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Whether Contractual Obligation Precedes the Word of Law?

By: Sharanya Ranga, Laxmi Joshi and Aditi Rani

The Delhi High Court in the case of Cruz City 1 Mauritius Holdings versus Unitech Limited recently ruled that contravention of India’s exchange control laws (“FEMA”) cannot be a ground to challenge enforcement of foreign arbitral awards. Significantly, this ruling comes in the wake of the Tata Sons – Docomo settlement in March 2017 where the parties mutually agreed to not proceed with the enforcement of a foreign arbitration award allegedly involving violation of FEMA. While the judgment in the Tata-Docomo matter is yet to be pronounced, the Delhi High Court appears to be all set to clear the air on the question of enforcements of such foreign arbitral awards in India and settling the on-going debate on the enforcement of the contractual obligations without flouting Indian laws.


This judgement was passed in the petition filed by Cruz City 1 Mauritius Holdings (“Cruz City”) for the enforcement of an arbitration award  (“Award”) passed by the London Court of International Arbitration (“LCIA”) on July 06, 2012  against the Unitech Ltd., (“Unitech”), one of India’s largest real estate investment companies and its wholly owned subsidiary, Burley Holdings Ltd. (”Burley”).

The transaction in question was two-fold wherein firstly, Cruz City and Arsanovia Ltd. (“Arsanovia”), a Cyprus based subsidiary of Unitech invested in a Mauritius entity, Kerrush Investments Ltd. (“Kerrush”).  Cruz City and Arsanovia each acquired 50% shares of Kerrush.  This company in turn through multiple downstream investments proposed to invest in an Indian subsidiary engaged in the business of a real estate project development in India, specifically a ‘Santacruz Project’, a development project in the suburbs in Mumbai. A shareholders’ agreement (“SHA”) was executed between the shareholders of Kerrush to govern their inter se relationship. Burley and Unitech, although not parties to the SHA, signed the same in confirmation of certain obligations under the SHA accepted by them. Simultaneously, a Keepwell Agreement (“Keepwell Agreement”) was executed between Cruz City, Burley and Unitech acknowledging their obligation to make payments as per the terms of the SHA.

Under the SHA, Cruz City was entitled to exercise a put option by which it could call upon Arsanovia and Burley to purchase its shares in Kerrush at a “post tax IRR of 15% on the capital contributions made by Cruz City in the event commencement of construction of Santacruz Project was delayed before the specified period” (the “put option”). Owing to the delay in the commencement of the Santacruz Project, Cruz City in the year 2010 exercised its put option. Further, as agreed in the Keepwell Agreement, Cruz City also called upon Unitech to cause Burley to make the payments for purchase of its shares in Kerrush. Burley and Unitech failed to comply with the same and Cruz City initiated the LCIA arbitration and obtained an Award against them to fulfil their obligations as agreed under the transaction documents.


The Award directed Burley and Unitech to pay pre-fixed consideration to Cruz City against the delivery of all shares of Kerrush held by Cruz City. In addition to the purchase price, Burley and Kerrush were also ordered to pay the legal fees as well as the cost of arbitrations to Cruz City.

Submissions made by Unitech against enforcement of the Award:

  1. Unitech’s obligations under the Keepwell Agreement were limited to (i) causing Burley to pay the amount pursuant to the exercise of put option by Cruz City; and (ii) to make sufficient funds available to Burley. There was no obligation on its part to purchase the shares held by Cruz City and that was not claimed by Cruz City. Thus, the Award directing Unitech to pay the price for the shares, would essentially amount to share purchase by Unitech, going beyond the relief claimed by Cruz City.

  2. Cruz City failed to issue any notice/communication to Unitech about its so-called failure to honour obligations with respect to the put option before initiating the arbitration proceeding.

  3. Enforcement of the Award was contrary to India’s public policy as it would lead to the following contraventions under FEMA:

  4. The Award directs Unitech to fulfill its obligation under the Keepwell Agreement which is in essence a guarantee extended by Unitech on behalf of Burley. However, under FEMA, Indian entities are not permitted to provide a guarantee or surety in respect of an obligation or liability of a non-resident entity.

  5. The Award mandates Unitech to pay the price of the shares of Kerrush held by Cruz City, which in effect means purchase of shares of Kerrush by Unitech. Being an overseas investment by an Indian entity, this was not permissible without the prior approval of the Reserve Bank of India.

  6. The amounts payable by Unitech to Cruz City towards the shares of Kerrush was based on the agreed rates of returns on investment. However, as per FEMA, valuation by a Category-I Merchant Banker/Investment Banker is a pre-requisite for determination of purchase price of a foreign entity’s shares. Also, a foreign investor can exit the investment made in India only at a valuation as on the date of exit. Any agreement structured to ensure a predetermined return on equity is therefore in violation of FEMA.

  7. Any arrangement contrary to FEMA would be void. Further, it has been duly established through various judicial precedents that provisions of FEMA are considered to be public policy and the Award being in contravention of the same is against public policy.

Verdict of the Delhi High Court:

  1. The Award did not require Unitech to purchase the shares of Kerrush as contended by Unitech, but only directed Unitech to pay the purchase price to Burley for further payment to Cruz City, which was in conformity with Unitech’s obligations under the Keepwell Agreement. Therefore, if Burley were to purchase Cruz City’s shares in Kerrush, the transaction would be outside the jurisdiction of FEMA and the question of its contravention would not arise.

  2. The terms of the Keepwell Agreement in relation to Unitech extending guarantee to Burley, its wholly owned subsidiary was well within the purview of law as FEMA permitted an Indian company to provide a guarantee on behalf of a wholly owned subsidiary.

  3. On the issue of assured return, the court pronounced that the assured return was permissible as long as it was not absolute and unconditional and could be invoked only under specific circumstances. This was true in the present case as the put option was relevant only in case of exit due to default i.e., delay in commencement of project construction beyond agreed timelines and not available otherwise. The Court also pointed out that various representations were made by Unitech in the Keepwell Agreement that the transactions envisaged under the Keepwell Agreement were compliant with applicable law, legally enforceable against Unitech and did not require any prior government approval. Thus, the court took the view that since Cruz City was induced to make an investment on such false assurances, Unitech must bear the consequences of violating the provisions of FEMA, but cannot escape its liability under the Award.

  4. As regards the Unitech argument that the Keepwell Agreement and the SHA were structured to overcome FEMA, the court held that since no such plea was raised before the LCIA arbitral tribunal, Unitech was not entitled to raise the same before it. The court went on to record that this plea was merely an afterthought and an abuse of the process of the court.

  5. On the most critical question of whether violation of any regulation or any provision of FEMA would result in violation of public policy of India, the court answered in the negative. The court held that the scope of a public policy’ defence to resist enforcement of a foreign award is extremely narrow and can be invoked only in cases of breach of the fundamental principles and the legislative policy forming the very basis of Indian statutes. Since the contravention of specific provisions of FEMA will not lead to violation of such vital tenements of Indian legislations, it cannot be equated with offending the public policy of India.

On this issue, the court also examined the material change in the fundamental policy of foreign exchange laws of India with the replacement of Foreign Exchange Regulation Act, 1947 (“FERA”) by FEMA. The court noted that while FERA was restrictive in nature, FEMA is a permissive legislation and underlying policy is to permit all transactions subject to reasonable restrictions in the interest of conserving and managing foreign exchange. Thus, violation of its provision even if established cannot result in breach of public policy.

Our observations:

For a long time now, contravention of FEMA requirements has been a convenient and effective excuse for depriving foreign investors of the contractual rights related to exit or return of their investment. This ruling is a welcome relief for foreign investors as it will prevent the use of the “FEMA contravention” route to resist enforcement of foreign arbitral awards. It has finally put the “public policy” defence against foreign arbitral awards in the right perspective. In doing so, the ruling has also confirmed India’s commitment to upholding the principal objective of the New York Convention, i.e. ensuring enforcement of foreign arbitral awards even if the same are not in conformity with the national laws.


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