Month: September 2013

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Use unilateral option clauses sparingly… And check if they can be enforced

SindhuSivakumar_DraftingForArbitrationIn our previous post, we looked at optional arbitration clauses — where the parties may arbitrate their disputes. Such clauses, we found, may be rejected for being uncertain. There is no certainty about the parties’ intention to arbitrate or to oust the jurisdiction of the competent national court.

In this post, we look at a specific type of optional clause — a unilateral option clause. Common in finance contracts, a unilateral option clause provides one of the contracting parties (typically the party with the stronger bargaining position, like the bank in a financing contract) with the flexibility of selecting between arbitration and litigation for the resolution of contractual disputes.

A unilateral option clause can be an arbitration clause with the option to litigate or a jurisdiction clause with the option to arbitrate. See the two examples below.

OptiontoLitigate_Unilateraloptionclause_DraftingforArbitration OptiontoArbitrate_UnilateralOptionClause_DraftingforArbitration

English courts have held both to be enforceable. Other jurisdictions however, may refuse to recognise such clauses for the following reasons.

– Uncertainty: The unilateral option could be construed as undermining the requirement to clearly agree to submit disputes to arbitration.

– Lack of mutuality: The unilateral option may be held to be unenforceable because it does not have the consent of all parties to submit to arbitration. Indian courts have used this argument in the past to invalidate such clauses.

– Unconscionability: The unilateral option may be considered unconscionable (and therefore, invalid), for example in consumer and employment contracts where the contractual parties are not commercial counterparties.

Recent French and Russian decisions for example, have invalidated unilateral clauses — leading to concerns in the international arbitration community that more and more jurisdictions will follow this trend. In the French Rothschild case, on September 26, 2012, the court invalidated a unilateral jurisdictional clause (offering one party the choice between two national courts) because of its potestative nature — it made the fulfilment of the agreement depend upon an event, which only one of the contracting parties had the power to make happen.

Similarly, a Russian decision, on June 19, 2012, held that a unilateral dispute resolution clause was unenforceable on the ground of unconscionability – as it was “contrary to the basic principle of procedural equality of the parties, adverse to the nature of the dispute resolution process, and breach the balance between the interests of the parties.”

The drafting lesson here is to firstly, avoid using optionality clauses just for the sake of it — only have them in the contract if your client (assuming your client has the stronger bargaining position and can ask for it) really sees a need for the flexibility it provides. Secondly, check the validity of the clause that you have drafted under the law governing your arbitration clause, the law at your seat, the law at the chosen court (for the litigation option), and the law at your likely place of enforcement.

(Sindhu Sivakumar is a member of the faculty on myLaw.net.)

Categories
Human Rights

Namita Wahi: New land acquisition law is a step towards creating a “culture of justification”

NamitaWahi_podcast_LandAcquisitionResettlementAndRehabilitationBill2013Land acquisition is always a controversial issue in countries with aspirations of rapid economic growth, where land is scarce. A few weeks ago, India came closer to replacing the 119-year-old Land Acquisition Act, 1894 (“the 1894 Act”) with the Land Acquisition (Resettlement and Rehabilitation) Bill, 2013 (“the Bill”). The Bill has cleared both houses of Parliament and will soon become law. Namita Wahi, a Fellow at the Centre for Policy Research and an S.J.D. Candidate at Harvard Law School, spoke with us about the Bill.

Ms. Wahi said that the Bill was a step towards creating a culture of justification during the government’s forcible acquisition of property. Even though the Bill shifts the balance of power between the competing interests involved, the struggle amongst them will continue even after the Bill becomes law.

She spoke of the shifting political, economic, and legislative contexts in which the 1894 Act operated, the main drawbacks of that law, and how the Bill has tried to remedy these problems. The Bill tries to expand the number of persons who are recognised to have interests in the land being acquired, limit the reasons for which government can acquire land, limits the government’s ability to invoke “urgency” and bypass the safeguards under the law, and provides for higher compensation. She also identified the exemption granted to the laws applicable to several sectors such as electricity, railways, coal, and mines from the provisions of the law as a major drawback and cautioned that the layers of bureaucracy proposed by the Bill may have unjust outcomes.

Ms. Wahi’s doctoral dissertation is on “The Right to Property and Economic Development in India”. She has written extensively on the Land Acquisition Bill and the history of the fundamental right to property, including here, here, here, and here.

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Corporate

Independent directors are now a crucial part of Indian company law

DeepaMookerjee_CompaniesBillContinuing with our series of posts on the Companies Act, 2013 (“2013 Act”), let us now turn our attention to the role of independent directors in a company, an issue that has become increasingly important after the Enron and the Satyam scandals. As I will discuss below, India’s new company law has recognised independent directors as a vital facet in the operation of a company.

Independent directors are considered the watchdogs of a company. Appointed to the board of directors of a company to oversee its business, they should be free of all external influences. To ensure their complete autonomy, an independent director should not have any material or pecuniary relationship with the company.

IndependentDirector_CorporateGovernanceWatchdogInterestingly, the Companies Act, 1956 did not contain any reference to independent directors. Further, the reference found in Clause 49 of the listing agreement is only applicable to listed companies.

Definition: The 2013 Act, for the first time, defines an “independent director”. Interestingly, the definition in Section 2(47) is similar to the one provided in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, a regulation applicable only to listed companies. The principle of impartiality is embedded in this definition. An independent director can only be a person:

– who is not a managing director, whole-time director, or a nominee director;

– who is not or was not a promoter of the company or its holding, subsidiary, or associate company;

– who is not related to the promoters or the directors of the company, its holding, subsidiary, or associate company; and

– who has or had no pecuniary relationship with the company, its holding, subsidiary, or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

Keeping in mind that an independent director must be free from all influence, the 2013 Act also places limits on the amount of shares that can be held in the company by a relative of such a director. Independent directors are also not entitled to any remuneration in the form of stock options.


ACC-BlogAdNumber of independent directors: Under Section 149 of the 2013 Act, there is a specific obligation on every listed public company that at least one-third of the board of directors should comprise of independent directors. This mirrors the requirement in Clause 49 of the listing agreement, and marks the first time that corporate governance norms have been recognised in company law in India. Additionally, Section 177(3) states that the majority of the members of an audit committee (in a listed company) must be comprised of independent directors.

In fact, Section 173(2) of the 2013 Act states that any board meeting held at shorter notice (to transact urgent business) requires the presence of at least one independent director. If such a director is not present, the matter discussed at the board will be considered approved only once an independent director ratifies it.

Protection from liability: Finally, in order to encourage a healthy environment where learned and well-respected individuals become independent directors in a company, the 2013 Act has, to a certain extent, protected independent directors from liability. Section 149 states that independent directors are liable only if any fraudulent act has been committed with the consent of such a director or where such director has not acted diligently and if such an act is attributable to the board process.

These are all welcome changes, and indeed, they will help improve the manner in which business is run in India by instilling strong corporate governance norms in a company.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

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Uncategorized

Non-mandatory arbitration clauses are also pathological

SindhuSivakumar_DraftingForArbitrationA major reason pathological clauses are so common is that contractual parties and their lawyers, against better judgement, tend to treat arbitration clauses as mere ‘boiler plate’ or ‘midnight’ clauses. Little attention is paid to these clauses when closing the deal and signing the contract.

This leads to all kinds of drafting disasters such as the inconsistent clause we saw in the previous post, which contained an agreement to arbitrate and the designation of a national court to resolve contractual disputes.

Optional or non-mandatory arbitration clauses are another type of pathological clauses. See the following examples.

Drafting-and-Reviewing-Comm-Contracts-Ad-2– “In the case of dispute (contestation), the parties undertake to submit to arbitration but in the case of litigation the Tribunal de la Seine shall have exclusive jurisdiction”

– “English law – arbitration, if any, London according ICC Rules” 

– “[t]he parties may refer any dispute to arbitration”

The language in all these clauses leads to uncertainty about the parties’ intention and agreement. Did they or did they not intend to submit their disputes to arbitration?

The agreement to arbitrate is the cornerstone of arbitration. An arbitration clause has to — clearly and unequivocally — record the consent of the parties to submit to arbitration. This is essential to conduct any process of dispute resolution outside the national court systems.

Not all the clauses listed above survived when challenged in the courts (which includes the English, Canadian, and Hong Kong courts). Even a pro-arbitration jurisdiction cannot always give effect to arbitration clauses that contain no clear agreement to arbitrate.

Moral of the story? Don’t draft a non-mandatory arbitration clause if your clients have indicated their preference to arbitrate. Make it very clear when drafting your arbitration clause that disputes arising out of or in connection with the underlying contract will be resolved by arbitration. Clearly oust the jurisdiction of the courts.

(Sindhu Sivakumar is a member of the faculty on myLaw.net.)

Categories
Human Rights

Seeking more out of food security

NationalFoodSecurityAct_VaibhavRaajAlong with many African countries, India stands at the verge of facing “extremely alarming” levels of hunger in its population and does not fare much better than Bangladesh or Nepal (see map below). According to statistics from the World Bank (see here), forty-eight per cent of children in India are underweight while only twenty-nine per cent in Sri Lanka are. Forty-six per cent of children in India are stunted and sixteen per cent are wasted but for Sri Lanka, these numbers are at fourteen per cent and fourteen per cent respectively. India’s infant mortality rate (sixty-two per cent) is much higher than any other county in South Asia except Pakistan. Excluding similar human development criteria from accounts of development and growth is a cruel ideological sleight of hand.

GlobalHungerMap

India is also home to some of the world’s largest food schemes. They include:

– Entitlement feeding programmes such as the Integrated Child Development Scheme for all children under six, and pregnant and lactating mothers; and the Mid Day Meal Scheme, for all primary school children.

– Food subsidy programmes such as the targeted public distribution system (“PDS”), which delivers thirty-five kilograms of subsidised food grains each month and the Annapurna scheme, under which ten kilograms of food grain are distributed to the destitute poor each month.

Employment programmes such as the National Rural Employment Scheme, which provides hundred days of employment at minimum wages.

Social safety net programmes such as the National Old Age Pension Scheme featuring a monthly pension for those below the poverty line and the National Family Benefit Scheme featuring compensation in case of the death of the breadwinner in families below the poverty line.

It is no secret that the implementation of these schemes has been marred by large-scale corruption and inefficiency. There are parts of the country where people received their first ration cards as late as 2006-07. All of us were also appalled at the tragic poisoning of children’s mid-day meals in Bihar.

At the same time, some state governments have been able to significantly improve upon these central schemes and deliver much-needed benefits to the people. The picture would be incomplete if we were to overlook the successful working of the PDS in Chhattisgarh and Tamil Nadu and many other parts of the country where at least half the monthly nutritional requirements of a household are met by the provisions from the PDS. Therefore, strengthening government intervention based on such successes is a workable and accountable solution to hunger and malnutrition.

A landmark in the way to resolve the artificially constructed “food crisis” in India has been the Supreme Court’s interventions in the PUCL case since 2001. The longest running mandamus on the right to food in the world, this case has provided civil society an anchor to both engage and confront the State on issues of food insecurity and employment. It has been successful in making the discourse of food security one of the most prominent concerns of policymakers. The case has resulted in:

– a universal MDMS and ICDS. 120 million children get school meals;

– restricting the lowering of the below-poverty-line quotas by the government of India;

– increasing the off-take of subsidised food grains through the targeted public distribution system;

– increasing the budgetary allocation for the ICDS and old age pensions threefold; and

– the passage of the National Rural Employment Guarantee Act, 2005.

Even as these attempts at reforms in governance and increase in government accountability have transformed all food-related schemes into legal entitlements, we are still short of achieving what can be called a right to food. The National Food Security Bill, 2013 that has now been passed by the Parliament fails to universalise measures for ensuring food security for the entire population. There can still be conspicuously unfair errors of exclusion, as the criteria for identifying the beneficiaries of this law remain unclear. Moreover, the provisions of this Act still focus on individual redressal rather than systemic changes. Some campaigners for food security are also concerned that even the limited achievements of the new law are largely an outcome of judicial activism — a fact that does not sit comfortably with our aspirations of a popular democracy.

The popular mobilisations on the right to food are a confluence of diverse interests that have arrived at the consensus that the right to food is more than just about food. The campaign for it has worked closely with movements for government accountability, right to work, gender justice, and equitable access to health and education. It is only in the fulfillment of all these requirements for a life with dignity that something like a right to food will actually be effective. This is a “broader view” of food security and the quest for it will remain unrequited unless all these goals are reached along with the universalisation of the right to food.

(Vaibhav Raaj is a PhD candidate at the Centre for Political Studies in Jawaharlal Nehru University, New Delhi.)