Claim of Damages for Breach of Contract under Section 73 of the Contract Act, 1872 by a non-resident does not violate the RBI guidelines

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Apr 01, 2017

Claim of Damages for Breach of Contract under Section 73 of the Contract Act, 1872 by a non-resident does not violate the RBI guidelines

On February 9, 2017, in the case of Shakti Nath and Ors v. Alpha Tiger Cyprus Investments[1], the Delhi High Court (‘Delhi HC’), while deciding a challenge to an arbitral award involving enforcement of put option rights, held that awarding damages to a non-resident investor does not amount to an indirect enforcement of an optionality clause under a contract.

Facts

Two foreign entities (‘Respondents’) had entered into inter alia a shareholders’ agreement (‘SHA’) with certain resident entities (‘Petitioners’) to invest in an Indian company in the real estate sector. The SHA provided for a ‘put option right’ in favour of the Respondents, entitling the Respondents, upon non-fulfilment of certain conditions by the Petitioner, to require the Petitioners to acquire the Respondents’ shares at a price ‘equal to the Investors’ Capital plus a post tax IRR of 19% on the Investors’ Capital’. The arbitral tribunal, appointed upon occurrence of certain disputes, awarded damages to the Respondents on finding that the Petitioners had breached their obligations under the SHA.

The issue before the Delhi HC was whether awarding damages to the Respondents would amount to an enforcement of their put option right, thereby violating the guidelines set out in the RBI Circular dated July 15, 2014 (‘RBI Circular’). The RBI Circular states that a transfer of shares between a resident and a non-resident is required to be undertaken at a price computed in accordance with internationally accepted methodology, with the underlying principle being that a non-resident investor cannot be guaranteed an assured return on its exit price.

Decision

The Delhi HC held that the Respondents had a choice between enforcement of the put option and claiming damages for breach of the SHA. Given that the Respondents chose to make a claim for damages for breach of contract under Section 73 of the Contract Act, 1872, the question of violation of the RBI Circular did not arise.

It is pertinent to note that the judgment reflects the pro-arbitration stance of Indian Courts, and indicates a liberal approach towards enforcement of awards arising out of obligations under optionality contracts.

[1] Judgment dated February 9, 2017, in OMP (Comm) 154/2016. (Delhi High Court)

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