bends before the need of necessary subject matter to such unimpeded jurisdiction.

    Conclusion

    Let’s take an illustration wherein X is conferred the wider jurisdiction to unilaterally approach any Court through the asymmetric clause and Y to the limited jurisdiction A. Whether in such circumstances, it is fair for the transnational parties in an agreement to choose any Court, destination B, which is outside the knowledge of Y? And would the decision by the Courts of such country B have any bearing on the parties? It is a visible hurdle in these limited jurisdiction clauses.

    In the case of Dr Jesse Mashate vs Yoweri Museveni Kaguta , theEnglish Court has tried to answer this riddle. In this case, an overseas party was subjected to the jurisdiction of the English Courts, and necessary summons was served. However, the overseas party failed to submit the necessary defence or any document intended to protect; consequently, the Court issued a default judgment under the English Civil Procedure Rules.

    The Court of Appeal construed that before involving a party to the jurisdiction of the English Courts, i.e., destination B, the party A, with flexible jurisdiction, must explain why such Court has an authority over the dispute and the party be subjected to such jurisdiction. Otherwise, an overseas party must not be vexed with proceedings lacking substance, who bear no other allegiance to the English Courts’ jurisdiction must not be vexatiously subjected to service upon them of process issued out of English courts. Therefore, an applicant to serve out of the jurisdiction must explain the reason behind conferring jurisdiction and how the overseas party is subjected to the exorbitant jurisdiction of that unilaterally chosen Court.

    Hence, the term ‘any Court’ and ‘competent jurisdiction’ are intertwined in financial agreements containing asymmetric clauses. The asymmetric clause is not an agreement to confer jurisdiction where none would otherwise exist; rather it limits the power of one party to approach a certain court, and expands for the another to ‘any Court’. It preserves the right to sue in any court which would reserve itself as competent by establishing a link with the subject matter; otherwise, an infinite ray of broad jurisdiction will be unnecessarily exorbitant on the parties to the agreement.

  • Claim Period and Enforcement Period in Bank Guarantees

    Claim Period and Enforcement Period in Bank Guarantees

    Manasvini Vyas, an NLU-O graduate currently practicing in Mumbai

    On 28 July 2021, the Delhi High Court in the case of Larsen & Toubro Limited vs. Punjab National Bank passed a landmark ruling clarifying the scope of exception 3 of section 28 of the Indian Contract Act 1872 (ICA). The order passed by a Single Judge Bench has set aside the circulars issued by the Indian Banking Association (IBA) that recommended an unalterable claim period of 12 months for bank guarantees. 

    Before delving further into the judgment, it is imperative to analyse the background against which the judgment holds significance.

    Background 

    Bank Guarantees (BG) are independent contracts that confer upon the beneficiary the right to claim performance from the bank in case of default by the principal borrower. On default, the beneficiary can invoke the guarantee by making a claim within the lifetime of the BG i.e. the “validity period”. This period is mutually determined by the creditor and the principal debtor and it expires on a decided date. Often, a BG provides for an additional grace period over and above the validity period for making a claim before the bank, which is known as the “claim period”. Stipulating a claim period is not a mandatory requirement and inclusion of the same depends solely on the discretion of the contracting parties.  If the bank defaults in honouring its obligations, the beneficiary is entitled to approach the court of law and the period within which the beneficiary is permitted to enforce their rights from the date of default is called the “enforcement period”.   

    The enforcement period is prescribed under the Limitation Act 1963 (Limitation Act) and any agreement that limits the time within which a party may enforce its rights is hit by section 28 of the ICA. According to the provision, an agreement is void 

    1. if it absolutely restricts a party from enforcing their rights under a contract or if it limits the time within which a party can enforce their contractual rights, or 
    2. if it extinguishes the contractual rights of a party or it discharges a party from any contractual liability on the expiry of a prescribed period such that the rights cannot be enforced beyond it.

    exception 3 appended to the provision states that if a contract for bank guarantee stipulates a term for extinguishment of rights or discharge of liability on the expiry of a given period, such a clause would not be void provided the said period is not less than one year from the date of the specified event.  

    History behind Exception 3

    Prior to 1997, the courts created a distinction between ‘remedy’ and ‘right’ and an agreement which barred a remedy to sue beyond the prescribed time period was void under section 28 but an agreement which relinquished rights under the contract was held to be valid[1]. The Law Commission, in its 97th Report dated 31 March 1984, observed that such a distinction was not practical and it gave a dominant party the power to limit the period of remedy by limiting the period of relinquishment of rights because if rights didn’t exist, the remedy would also be extinguished. Consequently, clause (b) was added to section 28. 

    As a result of this amendment, banks were concerned that they could no longer limit their obligations under the BGs and would be required to maintain their BGs for 30 years in case of government contracts and 3 years for private contracts pursuant to the Limitation Act. It was feared that the high cost of maintaining BGs would severely affect the banks’ ability to issue fresh guarantees. In order to assuage the concerns of the banking sector, exception 3 was added to section 28 by way of the Banking Law (Amendment) Act, 2012 (The 2013 Amendment) on the recommendations of Sh. T.R. Andhyarujina Committee. 

    The aftermath of the 2013 Amendment

    Post the 2013 amendment, there was confusion whether the exception dealt with the claim period or the enforcement period. The IBA was of the view that the exception concerned the claim period and therefore it issued circulars recommending banks to stipulate a minimum claim period of 12 months in BGs. It was further believed that if the banks stipulate a claim period of less than 12 months, they will lose the benefit under exception 3 and the period specified under the Limitation Act would be applicable.  

    The confusion was further compounded after the Supreme Court’s observations in the case of Union of India & Anr. vs. M/s Indusind Bank Ltd. & Anr. (2016). Here, the Apex Court was concerned with an issue concerning section 28 as it stood before the 1997 amendment. In this case, the BG stipulated an invocation period of three months beyond the validity period, however, the BG was invoked after the expiry of three months. The Court held that since the clause did not provide for a time limit for lodging a claim before the court, the same will not be hit by section 28. Further, in its obiter, the Court noted that:

     “… Stipulations like the present would pass muster after 2013 if the specified period is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of a party from liability.” 

    In this case, the Court was dealing with the time period for filing a claim with the bank and not the period for enforcing the guarantee before the courts. Therefore, when it mentioned “stipulations like the present would pass muster after 2013”, it seemed that the Court had interpreted exception 3 to mean that it provided for a mandatory claim period of minimum one year, thereby, worsening the already unsettled position with respect to exception 3.  

    Notably, a BG is a costly affair for the borrower as it has to maintain margin money/collateral security in support of the guarantee and has to pay commission charges at regular intervals. In such a scenario, a mandatory claim period of 12 months poses a financial burden on the borrower. Not only is the borrower forced into paying commissions for an additional period of one year, but funds locked in as margin money results in increasing the working capital requirements. A 12 month claim period would be even more commercially unviable in cases of short-term guarantees. For example, a BG with an original validity period of six months would be required to be kept open for a period of 18 months! In view of this, critics of exception 3 sought another amendment to section 28 to rectify the anomaly. 

    The decision in  Larsen & Toubro Limited vs. Punjab National BankIn this case, L&T had filed a writ petition against PNB, IBA and the RBI before the Delhi High Court challenging their interpretation of exception 3. As noted above, IBA, in its circulars dated 10 February 2017 and 5 December 2018, had recommended a minimum claim period of 12 months for BGs. It was also stated that, in the absence of such a clause, limitation period as per the Limitation Act would be applicable.

    L&T challenged this clause on the grounds that the extended claim period grossly affected its ability to sign new contracts and affected its fundamental right under Article 19(1)(g) of the Constitution of India to carry on business. It was also contended that a claim period is contractually agreed term between the borrower and the creditor and it may or may not be present in BGs. After scrutinising the tumultuous amendment history of section 28, the Court concluded that exception 3 provides for enforcement period and not a claim period. In coming to this conclusion, the Court observed that exception 3 curtails the limitation period within which the beneficiary can approach the appropriate forum for enforcing its rights. [SS3] The said provision, in no way, limits the period for filing a claim with the bank and the same is to be contractually agreed between the creditor and the debtor. Therefore, IBA’s interpretation that exception 3 dealt with a claim period does not hold ground. The Court also distinguished the obiter in the case of IndusInd with the present case and stated that “the judgement cannot be relied upon since the clauses in question dealt with the enforcement period i.e. curtailment of the limitation period and not the claim period of a bank guarantee”. 

    Concluding remarks

    The 2013 amendment, though well intended, had thrown open a can of worms. BGs, which should ensure smooth flow of cash in business, were rendered ineffective by the weight of exception 3. The confusion surrounding the provision often stood in the way of claims under guarantees and severely affected the ease of doing business in India. In view of this, the judgment of Delhi High Court is a welcome move as the parties can now choose to incorporate a claim period that suits their needs, thereby, significantly bringing down the cost of maintaining the guarantee. 

    [1]Shakoor Gany v. Hinde &Co (AIR 1932 Bom. 330); Kerala Electrical & Allied Engineering Co.Ltd. v. Canara Bank & Others (AIR 1980 Ker 151)