Arbitration

Enforceability of Foreign Awards Against Minors in India

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In the recent judgement of Daiichi Sankyo Company Limited (Petitioner) v. Malvinder Mohan Singh and Ors. (Respondents) (2018), the Delhi High Court enforced a foreign arbitration award, yet inter alia declared that the award of damages against minors is illegal, non est and void as it is opposed to the public policy of India. This article solely discusses the issue with respect to minors.

Background

In the case, the respondents had fraudulently induced the petitioner to acquire their shares by concealing a document that stated the genesis, nature and severity of pending investigations by the US Food and Drug Administration (FDA) and Department of Justice (DOJ). The petitioner invoked the arbitration clause of their Share Purchase and Share Subscription Agreement (“SPSSA”) via which the petitioner purchased the respondent’s stake in Ranbaxy Laboratories Limited (“Ranbaxy”) in 2008 – to seek compensatory damages as well as pre-award and post-award interest for the losses incurred due to the Ranbaxy’s fraud – in Singapore (as the seat of arbitration) following International Chamber of Commerce’s (“ICC”) institutional rules.

Judgement

The Delhi High Court held that arbitration tribunal’s finding that minor respondents are capable and guilty of fraud under Indian law is contrary to the statutory position in India as laid down in the Contract Act, 1872 (“ICA”) and the Hindu Minority and Guardianship Act, 1956 (“HMGA”). As per section 183 and 184 of ICA, a person employing an agent and an agent himself cannot be a minor. Thus, a minor who isn’t component to enter a contract is incapable of acting through an agent. Hence, fraud cannot be committed through a minor. Furthermore, the fraud committed by the major respondents could not bind the minor respondents.

The HMGA explains the relationship and duty of natural guardian towards the minors. Section 8 authorizes the natural guardian to do any necessary or reasonable and proper act for the benefit of the minor or for the realization, protection or benefit of the minor’s estate. What is reasonable and proper may/ can be determined from the facts and circumstances of the case as stated by Mayne’s Hindu Law and Usage, an authoritative legal text used in Hindu Law. An act of selling shares of a company belonging to a minor to carry out fraud to a third party jeopardizes the estate and is an act beyond the powers of a natural guardian. The risk, prejudice and liability for the fraud was beyond the power prescribed by act. The act does not and cannot bind or fasten any damages or liability on the estate of the minor. The Supreme Court in Bishundeo v. Sheogeni Rai (1951) as well as many High Court cases have affirmed the principle that a minor is entitled to challenge a decree passed against him and avoid its effects in case of the guardian-ad-litem or next friend of the minor engaging in gross negligence.

The Court held that it was the fundamental policy of Indian law to protect a minor and this was a substantial principle on which Indian law was founded. The Court relied on Order 32 Rule (7) of the Code of Civil Procedure, 1908 to establish that a minor has remedy to protect himself if he may be sued. In addition, section 30 of the Indian Partnership Act, 1932 admits a benefit to minors to not be personally liable for any acts of the partners or of the partnership for his share in the firm.

Thus, the award could not be held enforceable against the minor respondents. In addition, Justice Nath found the charges against the minors in the award (Rs. 3,500/-crores) highly disproportionate to the minors in comparison to the total sale considerations that they earned (around Rs. 14 lacs).  The minors were free to initiate proceedings against their natural guardian agent if they committed fraud. The award was held to be not enforceable against the minor respondents.

Analysis

Competency of Minors to Enter into Contracts

From the case arises the jurisprudence debate of whether minors can enter into contracts and on what grounds foreign awards cannot be enforced in India.

The term minor(s) is not defined in the ICA but section 11 of the same iterates that a minor is a person who has not attained the age of 18 years. Section 3 of the Majority Act, 1875 states that a person attains the age of majority on completion of 18 years, except in a case where a guardian is appointed for the property of the minor in which the age of majority is attained on completion of 21 years of age. The law presumes that a minor is not fully capable of understanding the nature of contracts as they are not component and mature enough. The intention behind the limitation stated above is to protect the interests of the minor and the possibility of them being taken advantage of.

Any agreement entered into by a minor is void ab initio regardless of whether the other party was aware of his minority or not. In the Calcutta High Court case of Mohiri Bibi vs. Dharmadas Ghose (1903), the Privy Council debated whether the nature of a minor’s agreement is absolutely void or is only a voidable contract. It was decided that an agreement of such nature would be an absolute nullity. If it is taken as a voidable contract, then it would pre-suppose the existence of a contract at the very least which would violate section 11 of the ICA which makes it clear that minors are not component to enter into a contract.

However, a guardian can enter into an agreement on behalf of the minor if the agreement is for the benefit of the minor, the view on which has evolved over time. Earlier there were certain agreements that the guardians were not competent to make. In the case of Mir Sarwarjan vs. Fakhruddin M. Chaudhury (1912), the court declared that a guardian of a minor cannot bind his ward in a contract to purchase immovable property. But with changing times and the increased active role of minors in family businesses, the court adopted a more flexible approach on minor’s agreement. Yet, the primary objective of Indian jurisprudence is to protect the minor.

In the case of Daichi Sankyo, the minors did not partake in the contract and their guardians acted on their behalf. Even if the guardians had obtained the consent of the minors before undertaking any action, it would be deemed irrelevant as the general law presumes that a minor is incapable of taking decisions before they attain age of majority. The law protects the minor from incurring personal liability in any agreement entered into by him or his guardians.

Thus, the judgement upholds the principles of Indian law and rights of minors, for whom there is a greater scope of misuse and thus, laws prohibiting them from entering contracts and protection laws are in place.

Public Policy Objection to Enforcement of a Foreign Arbitral Award

With regards to non-enforcement of a foreign arbitral award in India, Section 48 of the Arbitration Act limits the scope of objections. The court can refuse an enforcement if; (a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India or (b) if it is against public policy of India. The intervention of the courts in India on the subject of ‘Public Policy’ has increased in the past two decades. The interpretation of ‘Public Policy’ has widened with relevant case laws.

In the case of Renusagar Power Co v. General Electric Company, the Supreme Court held that merely a violation of Indian laws will not be enough to attract the bar of public policy to enforce a foreign award in the context of international arbitration. Further, this was affirmed by the Delhi High Court which held that an award would only be against the fundamental policy of Indian law if there was a breach of a substantial principle on which Indian law is founded and not a violation of provisions of a statute.

The Delhi High Court declared that the award with respect to minors could not be enforced against the minor respondents as it was the fundamental policy of Indian law to protect a minor and this was a rule of substantive principle on which Indian law was found on. The court did not merely rely on statutory violation of Indian law but examined the policy of Indian law on minors. For instance, Articles (15, 39 (e) and (f) and 45) of the Constitution of India, were mentioned to emphasize the power of the state to make special provisions for the protection of the children, apart from enumerating the various statutes passed by the Indian legislature protecting minors from liability due to the negligent or ultra vires acts of the guardians as discussed above.

The courts in India have a history of expanding the scope of “public policy” and increasing judicial intervention in proceedings relating to setting aside or enforcement of arbitral awards. Fortunately, the Delhi High Court did not commit the same error and limited its intervention by following the principles laid down in Renusagar, which were also favourably espoused by the Law Commission in its report on ‘Amendments to the Arbitration and Conciliation Act 1996’ .

[This post has been contributed by Namrata Kukreja and Sanjana Saxena, 3rd year law students of Jindal Global Law School, Sonipat]

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