Contractually Restricting Interim Reliefs

Certainty, as to the result is the hallmark of any commercial document. For e.g., in the event of A the result would be B. Perhaps this is one of the prime reasons why today we see elaborate contracts, running into several clauses. Some of the terms incorporated in these contracts, are matters which traditionally vests within the discretionary domain of the judiciary (albeit a few statutory guidelines). For e.g., grant of interim/equitable relief, specific performance etc. The question therefore is how far are these terms valid in law or in other words will these terms be given effect to by the courts. In this post and subsequent posts I will make an attempt to examine this question.

 One such clause was called into question before the Bombay High Court in BCCI v. KPH Dream CricketPrivate Limited (15.12.2010). The clause in question was Clause 21.6 of the franchisee agreement which reads as under:

 “ BCCIIPL (but not the Franchisee) shall have the right to bring an action seeking injunctive or other equitable relief before the Courts of Mumbai if it reasonably believes that damages may not be an adequate remedy for the breach by the Franchisee of this Agreement."

The clause stipulates that the franchisee will have no right to bring an action seeking interim injunction even if it reasonably believes that damages may not be an adequate relief. It is to be noted that the dispute between the parties was to be settled arbitration. So, what was effectively sought to be restrained through the aforementioned clause was the franchise's right to approach the court under S. 9 of the Arbitration and Conciliation Act, 1996 (at the very least that was sought to be restrained). The Bombay High Court refused to give effect to the clause 21.6 and stayed the termination under S. 9 of the Act and held as under:

“ However, in our view, it would be wholly destructive of the underlying principles of Section 28 of the Contract Act to allow a party to assert that the effect of a contractual term is to prohibit access to the Court in a petition under Section 9 of the Arbitration and Conciliation Act 1996 for obtaining suitable injunctive relief even if, damages were not to provide an adequate recompense. The Court would not readily adopt such a construction of Clause 21.6 and indeed if it were to do so, there would be serious questions in regard to validity of Clause 21.6. A construction must therefore be placed on Clause 21.6 which makes business sense. After all, the franchise agreement reflects a business understanding between parties to a commercial document. When the Court construes a commercial document, the effort must be to give business efficacy to a commercial understanding between the parties. We decline to read Clause 21.6 as enabling BCCI to successfully set up the defence that the remedy of injunctive relief under Section 9 is barred even if the franchisee is able to establish that damages would not provide an adequate remedy”- para. 27

It is sufficiently clear that the Bomaby High Court refused to give effect to Clause 21.6. However, it is respectfully submitted that the reasoning of the court is not entirely clear as one cannot reasonably conclude whether such as clause is:

(a) invalid, as it falls foul of section 28 of the Indian Contract Act, 1872 or;

(b) It is not invalid in law, but in light of the commercial understanding between the parties it does not mean what the BCCI argues it to mean i.e. the franchisee is barred from approaching the court under S. 9 of the Arbitration Act, 1996.

If the reasoning of the court is based on (a) then such a clause would be invalid in all circumstances. However if the reasoning of the court is based on (b) then such a clause would be valid if pressing commercial reasons are shown in this behalf. In my view, the correct reasoning is one based on clause (a) i.e. Clause 21.6 and all such clauses are invalid in law.

CISG and India

The convention on International Sale of Goods (CISG) is arguably one of the most successful international conventions in terms of the number of countries that have ratified it. Most of the leading trading countries, common law and civil law alike have adopted the convention with the exceptions of UK and India.

One would argue that with India extensively  engaged in International Commercial transaction, it would be apt for it to sign the CISG. However, some leading commentators and practitioners have outlined the difficulties for India in signing the CISG. In this regard two articles would be relevant. One by Monica Kilian, "CISG and The Problems with Common Law Jurisdictions" and the other one by Shishir Dholakia, "Ratifying the CISG-India's Options".

With the proposed changes being made in the Indian Arbitratin law discussed by Mihir here India would also boost its legal framework relating to International Commercial Transactions by ratifying the CISG. I would make an attempt to illucidate on these issues in some future posts.

Interpretation of Contracts: U.S. Context

In my previous post, the interpretation of commercial contract was outlined in light of the decisions of the supreme court of India. Interestingly Steven J Burton in his latest book: Elements of Contract Interpretation discusses the effective tools of contract interpretation in the United States. The author points out three different theories of contract interpretation generally followed in the U.S. The theories are discussed as under:

1. Literalism
This theory is similar to the ‘ordinary meaning test’ in the Indian context. It posits that ambiguous words in the contract are to be assigned their literal meaning i.e. their dictionary meanings. This theory can be criticised on the ground that generally dictionary would assign two or more meanings to a given word; in that case the context has to be perused into inorder to determine the correct literal meaning. Literalism expressly disregards the use of the context and hence, there seems to be an inherent fallacy in this theory.

2. Objectivism
This theory posits that in determining an ambiguous clause in a contract the entire contract should be read as a whole. Under this theory due regard is also given to the relation between the parties, the circumstances prevailing at the time of conclusion of the contract and the entire purpose of the contract. The following observation of the court of appeals in Kass v. Kass is apposite here:

“.......in deciding whether an agreement is ambiguous courts should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby. Form should not prevail over substance and a sensible meaning should be sought.”

3. Subjectivism
This theory is akin to the “subjective intent” test under most international commercial agreements such as the Convention on the International Sale of Goods (CISG). This element of contractual interpretation posits that the subjective intent of a party should be taken into consideration if the other party or a reasonable man under the same circumstances could not have been unaware of that intent.

Conclusion:
On a thorough analysis Steve finds “objectivism” as the most preferred tool of contractual interpretation.

Interpretation of Commercial Contracts

In a recent case Novartis Vaccines & Diagnostics Inc. v. Aventis Pharma Limited (dated 11.12.2009), the Bombay High Court has once again enumerated the principle of interpretation of commercial contracts. Justice Mohta while re-affirming his earlier observations in the Reliance Natural Resources Ltd.v. Reliance Industries Limited (2007 (Supp.) Bom. C.R. 925) further laid down the following principles for the interpretation of a commercial contract:

1. Ordinary Meaning: This principle essentially signifies that the words in the contract are to be construed in their ordinary and popular sense. The underlining principle being that parties to a contract, as reasonable men must have intended to use the word in its commonly used sense.

2. Business Like Interpretation: It signifies that a commercial contract must be interpreted in a manner which conforms with sound commercial principles and good business sense. In this regard Lord Diplock's observationin Antaios Cia Navieras SA V Salen Rederierna ((1984) 3 All ER 229) is apposite:
"If a detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts business common
sense, it must be made to yield to business common sense."

3. Commercial Object: This principle is based on a rather well established rule that the "the contract should be read as a whole" in light of the purpose of the contract.

4. Construction to Avoid Unreasonable Results: If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulation in their contract.

The traces of these principles can also be found in the apex court's recent decision in Vimal Chand Ghevarchand Jain & ors.v. Ramakant Eknath Jajoo (2009 (5) SCALE 59).