The Bombay High Court clarified that every right of an investor to participate in the management and governance of a joint venture company cannot be converted into an obligation to participate in the management. When an investor invests in a company, he contracts certain rights, and it is completely bestowed on him whether he wants to enforce or waive them.
The dispute at hand is a case of firm findings by the Arbitral Tribunal that one party to the Joint Venture Agreement (JVA) blatantly diverted the business away, wrongly seeking to justify it on the grounds of abandonment, and even raising the objection of limitation, all of which were firmly put down by the Arbitral Tribunal. Yet, the Tribunal victimised the other party by holding that the victim itself needs to be blamed for breach of its rights by not participating in the JVA; and that too when adjudicating a cause of action seeking intervention for that very breach.
The Court noted that on one hand, the Arbitral Tribunal had firmly held that the Vaghani Group had “miserably failed” to show abandonment of the JVA by the Subhkam Group, by ruling that acquiescence is neither pleaded nor synonymous with abandonment. In the same breath, the Arbitral Tribunal has equated the contractual rights of the Subhkam Group with their contractual obligations, which is completely untenable and an implausible view.
While stating that the Arbitral Tribunal had wrongly imported a public law concept of “power coupled with duty” into the domain of private contract, the Court explained that in matters of public law, when legislation provides for a discretionary action on the part of a public authority, it is with a certain legislative objective in mind. On the other hand, in a matter of private contract, the rights and obligations have no wider public interest considerations, and the parties are presumed to contract rights in their own enlightened self-interest.
Essentially, the Court pointed out that it is the contracting party’s sovereign and autonomous power to act upon a right or to trust the counterparty by not insisting on enforcing the right.
A Single Judge Bench of Justice Somasekhar Sundaresan observed that “the findings of the Arbitral Tribunal, namely, of failure to prove abandonment; of inability to allege acquiescence; of every moment of conducting competing business being a continuing tort; and yet holding that the tort is not an actionable tort because the party at the receiving end of the tort had purportedly not complied with an obligation, in the teeth of such “obligation” actually being a “right”, are mutually destructive, is writ large on the face of the Impugned Award”.
The Bench emphasised that returning an implausible finding that a right is an obligation, the Arbitral Tribunal wrongly denied specific relief and damages, in the teeth of the other findings, which would shock the conscience of any reasonable person applying commercial common sense. Essentially, what has happened is that a party firmly found to have indulged in abject contumacious conduct appears to have been allowed to get away with no consequences whatsoever by the Arbitral Tribunal.
Therefore, the Bench concluded that the treatment of a right as an obligation renders the award contrary to the contract. However, while refusing to set aside the award, the Bench directed the parties to agitate their disputes afresh.
Briefly, the Subhkam Group and the Vaghani Group, holding 50% each in the equity share capital of the Milton JV, executed a joint venture agreement. The Subhkam Group and the Vaghani Group structured a commercial relationship and reduced it to writing in the JVA, essentially to provide that the brands Milton, MP and Milton Plastics would be licensed by the Vaghani Group for exclusive exploitation by the Milton JV. On the same date, an agreement was executed to provide for such brand licensing.
According to the Subhkam Group, the dispute arose when the Vaghani Group systematically abused the relationship by diverting the business meant to be carried out exclusively by the Milton JV to the Vaghani Group company, Hamilton Houseware Pvt Ltd. This triggered an investigation, which led to the discovery that Hamilton was booking all the income and revenues from the business that was meant to be the exclusive preserve of the Milton JV. Claiming that the Vaghani Group had entirely cannibalised the business of the Milton JV and violated the non-compete obligations, the Subhkam Group alleged erosion of profit, and sought for appointment of an arbitrator.
Before the Arbitral Tribunal, the Vaghani Group contended that the Brand Licensing Agreement could not form part of the arbitral proceedings, which was negated, and the Arbitral Tribunal held that the proceedings were under the JVA and if any query was raised about the non-enforceable nature of the Brand Licensing Agreement, the Tribunal would go into it. As far as the contention of the Vaghani Group that the Subhkam Group slept on their rights for long, the Arbitral Tribunal rejected the same on the ground that every moment when the competing business was carried out by the Vaghani Group, the continuing tort gave rise to a fresh cause of action.
Though the Arbitral Tribunal firmly held in favour of the Subhkam Group, it held that the Subhkam Group could not be said to have been willing to perform the JVA, and therefore it was not entitled to any relief. The Subhkam Group challenged the same, contending that the Arbitral Tribunal has turned the provisions of the JVA on its head by treating its rights as its obligations. Despite holding that the Subhkam Group’s rights had been trampled upon and that the Subhkam Group had not abandoned the JVA, the Arbitral Tribunal held that the Subhkam Group was not entitled to any relief.
Appearances:
Senior Advocates Nikhil Sakhardande and Sharan Jagtiani, along with Advocates Ashish Venugopal, Ravichandra Hegde, Mitravinda Chunduru, Vinit Udernani, Apurva Manwani, Mahendra Ghelani, and Parikshit Desai, for the Petitioner
Senior Advocate Dinyar Madan, along with Advocates Rashmin Khandekar, Apurva Manwani, and Mikhail Behl, for the Respondent
