Nujs-hsf Moot Court Competition, 2015: Finalists - Appellants 6p2m4l

IN THE HIGH COURT OF CALCUTTA AT CALCUTTA Letters Patent Appeal No. ____/2013 (Under Clause 15 of Letters Patent for the High Court of Calcutta, 1865) Celltone plc…………………………………. …………………………………...Appellant v. IndMobile Telecoms Limited, 5G Star Networks Limited……………………………………………………...Respondents Clubbed with Letters Patent Appeal No. ____/2013 (Under Clause 15 of Letters Patent for the High Court of Calcutta, 1865) Celltone plc …………………………………. ……………………………………...Appellant v. Band Bank…………….…………………………...……………….………………Respondent Clubbed with Letters Patent Appeal No. ____/2013 (Under Clause 15 of Letters Patent for the High Court of Calcutta, 1865) Celltone plc …...…………………………………. ………………………………….Appellant v. M/s Darsh Legal Associates……………………...……………………………….Respondent Written submissions on behalf of, Team Code: HS15F Counsel for the Appellant. TABLE OF CONTENTS

7TH NUJS-HSF NATIONAL CORPORATE MOOT COURT COMPETITION, 2014-2015

List of Abbreviations..................................................................................................................3 Index of Authorities....................................................................................................................5 Statement of Jurisdiction..........................................................................................................10 Questions Presented.................................................................................................................11 Statement of Facts....................................................................................................................12 Summary of Pleadings.............................................................................................................16 Pleadings..................................................................................................................................20 I.

The Incidents Surrounding the LoI Amounted to a Fraudulent Breach of the SAA........20 [A]. The LoI was Enforceable and Legally Valid................................................................21 [C]. 5G Star’s Disclosure was Ineffective and Celltone’s knowledge did not Restrict a Claim for Breach of Warranty..............................................................................................23 [D]. The Representation in the SAA amounted to Fraudulent Misrepresentation..............24

II.

The Incidents Surrounding the Calcutta License Amount to a........................................25

Breach of the SAA...................................................................................................................25 [A]. The Conduct of IndMobile and 5G Star was in Violation of Law................................25 [B] The Violation of the Law led to an istrative Sanction which had a Material Impact...................................................................................................................................28 [C] This is Attributable to the Company and they can be held Liable for the same............28 III.

The Incorrect ARPU Figures amount to Fraudulent Misrepresentation.......................29

[A]. The Clarification from 5G STAR was Vague and Insufficient.....................................29 [B]. The Initial Projections Amount to Fraudulent Misrepresentation.................................31 IV. V.

The Damages Claimed should be Awarded...................................................................32 Band Bank is Obligated to Release the Escrow Amount.................................................33

[A]. Indemnification obligation has been triggered.............................................................33 MEMORIAL FOR THE APPELLANTPAGE 2


[B]. Damage has been Caused due to such a Breach...........................................................34 [C]. The Escrow Agent is bound to Follow the Instructions in the Escrow Agreement......34 VI.

DLA is Liable to Pay Damages for Rendering an Incorrect Opinion...........................35

[A]. The Opinion Rendered by DLA is Incorrect since it Amounts To Negligent Misrepresentation.................................................................................................................35 [B]. Celltone has a right to sue DLA....................................................................................37 [C]. Celltone’s Due Diligence does not preclude its claim against DLA.............................38 [D]. DLA is Liable to Pay Damages....................................................................................38 VII.

The Acts Of The Government Amount To Expropriation.............................................39

[A] Celltone is an investor...................................................................................................39 [B] The High Court Judgment Amounts to Indirect Expropriation.....................................39 [C] No Anti-Arbitration Injunction should be entertained...................................................40 Prayer.......................................................................................................................................41 Appendix I................................................................................................................................42

MEMORIAL FOR THE APPELLANTPAGE 3


LIST OF ABBREVIATIONS

¶

Paragraph

AC

Appeal Cases

AIR

All India Reporter

All ER

All England Reports

AoA

Articles of Association

ARPU

Average Revenue Per Unit

BCLC

Butterworths Company Law Cases

BIT

Agreement between The Government and Republic of India and The Government of the United Kingdom of Great Britain and Northern Ireland for the promotion and protection of investments

BomLR

Bombay Law Reporter

Ch

Chancery

Ch.D.

Chancery Division

Cir.

Circuit

CLC

Company Law Cases

Colo.

Colorado Supreme Court

CTR

Claims Tribunal Reports

CVC

Chief Vigilance Commissioner

Del. Ch.

Delaware Court of Chancery

Del. SC.

Delaware Supreme Court

DLA

Darsh Legal Associates

E.D. Pa.

Eastern District of Pennsylvania

Edn.

Edition

EWCA

England and Wales Court of Appeal

EWHC

England and Wales High Court

HL

House of Lords

ICSID

International Centre for Settlement of Investment Disputes



Lloyd’s Rep

Lloyd's Law Reports

LoI

Letter of Intent

LT

The Law Times Reports

Mass. App. Ct.Massachusetts Appeals Court Mass. Super.

Massachusetts Supreme Judicial Court

N.C.

North Carolina Supreme Court

N.D.Ga.

United States District Court for the Northern District of Georgia

N.Y.

New York Court of Appeals

PC

Privy Council

POCA

Prevention of Corruption Act

QB

Queen's Bench

S.D.N.Y

U.S. District Court for the Southern District of New York

SAA

Share Acquisition Agreement

SC

Supreme Court

SCC

Supreme Court Cases

SCLR

Scottish Council of Law Reporting

SEBI

Securities and Exchange Board of India

Supp.

Supplement

TLR

The Times Law Reports

UKHL

UK House of Lords

WLR

Weekly Law Report



INDEX OF AUTHORITIES Indian Cases 1. Centre for Public Interest Litigation v. Union of India, AIR 2012 SCC 117………27 2. Dresser Rand S.A. v. M/s. Bindal Agro Chemical Ltd. & Another, AIR 2006 SC 8357……………….……………………………………………………….22 3. Gajanan Moreshwar Parelkar v. Moreshwar Madan, AIR 1942 BOM 44…………..34 4. Iridium India Telecom Ltd. v. Motorola Incorporated and Ors., AIR 2011 SCC 74...................................................................................................26,29 5. Jet Airways (India) Limited v. Sahara Airlines Limited & Ors, AIR 2011 BOM 734…………………………………………………………………34 6. Kamal Kant Paliwal v. Smt Prakash Devi Paliwal, AIR 1976 Raj 79……………….24 7. M.S.Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., (2004) 9 SCC 204……...……44 8. RC Thakkar v. Gujarat HSG Board, AIR 1973 Guj 34………………………………31 UK Cases 1. Aaron Reefs ltd v. Twiss, [1986] AC 273……………………………………………32 2. Aveling Barford v. Perion, [1989] 5 BCLC 626……………………………………..26 3. Bottin International Investments Ltd v. Venson Group PLC, 2006 EWHC 3112………………………………………………………………..30, 32 4. Bristol & West Building Society v. Mothew, [1997] 2 WLR 436…………………...33 5. Brown Jenkinson & Co v. Percy Dalton, [1957] 2 All ER 844……………………...32 6. Casamo LLP v. Viscount Reidhaven’s Trustees, [2014] SCLR 484………………...30 7. Courtney v Fairbairn Ltd v Tolaini Bros Ltd, [1975] 1 All ER 716…………………21 8. Daniel Reeds Ltd v EM ESS Chemists Ltd, [1995] C.L.C. 1405……………………23 9. Derry v. Peek, [1889] 14 A.C.337……………………………………………………24 10. Downs v. Chappell, [1997] 1 WLR 426……………………………………………...33 11. Edwards v Skyways Ltd, [1964] 1 WLR 349………………………………………..21 12. Gencor A Ltd v. Dalby, [2000] 2 BCLC 734……………………………………..26 13. Gilford Motor Co v. Horne, [1933] Ch 935………………………………………….27 14. Invertec v. De Mol Holding BP, [2009] EWHC 2471……………………………….33 15. Jones v. Lipman, [1962] 1 WLR 832……………………………………………….26 16. Loftus v. Roberts, [1902] 18 T.L.R. 532.....................................................................21 17. Malik and Mahmud v. Bank of Credit, [1997] UKHL 23. ………………………...34 18. Meridium Global Funds Management Ltd v. Securities Commission, [1995] 2 AC 500…………………………………………………………………….29 19. Myers v. Elman, [1940] A.C. 282…………………………………………………...37 MEMORIAL FOR THE APPELLANTPAGE 6


20. New Hearts Ltd v Cosmopolitan Investments Ltd, [1997] 2 BCLC 249..................35 21. Pagnan Spa v Feed Products Ltd, [1987] 2 Lloyd’s Rep 601………………………23 22. Pitt v PHH Asset Management Ltd, [1993] 4 All ER 961………………………….22 23. Prentice v Scottish Power Plc., [1997] 2 BCLC 264………………………………..24 24. Redgrave v. Hurd, [1881] 20 Ch. D. 1……………………………………………...30 25. Russell v Northern Bank Development Corporation, [1992] 1 WLR 588………….21 26. Smith New Court Securities Ltd v. Citibank NA, [1997] AC 254…………………33 27. Standard Chartered bank v Pakistan Shipping co, [2003] 1 All ER 173…………...25 28. Tesco Supermarkets Ltd v. Nattrass, [1971] 2 WLR 1166…………………………26 29. Trustor AB v. Smallbone, [2001] 1 WLR 1177…………………………………….26 30. Vahey v. Kenyon,[2013] EWCA Civ 658…………………………………………..31 31. Von Hatzfeldt-Wildenburg v. Alexmder, [1912] 1 Ch 284………………………...23 32. Walford And Others v. Miles, [1992] 2 AC 128 (HL)……………………………...22 US Cases 1. Banco popular North America v. Suresh Gandhi, 876 A.2d 253 (2005)……………38 2. Blackburn v. McCoy, 1 CA2d 648, 656 (1934)……………………………………..35 3. Cariboo Redi-Mix& Contracting Ltd v. Barcelo, 1991 881 (BC SC 1991)………...28 4. CBS Inc. v. Ziff-Davis Publishing Co., 553 N.E.2d 997 (N.Y. 1990). .....................24 5. Continental Heller v. Amtech Mechanical Services, 53 Cal.App.4th 500, (1997)….35 6. Greycas v Proud, 826 F.2d 1560 (7th Cir. 1987)………………………………..36,38 7. Horizon Financial v. Hansen, 791F.Supp. 1561 (N.D.Ga.1992)……………………38 8. Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. SC. 2005).......24 9. Isler v Brown, 196 N.C. 685 (N.C. 1929)...................................................................25 10. Itek Corp v. Chicago Aerial Industries, Inc., 248 A.2d 625 (Del. SC 1968)..............22 11. Kline v. First Western Government Securities, 24 F.3d 480 (3d Cir. 1994).........36 12. LLMD v. Marine Midland Realty Credit Corp., 789F.Supp. 657, 660 (E.D. Pa. 1992)............................................................................................22 13. Mehaffy, Rider, Windholz & Wilson v. Central Bank Denver, 892 P.2d 230 (Colo. 1995)…………………..………………………………………………… 36, 38 14. National Bank of Canada v. Hale & Dorr, WL 1049072 (Mass. Super. 2004)……. .37 15. Slotkin v. Citizen’s casualty Co, 614 F.2d 301 (2nd Cir. 1979)..............................37,39 16. Teachers Insurance and Annuity Association of America v. Tribune Co., 670F.Supp. 491 (S.D.N.Y.987)....................................................................................22 17. Teamster Local Pension Trust Fund v. Angelos, 762 F.2d 522 (7th Cir, 1985)…...…38 18. Zimmerman v. Kent, 31 Mass. App. Ct. 72, 82 (1991)………………………………37 Arbitral Awards



1. Compania del Desarrollo de Santa Elena, SA v Costa Rica, ICSID Case no ARB/96/1, Award of February 17, 2000........................................................................................40 2. TecnicasMedioambientalesTecmed S.A. v. The United Mexican States, Award, May 29, 2003, 43 ILM 133 (2004)...............................................................................40 3. Chevron Corp v. Donzinger, No. 11 Civ. 0691(LAK), 2011 WL 778052 (S.D.N.Y. Mar.7, 2011)……………………………………………………………...41 Statutes 1. Companies Act, 1956………………………………………………………………...17 2. Companies Act, 2013……………………………………………………………...…17 3. Indian Penal Code, 1860……………………………………………………………..26 Miscellaneous 1. Agreement between The Government and Republic of India and The Government of the United Kingdom of Great Britain and Northern Ireland for the promotion and protection of investments (Adopted on March 14 1994)........................................39,40 2. CVC Order no. 71/12/05, dated 9/12/2005…………………………………………..27 3. SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011……...26 4. UNIDROIT Principles, 2010.......................................................................................23 Books 1. Beatson et al, ANSON’S LAW OF CONTRACT, (29th edn., 2010)..................................25 2. D. Baker, R. Jillson, DUE DILIGENCE, DISCLOSURES

AND

WARRANTIES

IN THE

CORPORATE ACQUISITIONS PRACTICE (1992)………………………………………31 3. Jeffrey W. Berkman, DUE

DILIGENCE AND THE

BUSINESS TRANSACTION: GETTING

A

DEAL DONE, (2013).....................................................................................................22 4. John Sterba, LEGAL LETTER

OPINION LETTERS

PRACTICE

: A COMPREHENSIVE GUIDE TO OPINION (3rd

edn,

2003)

…………………………………………………………....36 5. M.P. Jain & S.N. Jain, PRINCIPLES OF ISTRATIVE LAW, (17th edn., 2003)…..27 6. Mulla, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS (19th edn., 2012)…………...21

Articles



1. Articles on Responsibility of States for internationally wrongful acts, INTERNATIONAL LAW COMMISSION (November 2001)………………………………………………...40 2. B.H. Weston, Constructive Takings under International Law: A modest foray into the problem of creeping expropriation, VIRGINIA JOURNAL

OF

INTERNATIONAL LAW

(1976)...........................................................................................................................40 3. Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, 15 ICSID REVIEW -FOREIGN

INVESTMENT

LAW

JOURNAL

(2000)..............................................................40 4. Edward P. Welch, Andrew J. Turezyn & Robert S. Saunders, Folk on the Delaware General Corporation Law, 5th edn. (New York: Aspen Publishers, 2006).................21 5. Newcombe, The Boundaries of Regulatory Expropriation in International Law, ICSID REVIEW-FILJ (2005)....................................................................................... 40 6. S. Malhotra, Cancellation of telecom licenses in the 2G Case: Claim for indirect expropriation, 6(2) NUJS LAW REVIEW (2013)..........................................................40 7. UNCTAD, Series on Issues in International Investment Agreements, Takings of Property 11, available at http://unctad.org/en/docs/psiteiitd15.en.pdf. (Last visited on January 12th, 2015)......................................................................................................40 8. V. Umakant & M. Naniwadekar, Corporate Criminal Liability and Securities Offerings: Rationalizing the Iridium-Motorola Case, 23(1) NATIONAL LAW SCHOOL OF INDIA

REVIEW (2011)…………………………………………………………….29

STATEMENT OF JURISDICTION

APPEAL I The appellant has approached this Honourable Court under Clause 15 of Letters Patent for the High Court of Calcutta, 1865.

APPEAL II The appellant has approached this Honourable Court under Clause 15 of Letters Patent for the MEMORIAL FOR THE APPELLANTPAGE 9


High Court of Calcutta, 1865.

APPEAL III The appellant has approached this Honourable Court under Clause 15 of Letters Patent for the High Court of Calcutta, 1865.

QUESTIONS PRESENTED

I.

WHETHER

THE INCIDENTS SURROUNDING THE

FRAUDULENT BREACH OF THE

LETTER

OF INTENT AMOUNT TO A

SAA?

II.

WHETHER THE INCIDENTS SURROUNDING THE CALCUTTA LICENSE AMOUNT TO A BREACH OF THE SAA?

III.

WHETHER THE INCIDENTS SURROUNDING THE AVERAGE REVENUE PER UNIT AMOUNT TO A FRAUDULENT BREACH OF THE SAA?

IV.

WHETHER THE DAMAGES CLAIMED BY CELLTONE SHOULD BE AWARDED?



V.

WHETHER THE ESCROW AMOUNT SHOULD BE RELEASED OR NOT?

VI.

WHETHER DARSH LEGAL ASSOCIATES ARE LIABLE TO PAY DAMAGES?

VII.

WHETHER THERE WAS PRIMA FACIE EXPROPRIATION OR NOT?

STATEMENT OF FACTS

THE BACKGROUND IndMobile Telecoms Limited [‘IndMobile’], a company incorporated in India and a member of Nifty 50, is a successful telecom equipment company. The chairman and managing director of the company is Mr Sardar, who along with his family, is also the promoter of the IndMobile and holds 35% of the shares in the company with them. In order to enter the telecom services business, IndMobile decided to bid for the licenses for 5G mobile networks to be granted by the Government of India [‘GoI’]. For housing this telecom service business, a wholly owned subsidiary named 5G Star Networks Limited [‘5G Star’] had been set up by IndMobile. THE AWARD OF LICENSES MEMORIAL FOR THE APPELLANTPAGE 11


In the bidding process conducted by the GoI in 2013, bids were placed by 5G star for Kolkata, Chennai and Hyderabad circles. 5G star satisfied both the technical and financial criteria and was successful in bagging the license for Kolkata and Hyderabad. The actual license agreements were executed between 5G Star and the GoI on November 1, 2013. In order to source the expertise required to run this new business, IndMobile invited Celltone plc, a UK based leading telecom services company who agreed to invest US $490 million for a stake of 49% in 5G star. THE DUE DILIGENCE PROCESS Celltone had a zero tolerance policy for corruption and hence adopted a cautious approach before finalizing the deal. It decided to conduct a full blown due diligence and for this purpose, appointed M/s Lexman Associates, a leading Indian law firm and DBAB Partners, a leading ing firm. During a meeting in Kolkata, Mr Gangston, the project manager of Celltone, was assured by 5G Star’s representatives that the process of award of licenses was transparent and entirely above board. Celltone and their lawyers and ants were provided full access to all the relevant books and records of 5G Star and to the extent necessary, those of IndMobile. During further investigation, Mr Gangston came across a former employee of IndMobile who revealed that in the past the company entertained government employees and showered them with gifts. Although concerned about this, Mr Gangston decided not to escalate this issue to the senior management of Celltone since the deal was too important to be scuttled. THE SHARE ACQUISITION AGREEMENT Under the of the SAA, Celltone was to subscribe for 49% shares of 5G Star for a consideration of US$ 490 million. 40% of these shares were to be subscribed to Celltone out of a new issue of shares undertaken by the company for a consideration of US$ 400 and the remaining 9% representing 125,998 shares were to be acquired from IndMobile for a consideration of US$ 90 million paid to IndMobile [‘Sale shares’]. The SAA was executed on October 3, 3013. THE LEGAL OPINION A condition precedent to the SAA was the issue of a closing legal opinion by M/S Darsh Legal Associates [‘DLA’], the legal counsel representing IndMobile and 5G star which was issued MEMORIAL FOR THE APPELLANTPAGE 12


on 25th November, 2013. DLA gave various opinions based on the assumption that it had not come across any event or circumstances that would render the SAA void or voidable by reason of fraud, misrepresentation, default or lack of consideration. DLA also obtained professional liability insurance worth at least US $100 from ProInsure for this purpose. On satisfaction of the conditions precedent, Celltone completed the acquisition under SAA on November 25, 2013. THE ESCROW AGREEMENT Celltone, IndMobile and 5G star entered into an escrow agreement dated November 25, 2013 with Band Bank [‘Bank’], the escrow agent. Based on the of this agreement, Band Bank was to hold 10% of the consideration payable by Celltone to IndMobile and 5G Star for a period of 3 years from the closing date which was to be applied towards satisfaction of any indemnification obligations of IndMobile and 5G Star that may arise under the SAA. The indemnification clause (10.1) under the SAA provided inter alia, that in the event of damages caused due to the breach of any representation, warranty, covenant or agreement made by the IndMobile and 5G Star, they would undertake to indemnify and hold harmless the purchaser to the extent of any and all damages suffered. In the absence of such claim, the escrow agent was to the pay the escrow amount to IndMobile and 5G Star at the end of the said three-year period. THE CANCELLATION OF KOLKATA METRO LICENSE After the business had commenced and huge financial investments had been made, it came to light that the award of license to 5G star in the Kolkata Metro, was challenged under a writ petition filed by Navro Telecom Limited in December 2013. It was alleged that Mr. Bantha Ranga, a project manager at IndMobile, paid Rs 2, 50,000 to a company owned by Mr. Debraya, a member of the committee deciding upon the bids. This sum was paid from 5G star and was shown as consulting fees in its books. Mr Sardar claimed to be unaware of any such actions by Mr Bantha Ranga and was quite shocked. The Calcutta High Court after weighing the seriousness of the allegations and following the law laid down by the Supreme Court, cancelled the license awarded to 5G Star for Kolkata. A special leave petition to Supreme Court made by 5G star was dismissed at the ission stage itself. INCIDENTS SURROUNDING CALCULATION OF ARPU



While Celltone was still assessing its situation, more new discoveries were made. Celltone had been operating on the assumption that the projected ARPU for the Hyderabad metro area was Rs 250. On being advised by DBAB partners to clarify the components that went into calculation of ARPU, Mr Beanman, the Vice President (Finance) of Celltone, raised this issue during a telephone conference call with the finance personnel of 5G Star. During the call, 5G Star personnel clarified that the projected ARPU was without regards to discounts and rebates. 5G Star remained under the assumption that the information had been disclosed, however due to poor connectivity and continuous disruptions in the conference call, the information was not received properly by Celltone. Celltone did not find an opportunity to clarify the same. Only after closing of Celltone’s investment in 5G Star it was discovered that the net figure of ARPU without taking into the discounts and rebates was only Rs 175 implying that Celltone had considerably overpaid for its stake in 5G Star. THE LETTER OF INTENT After the incidents surrounding ARPU, Celltone got another shock on receiving a legal notice from Grovera Inc, [‘Grovera’] a telecom consultancy company based in Greenwich, Connecticut which claimed that the sale of 125,998 shares to Celltone was illegal since IndMobile had signed an LoI with Grovera to sell it those shares. THE SUITS Celltone decided to take remedial actions and filed three civil suits before the Calcutta High Court. It sued IndMobile and 5G stars to refund the purchase consideration or pay equivalent damages. (First suit) It sued Band Bank seeking release the Escrow amount in favour of Celltone pursuant to the Escrow Agreement. (Second suit). It sued DLA seeking damages to the tune of $490 million for rendering an incorrect legal opinion. (Third suit). In parallel, Celltone also initiated an arbitration claim under the India-UK Bilateral Investment Treaty against the Government of India, on the ground that the action of cancellation of the licence for the Kolkata metro area amounted to an expropriation of its investment in 5G Star. All three suits were dismissed on their merits by the Calcutta High Court. Celltone has preferred an appeal against all the orders to a division bench of the Calcutta High Court. It has decided to club all the appeals and hear them in a composite fashion.



SUMMARY OF PLEADINGS

I.

THE INCIDENTS SURROUNDING THE LETTER OF INTENT AMOUNTED TO A FRAUDULENT BREACH OF THE SAA.

It is submitted that the sale of shares to Celltone amounted to a fraudulent breach of the SAA. First, the LoI entered into between IndMobile and Grovera in respect of sale of the 9% shares is an enforceable and legally binding contract. It is recognized under the Companies Act and is binding on the parties as well. The lock-in agreement and the exclusivity provision were binding provisions. This acceptance was an indication of the intent to create legal relations and the LoI is therefore, binding. Second, the disclosure of the LoI as was made available to the professionals engaged by Celltone did not amount to a fair and true disclosure. Mere reference to a source of document does not meet the standards for a fair disclosure. Further, the warranties and representations of the Seller are not affected by the opportunity of due diligence provided to the purchaser. Third, this was fraudulent misrepresentation. The information about encumbrances on the shares was suppressed, which amounted to a suggestion of falsehood in relation to free transferability of shares. Celltone operated on good faith on the representations of 5G Star, and a claim for breach of the same can be sustained in the current circumstances. Hence, the incidents surrounding the LoI constitute a fraudulent breach of the SAA.s



II.

THE INCIDENTS SURROUNDING THE CALCUTTA LICENSE CONSTITUTE BREACH OF THE

SAA

It is submitted that the incidents surrounding the Calcutta license constitute a breach of Clause 6.7 of the SAA. The actions of 5G Star amount to bribery under the Prevention of Corruption Act 1988. First, gratification was paid to a public servant. Although the payment was made to a consultancy firm, the receipt of money by the firm should be treated as the receipt of money by the individual. This is because he was the sole beneficiary in control of the firm, and the firm was used to mask receipt of this money. Second, this gratification was illegal remuneration. Mr. Debaraya was a member of the tender committee, and did not disclose receipt of this amount from an interested party. This is clearly in violation of tender guidelines and indicative of the intent of Mr. Debaraya. Third, this illegal gratification was in respect of an official act. Therefore, 5G Star was involved in bribery. The receipt of money by Mr. Debaraya places him in a conflict of interest with regards to the pecuniary interests of the Government. These actions of the firm invited the decision of the Calcutta High Court which quashed the licenses. The ability of the business to conduct itself as contemplated to be conducted was severely hampered by this sanction. Hence, it is submitted that the actions of the respondents in this matter amount to a breach of the SAA. III.

THE INCIDENTS SURROUNDING THE ARPU CONSTITUTE FRAUDULENT MISREPRESENTATION

It is submitted that the 5G Star supplied Celltone with an incorrect profit projection to induce them into entering the contract. First, the initial figure of Rs.250 was provided by 5G Star, knowing it to be false. The clarification offered by them during due diligence was incomplete, speculative and failed to provide the complete picture. Therefore, this clarification fails to meet the standard of disclosure and should not be considered. Second, this was fraudulent misrepresentation. The initial projection was supplied recklessly by the 5G Star in order to present a false image about the profitability of the business. There were no reasonable grounds for believing this projection to be true. Celltone had relied on this projection and it influenced its decision to enter into the contract. Therefore, the reckless suggestion of the untrue fact induced them to enter the agreement, and it is submitted that the false projection amounts to fraudulent misrepresentation. IV. THE DAMAGES CLAIMED SHOULD BE AWARDED MEMORIAL FOR THE APPELLANTPAGE 16


It is submitted that the damages claimed by Celltone should be awarded in full. In the absence of these fraudulent misrepresentations, Celltone would not have entered into the contract at all. The damages should be calculated on a ‘no transaction’ basis, and it should be entitled to be put into the position it would have been had these representations not been made. Hence, it is submitted that the damages claimed should be awarded in full. V. BAND BANK IS OBLIGATED TO RELEASE THE ESCROW AMOUNT. It is submitted that the Bank is bound to release the escrow amount as the indemnification obligation has been triggered. First, there was a breach of warranty which triggered the indemnification obligation. Second, damages have been caused due to the breach. The indemnification obligations covered ‘any and all damages’ suffered. This includes the fall in valuation, goodwill, attorney fees and other expenses. Third, the escrow agent is bound to follow the instructions of the escrow agreement. The agreement clearly stipulated that indemnification obligations would be triggered in the event of any breach of warranty by IndMobile or 5G Star. Since the breach has occurred, and damages have been suffered following from the breach, the escrow agent is bound to release the amount. Hence, Band Bank is obligated to release the escrow amount. VI. DLA IS LIABLE TO PAY DAMAGES FOR RENDERING AN INCORRECT OPINION. It is submitted that DLA is liable to pay damages as claimed by Celltone. First, the opinion rendered was incorrect and amounts to negligent misrepresentation. DLA incorrectly stated that the execution, delivery and performance of the SAA would not breach the and conditions of a contract. This amounts to negligent misrepresentation since DLA had knowledge of the LoI and the enforceable lock-in clause therein. Further, its opinion was based on erroneous assumptions. DLA had a duty to investigate the circumstances before rendering an opinion and therefore a ive failure to know the facts does not excuse its liability. Second, Celltone has a right to sue DLA for rendering an incorrect opinion since it had superior knowledge of facts which shaped its opinion. Further, DLA knew that Celltone would place reliance on its opinion, which in turn created a duty of care towards Celltone. Third, Celltone’s due diligence does not preclude its claim against DLA as its own investigation does not imply non-reliance on the opinion letter. Celltone placed reliance on the negligent misrepresentation of DLA and suffered damages due to such reliance. These damages must therefore put Celltone in the same position as it would have been had there MEMORIAL FOR THE APPELLANTPAGE 17


been no misrepresentation. The damages therefore, should be calculated on a ‘no transaction’ basis making DLA liable to pay damages in full. VII. THE ACTS OF THE GOVERNMENT AMOUNT TO EXPROPRIATION AND NO ANTI ARBITRATION INJUNCTION SHOULD BE ENTERTAINED. It is submitted that there is a prima facie case for expropriation of the assets of Celltone and therefore, no anti-suit injunction should be granted. First, the Celltone satisfies the definition of investor under the India-UK Bilateral Investment Treaty, and their purchase of shares amounts to an investment. Second, the revocation of the Calcutta licenses deprives Celltone of the use, value and enjoyment of its investment. Regulatory action of this sort has routinely been held to be expropriation. Third, since a prima facie legitimate case for expropriation has been established, and the objects of the arbitration dispute and the current proceedings are completely divorced, the proceedings should be allowed to continue as is. Hence, it is submitted that since a prima facie case for expropriation exists, no anti-suit injunction should be entertained.



PLEADINGS I.

THE INCIDENTS SURROUNDING

THE

FRAUDULENT BREACH

LOI AMOUNTED

OF THE

TO A

SAA

1. It is submitted that the sale of 9% shares by the Vendor Company IndMobile to Celltone is patently illegal. First, the LoI was enforceable and legally valid [A]. Second, 5G Star’s disclosure was ineffective and Celltone’s knowledge did not restrict a claim for breach of warranty [B]. In any event, the representation in the SAA amounted to fraudulent misrepresentation [C]. [A]. THE LOI WAS ENFORCEABLE AND LEGALLY VALID



2. It is submitted that the clause in the LoI that restricted transfer of Sale Shares to any third party is valid and legally enforceable. 1 Restrictions on transferability of shares of a public company in private agreements are permissible contractual arrangements between shareholders, even if the claim is unenforceable against the Company. 2 3. It is further submitted that the LoI was enforceable and legally binding on both parties. It is settled law that an LoI may be construed as a letter of acceptance depending on factors such as intention of the parties, the nature of the transaction and the language employed in the agreement.3 The onus of demonstrating a lack of intention to create legal relations lies on the party asserting it and is a heavy burden to discharge.4 4. The LoI in this case left no essential uncertain or undetermined.5 One of the prerequisites for a contract to be binding is an “agreed price” 6 without which an agreement can be rendered vague. In this case, the parties were unequivocally in agreement on the purchase consideration as well as the number of shares sought to be purchased. 7 The AoA of the Company too, was to be amended to reflect the same agreement which indicates the clear intention of the parties to be legally bound. It is therefore submitted that the LoI is an enforceable “preliminary contract” whereby the parties simply desired a more elaborate formalization of the agreement.8 1 Section 58(2), Companies Act, 2013. 2Russell v. Northern Bank Development Corporation, [1992] 1 WLR 588; Section 202, DELAWARE GENERAL CORPORATION LAW; Edward P. Welch, Andrew J. Turezyn & Robert S. Saunders, Folk on the Delaware General Corporation Law (5th edn., New York: Aspen Publishers, 2006)

3 Mulla, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, 317-318 (13th edn., 2012). 4 Edwards v. Skyways Ltd., [1964] 1 WLR 349. 5 Loftus v. Roberts, 18 T.L.R. 532. 6 Courtney & Fairbairn Ltd. v Tolaini Bros (Hotels) Ltd [1975] 1 All ER 716. 7 Dresser Rand S.A. v. M/s. Bindal Agro Chemical Ltd. & Another, AIR 2006 SC 871. 8 Teachers Insurance and Annuity Association of America v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987) [“Teachers”].



5. Furthermore, the condition restricting the sale or transfer of the shares to any third party 9 is an integral part of the whole understanding, based on which the Grovera had signed the agreement. Even the clause that “The parties shall negotiate in good faith” is a fundamental part of the whole agreement and forms part of the consideration for Grovera assenting to the agreement. Since the lock-out period was only for a specified period for which the restriction lasted, there was no hindrance to its enforceability. 10 This exclusivity or no-shop provision in itself constitutes a separate binding provision. 11 Even the lock-in agreement having been for a specified period of 3 months was therefore enforceable, as it rendered certainty as to the period within which negotiations were to be concluded. 12 The provisions in the agreement, therefore, obligated the parties to attempt in good faith to reach a final and formal agreement13. The LoI is enforceable as a mutually binding obligation to negotiate in good faith.14 This obligation, in turn, implied that the agreed shares could not be transferred to anyone within the specified lock-in period. 6. It is further submitted that the mere fact that the parties contemplated that the LoI would be superseded by a more formal agreement and by future negotiations, 15 does not prevent it from taking effect as a contract16 It is for the parties to decide at what stage they wish to be 9 ¶ Appendix C, Factsheet. 10 Walford And Others v. Miles, [1992] 2 AC 128 (HL) [“Walford”]; Pitt v. PHH Asset Management Ltd, [1993] 4 All ER 961.

11 Jeffrey W. Berkman, DUE DILIGENCE AND THE BUSINESS TRANSACTION: GETTING A DEAL DONE, 170 (2013). 12 Walford, [1992] 2 AC 128. 13 Itek Corp v. Chicago Aerial Industries, Inc., 248 A.2d 625 (Del. 1968) 14 Channel Home Centers v. Grossman, 795 F.2d 291 (3d Cir. 1986); LLMD v. Marine Midland Realty Credit Corp., 789 F.Supp. 657, 660 (E.D. Pa. 1992).

15 Art. 2.14., UNIDROIT Principles. 16 Mulla, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, 317-318( 13th edn., 2012). MEMORIAL FOR THE APPELLANTPAGE 21


contractually bound.17 In the present case, the LoI carried no clause making the conclusion of the contract incumbent upon the formally drawn document. All the basic and essential had been given an unqualified acceptance, with the intention to treat the same as a concluded contract.18 Therefore, definitive documentation was a mere extension to the already decided contractual agreement and the lack of formality does not invalidate the LoI.19 It simply represented the desire of the parties as to the manner in which the previously agreed transaction will in fact proceed.20 7. Hence, it is submitted that the LoI was legal and binding. [C]. 5G STAR’S DISCLOSURE WAS INEFFECTIVE AND CELLTONE’S KNOWLEDGE DID NOT RESTRICT A CLAIM FOR BREACH OF WARRANTY 8. It is well established that in the absence of a contractual stipulation any disclosure to be effective for the purpose of qualifying warranties, would require to be fair and sufficiently detailed to effectively bring the potential breach of warranty to the purchaser’s attention 21 and mere reference to a source information will not satisfy the requirements of a fair disclosure.22 Therefore, it is submitted that merely providing the LoI without actually pointing out its binding nature was not specific enough and does not amount to a fair and effective disclosure so as to qualify the warranties made in the SAA. 9. Furthermore, in the absence of an express “sand-bagging” provision, Courts have held that in cases where the agreement of sale is silent, the seller’s representations and warranties are unaffected by the purchaser’s due diligence.23 The seller having owned and operated the business was in a better position than the purchaser to know about critical facts relating to 17 Pagnan Spa v. Feed Products Limited, [1987] 2 Lloyd’s Rep 601. 18 Currimbhoy and Co. Ltd. v. Creet, (AIR 1933 PC 29.) 19 Shankarlal Narayandas Mundade v. The New Mofussil Co. Ltd. & Ors., AIR 1946 PC 97. 20 Von Hatzfeldt-Wildenburg v. Alexmder, (1912) 1 Ch 284. 21 Prentice v. Scottish Power plc., [1997] 2 BCLC 264. 22 Levison v. Farin [1978] 2 All E.R. 1149 and Daniel Reeds Ltd. v. EM ESS Chemists Ltd. [1995] C.L.C. 1405).



the business. The period to conduct due diligence was limited in duration within which there were numerous factors that Celltone had to investigate and . As a consequence, it was not unusual that Celltone would fail to fully appreciate the significance of the facts uncovered during due diligence.24 This being Celltone’s first foray into the Indian market, it can be presumed that it relied on the seller’s representations and warranties to provide an extra layer of protection in the transaction, in addition to the layer of protection provided by its own due diligence. It is therefore submitted that Celltone’s constructive knowledge of the LoI should not affect its ability to subsequently bring suit for breach. [D]. THE REPRESENTATION IN THE SAA AMOUNTED TO FRAUDULENT MISREPRESENTATION 10. It is submitted that the representation in the SAA constitutes fraudulent misrepresentation. Fraudulent misrepresentation arises when there is a suggestion of an untrue fact, either negligently or recklessly, intended to induce the other party to enter into the contract and this leads to damages.25 It is submitted that the representation was false since the respondent was not absolutely entitled to sell and transfer the shares due to the of the LoI, and reliance was placed on this for two reasons. i. Suppression of truth amounts to suggestion of falsehood. 11. It is submitted that the respondents cannot take the defense that mere silence does not amount to misrepresentation.26 It is a rule of equity, as well as of law, that a suppressio veri is equivalent to a suggestio falsi.27 The respondents were clearly aware of the binding nature of the LoI and thus had knowledge of the falsity of their representation. Therefore, when a statement of clear title was made but the fact that there was an existing encumbrance

23 Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. Super. Ct. 2005). 24 CBS Inc. v. Ziff-Davis Publishing Co., 553 N.E.2d 997 (N.Y. 1990). 25 Derry v. Peek, [1889] 14 A.C.337 . 26 Kamal Kant Paliwal v. Smt Prakash Devi Paliwal, AIR 1976 Raj 79 [“Kamal”] 27 Kamal, AIR 1976 Raj 79. MEMORIAL FOR THE APPELLANTPAGE 23


had rather been suppressed, it was a suppression of truth with a suggestion of falsehood and hence, amounted to fraudulent misrepresentation.28 ii. Intention of the Party is immaterial 12. It is further submitted that the intention of the respondents is immaterial. 29 The mere fact that they made a representation claiming to have title over the shares knowing it was untrue is sufficient to prove fraudulent misrepresentation. Furthermore, merely because the misled party had the opportunity to investigate it is not deprived of the right to claim deception and therefore a breach of warranty.30 There is an obligation upon the party upon whom confidence has been reposed to disclose information relevant to the contract 31 IndMobile, having special knowledge which was not accessible to Celltone, had a duty to disclose everything that may have affected the latter’s judgment.32 13. Therefore, even though Celltone conducted due diligence, it relied on the representations made in the SAA on the basis of which it was induced to enter into the transaction with IndMobile and 5G Star. Additionally, as a result of the breach of the warranties, it suffered damages in the form of loss of goodwill, overpayment of purchase consideration etc. Hence, it is submitted that the representation amounted to fraudulent misrepresentation.

II.

THE INCIDENTS SURROUNDING BREACH

THE

OF THE

CALCUTTA LICENSE AMOUNT

TO A

SAA

14. It is submitted that during the process of obtaining the Calcutta licenses, 5G Star was in violation of an applicable law and regulation which resulted in an istrative sanction of a material nature [A]. This in turn had a material adverse effect on the ability of the

28 Isler v. Brown, 196 N.C. 685 (N.C. 1929). 29 United Motors Finance Co v. Addison and Co., (1937) 39 BOMLR 706. 30 Standard Chartered bank v. Pakistan Shipping Co., [2003] 1 All ER 173. 31 Al-Kandari v.JR brown, 1988 QB 665. 32 Anson’s Law of Contract, 3019 (Beatson et al, 29th edn., 2010). MEMORIAL FOR THE APPELLANTPAGE 24


Company to conduct its business [B]. This act is attributable to 5G Star, and is a breach of representations made in the SAA [C]. [A]. THE CONDUCT OF INDMOBILE AND 5G STAR WAS IN VIOLATION OF LAW

15. It is submitted that 5G Star committed bribery under the POCA. This is because the payments to Mr. Debaraya’s Company were gratification to a public servant [i], other than legal remuneration [ii] and this was in respect of an official act [iii]. i. The payment amounted to a gratification to a public servant 16. It is submitted that the payment made to Mr. Debaraya’s company, should be construed as having been to Mr. Debaraya. Mr. Debaraya was a public servant under Section 21 of the Indian Penal Code, as he was “an officer entitled to make assessments on pecuniary matters relating to the Government”.33 Although the consultancy company is a separate legal entity, the “corporate veil” can be pierced in cases where the “company serves as a façade to obfuscate identity”.34 In the instant case, the threefold test for this as set out in Trustor AB35 has been met. First, the individual was in control. Second, the company was used to conceal receipt or avoid liability. Third, it is in the interests of justice. 17. First, the individual was in control of the company. Mr. Debaraya along with his wife fully owned the consulting company36, and was the ‘sole beneficial shareholder’.37 Thus, he had both de facto and de jure control of the company.38 In any case, he was the ‘directing mind and will’ of his company, and the actions of his company can be attributed to him. 39 In light of this attribution, his transactions indicate knowing receipt of the money. 33 Sec. 21, INDIAN PENAL CODE, 1860. 34 Jones v. Lipman, 1962 1 WLR 832; Gencor A Ltd v. Dalby, 2000 2 BCLC 734. 35 Trustor AB v. Smallbone (no 2), 2001 1 WLR 1177. 36 ¶10, Factsheet. 37 Aveling Barford v. Perion, 1989 5 BCC 677 [“Perion”]. 38 Reg 2(1)(e), SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011. MEMORIAL FOR THE APPELLANTPAGE 25


18. Second, the company was used to conceal receipt from the principal. It is submitted that Mr. Debaraya used the company as a ‘vehicle’ to hide receipt. As per the CVC Guidelines on Tenders,40 Mr. Debaraya should have disclosed this conflict of interest to the Government, which would have led to his removal from the tender committee. Failure to do so is an ‘improper use of the corporate structure.’41 19. Third, piercing the veil is in the interests of justice. Mr. Debaraya was engaged in the abuse of a corporate structure to the detriment of the Government. In this case, Mr. Debaraya’s dealings with 5G Star raise a presumption of bias 42 in the tender dealings, which was confirmed by the decision of the Calcutta High Court. 43 In light of this bias in public dealings, the corporate veil must be pierced to establish the identity of Mr. Debaraya as the recipient of money.44 ii. The payment did not amount to a legal remuneration 20. Mr. Debaraya was a member of the tender committee 45 which was responsible for awarding licenses for the 5G mobile networks. of tender committees owe a fiduciary duty to the Government46, and any possible conflict that may lead to sub-optimal allocation of resources is a betrayal of such duty. Therefore, any remuneration received by a public

39 Iridium India Telecom Ltd. v. Motorola Incorporated and Ors., 2011 1 SCC 74; Tesco Supermarkets Ltd v. Nattrass, 1971 2 WLR 1166.

40 CVC Order no. 71/12/05 dated 9/12/2005. 41 Perion, 1989 5 BCC 677. 42 M.P. Jain & S.N. Jain, PRINCIPLES OF ISTRATIVE LAW, 542 (17th edn., 2003). 43 ¶12, Factsheet. 44 Gilford Motor Co v. Horne, 1933 Ch 935. 45 ¶10, Factsheet. 46 Centre for Public Interest Litigation v. Union of India, 2012 Indlaw DEL 794. MEMORIAL FOR THE APPELLANTPAGE 26


servant from an interested party in the tender proceedings, without disclosure of the same to the Government, is illegal. iii.

The gratification was in respect of an official act

21. Finally, it is submitted that the receipt of this money places Mr. Debaraya in a situation where there is a possible conflict of interest. The defence of the consultancy services provided being legitimate is excluded by the decision of the Calcutta High Court. This assumption of bias indicates a potential conflict of interest.47 22. The question of whether Mr. Debaraya actually influenced tender proceedings or had the intention to do so in 5G Star’s favour is irrelevant as “if the intention or object with which money is offered to a public servant is to induce him to perform an official act to show favor in the exercise of his official function, the offence would be complete”.48 In the instant case, the finding of presumption of bias by the Calcutta High Court as well as the concealment of this amount by Mr. Debaraya sufficiently establishes the required intention.

[B] THE VIOLATION OF THE LAW LED TO AN ISTRATIVE SANCTION WHICH HAD A MATERIAL IMPACT.

23. The Calcutta license was cancelled after a revelation of the nexus between Mr. Debaraya and 5G Star by a decision of the Calcutta High Court. It is submitted that the cancellation of a license amounts to istrative action,49 and this is likely to lead to a material adverse effect. 24. The clause in the SAA reads ‘likely to result in an istrative sanction of a material nature’.50Therefore, it is adequate to prove that on the balance of probabilities, the

47 CVC Order no. 71/12/05, dated 9/12/2005. 48 Mohadeo Daunappa Gunaki v. State, AIR 1952 Bom 435. 49 Art. 4, Articles on Responsibility of States for Internationally Wrongful Acts, INTERNATIONAL COMMISSION, (November 2001).

50 Cl. 6.7, Appendix A, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 27

LAW


istrative sanction is likely to lead to a material adverse effect on the ability of the company in a reasonable man’s position to continue its business. 25. It is submitted that the cancellation of the license means the loss of a significant source of revenue, which is material and permanent, and therefore, a material adverse effect to the functioning of the company as envisaged at the time of the agreement. It has been stated that in commercial agreements, the loss of a significant source of revenue is sufficient to signify a material adverse effect.51 Hence, it is submitted that there is a loss of the ability to conduct business in Calcutta and hence the material adverse impact is a direct result of the istrative sanction. [C] THIS IS ATTRIBUTABLE TO THE COMPANY AND THEY CAN BE HELD LIABLE FOR THE SAME.

26. It is submitted that the actions and mens rea of Mr. Bantha Ranga, in addition to the payment of the money to Mr. Debaraya can be attributed to 5G Star. Such actions constitute a breach of warranty in the SAA and render them abettors of bribery under Section 109 of the Indian Penal Code. 27. The money paid to Mr. Debaraya was paid out of the s of 5G Star, and therefore, can be easily attributed to 5G Star. 28. On the issue of the intent of Mr. Bantha Ranga, the Courts have held that the mens rea of an employee can be attributed to the Parent Company.52 In the instant case, Mr. Bantha Ranga was a part of the core team handling the licensing process and was authorized by the Company to deal in the licensing process. 53 The test laid down in Meridian54 therefore, is satisfied, which stated that “irrespective of the person being the ‘directing will and mind’ of the company, if the person was authorized by the Company for a particular purpose, then his knowledge shall be attributed to the Company”. The same principle was affirmed in 51 Cariboo Redi-Mix& Contracting Ltd v. Barcelo, 1991 881 BC SC. 52 V. Umakant & M. Naniwadekar, Corporate Criminal Liability and Securities Offerings: Rationalizing the Iridium-Motorola case, 23(1) NATIONAL LAW SCHOOL OF INDIA REVIEW 109 (2011).

53 Q.9, Clarifications. 54 Meridium Global Funds Management Ltd v. Securities Commission, 1995 2 AC 500. MEMORIAL FOR THE APPELLANTPAGE 28


Iridium55, which stated that the mens rea of persons ‘entrusted with the exercise of powers of the Company’ could be attributed to the company. Hence, the mens rea of Mr. Ranga can be attributed to 5G Star. It is therefore submitted that 5G Star committed a breach of warranty. III.

THE INCORRECT ARPU FIGURES

AMOUNT TO

FRAUDULENT

MISREPRESENTATION 29. It is submitted that the communication of the incorrect ARPU figure to Celltone amounts to fraudulent misrepresentation by 5G Star and IndMobile for three reasons. First, the clarification was vague and insufficient and should not be considered [A]. Second, the initial projection amounts to fraudulent misrepresentation[B]. [A]. THE CLARIFICATION FROM 5G STAR WAS VAGUE AND INSUFFICIENT

30. It is submitted that once the figure of Rs.250 had been ‘provided to Celltone plc’,56 a continuing responsibility for those representations can be imputed to 5G Star.57 The burden to rectify this projection lies on 5G Star. The fact that no further documents rectifying the ARPU figure were sent out, even after the frustrated phone call is indicative of 5G Star’s failure to fulfil this responsibility. The fact that the phone call kept getting frustrated implies that it was foreseeable that Celltone did not obtain the correct information, and the continuing responsibility for the original representation is sustained.58 Further, the response was a conjecture and not reflected in any internal documents. The Court in Bottlin International Investments held that ‘such a conveyance does not satisfy the standard of

55 Iridium India Telecom Ltd v. Motorola Incorporated and Ors., 2011 1 SCC 74. 56 ¶12, Factsheet. 57 Casamo LLP v. Viscount Reidhaven’s Trustees, 2014 SCLR 484 [“Viscount”]. 58 Viscount, 2014 SCLR 484.



disclosure’59. In light of this responsibility, a finding on the basis of the clarification offered during the phone call cannot be sustained. 31. Further, it is submitted that ‘it is not enough if the claimants could have discovered the truth, but whether they in fact discovered the truth’.60 In the current scenario, Celltone had not discovered the actual figure of Rs.175 until after the completion of the deal. 61 Mere opportunity of due diligence with the other party does not exclude the duty on 5G Star to disclose material facts. In keeping with this standard of disclosure and general corporate practice, a disclosure letter should have been sent out by 5G Star. 62 A disclosure that is neither specific nor express does not meet the standard for disclosure in share sale agreements.63 32. In any case, it is submitted that the response given by 5G Star officials during the phone call failed to provide an accurate picture. This engages the rule laid down in Vahey64, which states that ‘if a reply, though accurate, fails to provide a complete picture, it may be treated as deceit’. It is submitted that in the instant case, the reply to the enquiry raised in the course of due diligence was vague and insufficient for two reasons. First, the accurate figure was not provided to Celltone, as only a vague statement that ‘this was without regard to discounts and rebates that may be offered’65 was made. Not only is this statement speculative in nature, owing to the construction of the word ‘may’, but also does not reflect 59 Bottin International Investments Ltd v. Venson Group PLC, 2006 EWHC 3112. [“Bottin”]

60 Redgrave v. Hurd, 1881 20 Ch. D.; Levison v. Farin, 1978 2 ALL ER 1149.

61 ¶12, Factsheet.

62 D. Baker, R. Jillson, DUE DILIGENCE, DISCLOSURES AND WARRANTIES IN PRACTICE (1992).

63 New Hearts v. Cosmopolitan Investments Ltd, 1997 2 BCLC 249. 64 Vahey v. Kenyon, 2013 EWCA Civ 658. 65 ¶12, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 30

THE

CORPORATE ACQUISITIONS


the amount of reduction in profitability. Second, in a corporate deal involving large amounts of money, no attempt was made to rectify the original document which was sent out. The ‘warranted representation’, therefore, remains the initial representation of Rs. 250 which was ‘provided by 5G Star’ and the conveyance by 5G Star officials failed to provide the complete picture, and is squarely insufficient. [B]. THE INITIAL PROJECTIONS AMOUNT TO FRAUDULENT MISREPRESENTATION. 33. It is submitted that the projections were fraudulent misrepresentations as they satisfy the test laid down in RC Thakkar66. First, there was a reckless suggestion of an untrue fact. Second, it was made with the intent to deceive or to induce the other party to enter into the contract. Third, reliance was placed on it. 34. First, it is submitted that the initial ARPU projection was supplied recklessly without belief in its truth. The initial projection simply served to provide Celltone with a ‘false reassurances about the profitability of the business’, and therefore constitute false statements as ‘general impression created by the statement is false, even though components of the statement may be true’.67 35. It is submitted that 5G Star had no reasonable ground to believe this statement to be true. The projection was made with the knowledge that discounts would be offered. 68 Nondisclosure of the existence of discounts is ‘equivalent to an assertion that the discounts do not exist’, especially when 5G Star ‘knew that disclosure of this fact would correct a mistake of the other party as to a basic assumption on which they are making the contract.’69 36. Second, it is submitted that the intent to make this initial representation was to provide a ‘false image about the profitability of the business.’ The escalated projection paints a better picture about the profitability of 5G Star than it actually is. This would serve only to entice

66 RC Thakkar v. Gujarat HSG Board, AIR 1973 Guj 34. 67 Aaron Reefs ltd v. Twiss, 1986 AC 273; Bottin, 2006 EWHC 3112. 68 ¶12, Factsheet. 69 Sec. 161(b), American Restatement 2d. MEMORIAL FOR THE APPELLANTPAGE 31


Celltone to invest in the deal. In any case, it is no justification that this representation was made without a bad motive,70 or that there was no intention to cheat or cause loss.71 37. Third, Celltone proceeded on the initial projection72 until they knew of the real figure, which was after completion of the deal. The false of the profitability of the business therefore, was in the minds of Celltone plc when they entered the deal. 73 Hence it is submitted that there exists a causal link between the profitability of the company and the decision to invest in it, which is adequate to meet the standard for reliance. 74 Therefore, it is submitted that the actions of the respondents amount to fraudulent misrepresentation. IV.

THE DAMAGES CLAIMED

SHOULD BE

AWARDED

38. It is submitted that the damages claimed by the appellants in respect of the breach of warranty should be awarded in full. In Downs,75 it was held that in cases involving fraud, damages should be calculated on a ‘no transaction’ basis. In the instant case, if the fraudulent misrepresentations had not been made, the appellants would not have gone through with the transaction. This is clear from their reliance on the statements made by the respondents, as submitted above. The appellants made the entire investment with the belief that ‘the process was above board’76, ‘the shares were transferable’77 and that they were not ‘considerably overpaying for their stock’78. The rule laid down in Smith New Court 70 United Motor finance Co v. Addison & Co., AIR 1937 PC 21. 71 Brown Jenkinson & Co v. Percy Dalton, [1957] 2 All ER 844. 72 ¶12, Factsheet. 73 Bottin, PLC, [2006] EWHC 3112. 74 Bristol & West Building Society v. Mothew, 1997 2 WLR 436. 75 Downs v. Chappell, [1997] 1 WLR 426. 76 ¶5, Factsheet. 77 Appendix A, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 32


Securities79 should be followed, and the entire purchase consideration should be awarded as damages. 39. It is submitted that the appellants are entitled to be put into the position they would have been had those representations not been made. 80 In the instant case, the entire investment of $490 million would not have been made in the absence of fraud. Therefore, the damages claimed by the appellants are correct and should be awarded to them.

V.

BAND BANK

IS

OBLIGATED

TO

RELEASE

THE

ESCROW AMOUNT

40. It is submitted that Band Bank must release the escrow amount because the indemnification obligation has arisen due to breach of warranty, misrepresentation etc [A]. Damage has been caused due to such a breach [B]; and consequently, the escrow agent is bound to follow the instructions in the escrow agreement [C].

[A]. INDEMNIFICATION OBLIGATION HAS BEEN TRIGGERED

41. The escrow amount was ‘to be applied towards satisfaction of any indemnification obligations of IndMobile and 5G Star that may arise under the SAA.’81 As submitted above, there has been a breach of warranty and thus the indemnification obligation of respondents has been triggered.

78 ¶12, Factsheet. 79 Smith New Court Securities Ltd v. Citibank NA, [1997] AC 254.

80 Invertec v. De Mol Holding BP, [2009] EWHC 2471.

81 ¶9, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 33


[B]. DAMAGE HAS BEEN CAUSED DUE TO SUCH A BREACH 42. The rights of the indemnity holder extend beyond Section 125 of the Indian Contract Act. 82 Thus, where damages have been suffered or a reasonable claim has been made which shows that an absolute liability has been incurred by the indemnity holder, it is entitled to be indemnified.83 43. It is submitted that IndMobile undertook to indemnify the petitioner for ‘any and all damages’ suffered by the petitioner, resulting from or consequent upon or relating to such a breach of representation, warranty et al .84 44. As submitted above, the Celltone has over-paid the consideration due to the fraudulent misrepresentation made by 5G Star. It has also suffered damage to its goodwill owing to the incidents surrounding the Calcutta license.85 Additionally, Celltone is also entitled to claim the attorney fees and expenses incurred in establishing its right to indemnity since it has been specifically been included in the indemnification clause. 86 Therefore, it is submitted that Celltone has suffered damages resulting from the breach of warranty, representations etc.

[C]. THE ESCROW AGENT IS BOUND TO FOLLOW THE INSTRUCTIONS IN THE ESCROW AGREEMENT

45. It is submitted that the escrow agreement creates a limited agency in Band Bank wherein the escrow holder is obligated to act strictly in accordance with the escrow instructions given by that party.87 Thus, it is submitted that since there has been a breach of warranty which has resulted in damages to the appellants, the bank is bound to release the escrow amount. 82 Gajanan Moreshwar Parelkar v. Moreshwar Madan, AIR 1942 BOM 44. 83Jet Airways (India) Ltd v. Sahara Airlines Ltd & Ors, AIR 2011 BOM 734. 84 Cl. 10.1, Appendix A, Factsheet. 85 Malik and Mahmud v. Bank of Credit , [1997] UKHL 23. 86 Continental Heller v. Amtech Mechanical Services, [1997] 53 Cal.App.4th 500, 504. MEMORIAL FOR THE APPELLANTPAGE 34


VI.

DLA

IS

LIABLE

TO

PAY DAMAGES

FOR

RENDERING

AN INCORRECT

OPINION 46. It is submitted that DLA is liable to pay damages to the tune of $490 million since it has rendered an incorrect opinion to Celltone. This is owing to three reasons; first the opinion was incorrect as it amounts to negligent misrepresentation [A]. Second, Celltone has a right to sue DLA for it [B], and third, Celltone’s due diligence does not preclude its claim against DLA [C].

[A]. THE OPINION RENDERED BY DLA IS INCORRECT SINCE IT AMOUNTS TO NEGLIGENT MISREPRESENTATION. 47. It is submitted that the opinion rendered by DLA is incorrect because DLA incorrectly stated that the execution, delivery and performance of SAA would not breach the and conditions of a contract [i]. DLA merely assumed the facts without investigating them properly [ii]. i.

DLA incorrectly stated that the execution, delivery and performance of SAA would not breach the and conditions of a contract

48. It is submitted that at the time of rendering the opinion, DLA was aware of the LoI 88 in which it had clearly been stipulated that Grovera and Indmobile were locked in for a period of 3 months to negotiate in good faith. As submitted above, the LoI had the characteristics of an enforceable contract. Despite having knowledge of the fact that the 3 months of lockin period had not ended, DLA in its opinion, stated that the execution and performance of the SAA will not breach the of any contract.89 It is, therefore, submitted that this amounts to negligent misrepresentation since DLA misrepresented a material fact to Celltone for the guidance of their business transaction.90 87 Blackburn v. McCoy, [1934] 1 CA2d 648, 656. 88 Q.4, Clarifications. 89 ¶ 3(b), Appendix B, Factsheet. 90 Mehaffy, Rider, Windholz & Wilson v. Central Bank Denver, 892 P.2d 230 (Colo. 1995). [“Mehaffy Rider”] MEMORIAL FOR THE APPELLANTPAGE 35


49. It is further submitted that notwithstanding the disclaimer of assumptions, the opinion giver can be held responsible for an incorrect opinion if he either knew of or had reason to believe there existed, facts contrary to those contained in the documents reviewed.91 Hence, it is submitted that notwithstanding the assumptions, DLA can be held liable for an incorrect opinion since it was aware that the execution and performance of the LoI before the expiry of the 3 month lock-in period would amount to a breach of the and conditions of the LoI. ii. DLA merely assumed the facts without investigating them properly 50. It is submitted that DLA should have investigated the circumstances surrounding the transaction before giving the opinion. A lawyer cannot escape liability merely by pointing out that he has relied on the facts provided by the client. 92 The solicitor has an overall responsibility of careful investigation and supervision in the disclosure process and he cannot simply leave this task to his client.93 Thus, a ive failure to know cannot be claimed as a defense by the attorney.94 51. In the instant case, the client’s employees were alleged to have been indulged in corrupt activities, which was common knowledge even among outsiders like Navro. 95 In light of such circumstances, the counsel cannot merely assume that there existed no facts that could render the SAA void. Hence, the opinion amounted to negligent misrepresentation. [B]. CELLTONE HAS A RIGHT TO SUE DLA

91John Sterba, LEGAL

A COMPREHENSIVE GUIDE TO OPINION LETTER PRACTICE, 2.11(3rd edn, 2003). ; Kline v. First Western Government Securities, 24 F.3d 480 (3d Cir. 1994). [“Kline”]. OPINION LETTERS:

92 Kline, 24 F.3d 480 (3d Cir. 1994) ; Greycas v Proud, 826 F.2d 1560 (7th Cir. 1987). [“Greycas”] 93 Myers v. Elman [1940] A.C. 282. 94 Slotkin v Citizens Casualty Co., 614 F.2d 301 (2nd Cir.1979). 95 ¶ 10, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 36


52. It is submitted that the Celltone has a right to sue DLA owing to two reasons. First, because statements of opinion are actionable [i]. Further, DLA can be held liable even if it does not share an attorney-client relationship with the Celltone [ii].

i.

Statements of opinion are actionable and hence DLA can be held liable for an incorrect opinion.

53. ittedly, a statement on which liability for misrepresentation may be based must be one of fact and not of expectation, estimate, opinion or judgment. 96 However, a statement of opinion may be actionable where the speaker possesses superior knowledge concerning the subject matter to which the misrepresentations relate, or where the opinion is ‘reasonably interpreted by the recipient to imply that the speaker knows facts that justify the opinion.’97 54. The fact that DLA had perused the document and that they were the 5G Star’s’ legal advisors indicates that they possessed superior knowledge concerning the subject matter of the opinion and made the statements with certainty.98 Hence, it was reasonable for Celltone to believe that DLA “knew facts that justified the opinion” and thus, the statement of opinion is actionable.99 Thus, DLA can be held liable for an incorrect legal opinion, due to their superior knowledge of facts which shaped their opinion. ii.

Appellant can hold the firm liable even though they do not share an attorneyclient relationship

55. An attorney owes a duty to the third parties that the attorney knows or can reasonably foresee reliance being placed on the information supplied by him. 100 It is submitted that to sustain a claim of negligent misrepresentation an attorney-client relationship is not 96 Zimmerman v. Kent, 31 Mass. App. Ct. 72, 82 (1991). 97 Stolzoff v. Waste Sys. Int'l, Inc., 58 Mass.App.Ct. (2003). 98 National Bank of Canada v. Hale & Dorr, WL 1049072 (Mass. Super. 2004) [“Hale&Dorr”] 99 Hale&Dorr, WL 1049072 (Mass. Super. 2004). 100 Horizon Financial v. Hansen, 791 F.Supp. 1561 (N.D.Ga.1992). MEMORIAL FOR THE APPELLANTPAGE 37


necessary.101 If the attorney’s actions are intended to induce a specific non-client’s reasonable reliance on his or her representations, then there is a relationship between the attorney and the third party that substitutes the attorney-client relationship requirement. 102 In the instant case, DLA’s closing opinion was specifically addressed to Celltone and furthermore was a condition precedent to the SAA. It was reasonably foreseeable by DLA that Celltone would rely on the information provided in the opinion. [C]. CELLTONE’S DUE DILIGENCE DOES NOT PRECLUDE ITS CLAIM AGAINST DLA 56. It is submitted that merely because Celltone conducted due diligence before entering into this agreement, it is not precluded from suing DLA for an incorrect opinion. The investigation by Celltone was limited only to the extent it considered necessary and this investigation did not imply non-reliance on the opinion letter issued.103 Thus, in the instant case, merely because the LoI has been discovered in the due diligence, DLA cannot be excused from the liability of giving an incorrect legal opinion. The same is applicable for the knowledge of the corrupt activities of IndMobile’s employees.104 [D]. DLA IS LIABLE TO PAY DAMAGES

57. It is submitted that the opinion giver is liable to pay damages which arise as a direct consequence of the misrepresentation in the opinion letter.105 In the case of misrepresentation, the damages awarded must be equivalent to the amount had there been no misrepresentation.106 As submitted above, Celltone has indeed relied on the opinion letter 101 Greycas, 826 F.2d 1560 (7th Cir. 1987). 102 Banco Popular North America v. Suresh Gandhi, 876 A.2d 253 (2005). 103 Mehaffy, 892 P.2d 230 (Colo.1995). 104 Teamster Local Pension Trust Fund v. Angelos 762 F.2d 522 (7th Cir, 1985). 105 Dean Foods, 2004 WL 3019442 (Mass.Super.) 106 Slotkin, 614 F.2d 301. MEMORIAL FOR THE APPELLANTPAGE 38


that induced it to enter into the contract on the basis of the representations. Had there been no misrepresentation, Celltone would not have gone through the transaction. Thus, the damages must be awarded in full and an amount equivalent to the purchase consideration must be paid to Celltone. VII.

THE ACTS OF THE GOVERNMENT AMOUNT TO EXPROPRIATION

58. It is submitted that there is a prima facie case for indirect expropriation of the assets of Celltone and therefore, no anti-arbitration injunction should be entertained. The ingredients for expropriation under the India-UK BIT have been met in this case because Celltone can be termed an investor [A], the High Court judgment amounts to expropriation, or action equivalent to indirect expropriation [B] therefore since a prima facie case exists, no antiarbitration injunction should be entertained [C]. [A] CELLTONE IS AN INVESTOR 59. Celltone is an investor for the purposes of the BIT. Article 1(a) of the BIT describes a company to be a “corporation, firms or association incorporated or constituted under the law in force in any part of the United Kingdom”.107 In the current scenario, Celltone is a company as mentioned in the factsheet, to be a ‘leading telecom services company in the UK’108. Therefore, the first threshold is satisfied by Celltone. Article 1(b) of the BIT, inter alia, includes ‘shares in and stock and debentures of a company and any other similar forms of interest in a company’.109 In the current scenario, Celltone acquired 49% of the shares in 5G Star.110 Consequently, this equity holding squarely falls within the definition of investment provided under the BIT. 107 Art.1(a), Agreement between The Government and Republic of India and The Government of the United Kingdom of Great Britain and Northern Ireland for the promotion and protection of investments (Adopted on March 14 1994). [“BIT”].

108 ¶4, Factsheet. 109 Art.1(b), BIT. 110 ¶7, Factsheet. MEMORIAL FOR THE APPELLANTPAGE 39


[B] THE HIGH COURT JUDGMENT AMOUNTS TO INDIRECT EXPROPRIATION 60. It is submitted that the High Court judgment amounts to indirect expropriation for two reasons. First, the act of the High Court would amount to a government action. The High Court of Calcutta is a part of the judiciary, and therefore a State organ for the purposes of the UN Articles on the ‘Responsibility of States for internationally wrongful acts’, which expressly mentions any organ which exercises ‘judicial functions’ as an organ of the State. 111 The conduct of the state organ, which is the High Court is therefore an ‘act of the State’.112 61. Secondly, the actions of the High Court deprive Celltone of the ‘use, value and enjoyment of its investment’.113The cancellation of licenses by the State, which were awarded by the State itself has the effect of depriving Celltone of the use, value and enjoyment of its investment.114 In Techmed v. Mexico, the arbitral tribunal found that “the revocation of an operating license was an act ‘tantamount to expropriation’”.115 This proposition has been affirmed by various tribunals.116 The revocation of these licenses, will cause a huge loss to Celltone.117

111 Art. 4, Articles on Responsibility of States for internationally wrongful acts, INTERNATIONAL LAW COMMISSION, (November, 2001).

112 S. Malhotra, Cancellation of telecom licenses in the 2G Case: Claim for indirect expropriation, 6(2), NUJS LAW REVIEW, 335 (2013).

113 B.H. Weston, Constructive Takings under International Law: A modest foray into the problem of creeping expropriation, 16, VIRGINIA JOURNAL OF INTERNATIONAL LAW, 103 (1976).

114 UNCTAD, Series on Issues in International Investment Agreements, Takings of Property 11, available at http://unctad.org/en/docs/psiteiitd15.en.pdf. (Last visited on January 12 th, 2015); Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, 15 ICSID REVIEW -FOREIGN INVESTMENT LAW JOURNAL (2000), 169, ¶ 76.

115 TecnicasMedioambientalesTecmed S.A. v. The United Mexican States, Award, May 29, 2003, 43 ILM 133 (2004), ¶ 114.

116 Tippets v. Tams Affa Consulting Engineers, 1984 6 Iran-US CTR 219, 225-6.



[C] NO ANTI-ARBITRATION INJUNCTION SHOULD BE ENTERTAINED. 62. It is submitted that since the objects of the arbitration dispute and the proceedings before this Court are different, and there is no immediate nexus between the two objects. The arbitration dispute deals exclusively with the revocation of the Calcutta license, while the current proceedings deal with the breach of representations by 5G Star and Indmobile. Since the object of the arbitration dispute does not suffer any imminent injury as a result of these proceedings, the stringent test for anti-arbitration injunctions in investment arbitration is not satisfied118 and they should be allowed to proceed as is. 63. Therefore, prima facie there is a legitimate case for regulatory expropriation. It is therefore submitted that no anti-arbitration injunction should be entertained by the Court. PRAYER Wherefore in light of the issues raised, arguments advanced and authorities cited, it is humbly prayed that this Court may be pleased to hold, adjudge and declare that; 1. The appeals filed by the appellant are allowed. 2. Damages in full, worth US $490 million are awarded to the appellant for fraudulent breach of the SAA. 3. The escrow amount is released. 4. Darsh Legal Associates are liable to pay damages worth $490 million for negligent misrepresentation. 5. No anti-arbitration injunction can be entertained. And any other order it may deem fit in the interest of justice, equity and good conscience. All of which is humbly prayed, Team Code HS15F, Counsel for the appellant.

117 ¶7, Factsheet.

118 Chevron Corp v. Donzinger, No. 11 Civ. 0691(LAK), 2011 WL 778052 (S.D.N.Y. Mar.7, 2011). MEMORIAL FOR THE APPELLANTPAGE 41


APPENDIX I

RELEVANT PROVISIONS FROM LEGISLATIONS 1. PROVISO

TO

SECTION 58(2), COMPANIES ACT, 2013:

Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. 2. Section 111A(2), Companies Act, 1956: Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable. [Provided that if a company without sufficient cause refuses to transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the 3 [Tribunal] and it shall direct such company to the transfer of shares]. 3. Art. 2.14., UNIDROIT Principles. MEMORIAL FOR THE APPELLANTPAGE 42


Contract with Deliberately Left Open (1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence.(2) The existence of the contract is not affected by the fact that subsequently (a) the parties reach no agreement on the ; or (b) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties. 4. Section 7, Prevention of Corruption Act, 1988. Public servant taking gratification other than legal remuneration in respect of an official act. Whoever, being, or expecting to be a public servant, accepts or obtains or agrees to accept or attempts to obtain from any person, for himself or for any other person, any gratification whatever, other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to show, in the exercise of his official functions, favour or disfavour to any person or for rendering or attempting to render any service or disservice to any person, with the Central Government or any State Government or Parliament or the Legislature of any State or with any local authority, corporation or Government company referred to in clause (c) of section 2, or with any public servant, whether named or otherwise, shall be punishable with imprisonment which shall be not less than six months but which may extend to five years and shall also be liable to fine. 5. Section 109, Indian Penal Code 1860. Punishment of abetment if the act abetted is committed in consequence and where no express provision is made for its punishment. Whoever abets any offence shall, if the act abetted is committed in consequence of the abetment, and no express provision is made by this Code for the punishment of such abetment, be punished with the punishment provided for the offence. Explanation.—An act or offence is said to be committed in consequence of abetment, when it is committed in consequence of the instigation, or in pursuance of the conspiracy, or with the aid which constitutes the abetment. Illustrations



(a) A offers a bribe to B, a public servant, as a reward for showing A some favour in the exercise of B’s official functions. B accepts the bribe. A has abetted the offence defined in section 161.

SUMMARIES OF RELEVANT CASE LAWS 1. Courtney & Fairbairn Ltd. v Tolaini Bros (Hotels) Ltd.119 In this case, offered to help Tolaini find a contractor to help him build the hotel that he desired. They entered into a contract stating that if the Tolaini quality supervisor approved the price that Courtney was able to find, then Courtney would receive 5% of the purchase price as payment. Courtney found a potential builder, however the Tolaini quality supervisor would not accept the . Tolaini found another contractor without the help of Courtney and used him to build his project. Courtney sued for breach of contract and was successful at trial, which Tolaini appealed. The issue was whether the contract to enter into a contract valid. Lord Denning discussed the of the contract that clearly stated that the quality surveyor must negotiate the price with the Courtney's contractor before a contract was reached. It therefore held that in the absence of an agreed price, it is unconceivable that a contract can be established. 2. Teachers Insurance and Annuity Association of America v. Tribune Co.120 119 Courtney & Fairbairn Ltd. v Tolaini Bros [1975] 1 All ER 716 120 Teachers Insurance and Annuity Association of America v. Tribune Co 670 F. Supp. 491 (S.D.N.Y. 1987) MEMORIAL FOR THE APPELLANTPAGE 44


In this case, the borrower sought a loan under which it believed would permit it to employ offset ing, by which certain assets and liabilities would not appear directly on its balance sheets. The lender sent a letter which set forth the basic economic of the proposed loan but which made no reference to offset ing. It invited the borrower to send a counterpart of the letter, upon which time the agreement would become binding upon the parties. When advisers to the borrower expressed doubt that the Securities and Exchange Commission would accept the offset ing, the borrower refused to conclude the loan. In response to the lender’s complaint, the borrower argued that the lender had understood the loan to be contingent upon the borrower’s ability to employ offset ing. The court held that the agreement became binding when the borrower responded to the lender’s letter with an acceptance letter that made no mention of offset ing. While there were still open , they were not basic of prime importance and were subject only to good-faith negotiation. It established that a binding preliminary commitment obligates both sides to negotiate in good faith towards the conclusion of a final judgment.

A

preliminary contract with binding force occurs when the parties have reached complete agreement, including the agreement to be bound, on all the issues perceived to require negotiation. Such an agreement is preliminary only in form — only in the sense that the parties desire a more elaborate formalization of the agreement. The second stage is not necessary; it is merely considered desirable. The mere fact that the parties contemplate memorializing their agreement in a formal document does not prevent their informal agreement from taking effect prior to that event. The parties can bind themselves to a incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that has been settled in the preliminary agreement. 3. Kollipara Sriramulu v. T. Aswathanarayana & Ors.121 In this case the Supreme Court was called upon to decide whether an oral agreement for sale of certain shares in a partnership was effective because the parties contemplated the execution of a formal document. The Court held as follow: “ It is well-established that a mere reference to a future formal contract will not prevent a binding bargain between the parties. The fact that the parties refer to the preparation of an agreement by which the agreed upon are to 121 Kollipara Sriramulu v. T. Aswathanarayana & Ors , AIR 1968 SC 1028 MEMORIAL FOR THE APPELLANTPAGE 45


be put in a more formal shape does not prevent the existence of a binding contract. …… The evidence adduced on behalf of the Respondent No.1 does not show that the drawing up of a written agreement was a prerequisite to the coming into the effect of the oral agreement. It is, therefore, not possible to accept the contention of the Appellant that the oral agreement was ineffective in law because there is no execution of any formal written document”. 4. Trustor AB v. Smallbone (no. 2)122 In this case, the plaintiffs applied to pierce the corporate veil and treat the receipt of money by the defendants company as the receipt of money by the defendant himself. This was on the grounds that (1) the company had been a sham and no unconnected third party had been involved; (2) the company was being used to participate in improper acts, and (3) in the interests of justice. It was held, granting the application, that it was appropriate to pierce the corporate veil in the circumstances of the instant case since (1) the defendant was the only beneficiary and in control of the Company; (2) The acts of the defendant were linked to the use of the company structure as a device to conceal the facts so as to seek to evade any personal liability on the part of individuals, and (3) it was clearly in the interests of justice to do so since the company had been used solely as a vehicle of the receipt of monies. 5. Iridium India Telecom v. Motorola Incorporated123 The plaintiffs filed a criminal complaint against the defendants alleging offences of cheating and conspiracy under the Indian Penal Code. The complaint alleged that the defendants had floated a private placement memorandum (PPM) to obtain funds/investments to finance the 'Iridium project'. The information provided in the memorandum was false and caused a huge loss to the plaintiffs. The Supreme Court was concerned with the question of corporate criminal liability, and attribution of mens rea. It was held that a company can be held liable for criminal offences requiring mens rea. The Court stated that the mens rea of persons ‘entrusted with the exercise of powers of the Company’ could be attributed to the company. 122 Trustor AB v. Smallbone (no 2), 2001 1 WLR 1177. 123 Iridium India Telecom v. Motorola Incorporated, 2011 1 SCC 74. MEMORIAL FOR THE APPELLANTPAGE 46


6. Meridian Global Funds Management Asia Ltd v. Securities Commission124 The accused was the chief investment officer of the plaintiff company. With the company's authority, but without the directors' knowledge, he purchased substantial shares in a public issuer for the company. No notice was given as required by the Securities Amendment Act 1988 Section 20(3). The judge made a declaration that the company was in breach of its duty to give notice. The Court of Appeal upheld that decision on the basis that the accused was the directing mind and will of the company. The company appealed to the Judicial Committee. It was held, dismissing the appeal, that the appropriate rule of attribution to be implied was that a corporate security holding company knew it was a substantial holder in a public issuer when that holding was known to the person who acquired the interest with the company's authority, irrespective of whether that person was properly described as the directing mind and will. In the instant case the accused’s knowledge of the acquisition was attributed to the employer. 7. Bottin International Investments Ltd v. Venson Group plc125 The claimant company sought damages for misrepresentation against the senior officers of the defendant company and for breach of warranty in relation to the plaintiff’s purchase of shares in the defendant. The plaintiff was a potential investor and had been provided with a financial forecast in October indicating that the defendants would make a substantial profit in 1999. In an updated forecast supplied in December the level of expected profits was reduced, but budget figures referred to as "Budget 4" indicated that actual profits in the first 10 months of 1999 would be well above the level expected in that budget. Thereafter, the plaintiff had bought shares in the defendant for GBP 10 million by means of a share purchase agreement. Shortly after the agreement was signed, the defendant's year-end results were prepared. These indicated that they had made a trading loss of over GBP 2 million for 1999 and not the substantial profit indicated in the financial forecasts supplied. In light of that discrepancy, the 124 Meridian Global Funds Management Asia Ltd v. Securities Commission , 1995 2 AC 500. 125 Bottin International Investments v. Venson Group plc, 2006 EWHC 3112. MEMORIAL FOR THE APPELLANTPAGE 47


plaintiffs brought the instant proceedings on grounds that they had been deceived into making the

investment

by

inaccurate

financial

information.

Held, giving judgment for the plaintiff, that in providing B with the December forecast and Budget 4, the defendants had deliberately set out to provide a false sense of reassurance about their profitability. The inclusion of the budget figures alongside the actual figures was intended to give the impression that they were operating significantly better than they had been budgeted to. Accordingly, B's claims succeeded. 8. Levison v. Farin126 The plaintiffs were the shareholders of a fashion company. The company began running at a loss, and the plaintiffs negotiated to sell the company to the defendants. During due diligence, they disclosed that no new collection had been designed, that the company was running at a loss and in a down state, but they did not know how much money was being lost. After the purchase, the defendants realized the true quantum of the loss and sued. It was held that on the reduction of a company's assets between balance sheet date and completion, disclosure generally of the causes of probable future losses, as opposed to disclosure of a quantified reduction in the net asset value or the actual rate of continuing losses, will not protect the vendors of the company from being in breach of a warranty. 9. Downs v. Chappell127 The plaintiffs brought a case against the defendants for fraudulent misrepresentation which caused them to purchase a shop, and claimed the entire purchase consideration as damages. In this case, it was held that in cases of fraud and deceit, the damages should be assessed on a no transaction basis, because if the plaintiff had been aware of the true figures there would have been no transaction. The plaintiff should be entitled to recover all the losses he had suffered which included the entire purchase consideration. 10. Dean Foods Co. v. Pappathanasi128

126 Levison v. Farin, 1978 2 All ER 1149. 127 Downs v. Chappell, 1997 1 WLR 426. MEMORIAL FOR THE APPELLANTPAGE 48


This case involved an opinion by the seller's counsel to the purchaser of a business that the seller was not the subject of any litigation or investigation not disclosed in a schedule to the purchase and sale agreement. The opinion did not disclose a tax fraud investigation by the U.S. Attorney of a customer of the seller. The transactional lawyer who prepared the opinion spoke to the litigator representing the client in the tax fraud investigation about the matter but did not attempt to obtain a full picture of what the litigator knew. Instead, he relied on the "guesstimate" of the litigator that the investigation had ended. The litigator's judgment proved to be wrong: the purchaser received a "target letter" from the U.S. Attorney three months after the opinion was given and eventually paid a $7.2 million fine for aiding a tax fraud. The purchaser then sued the law firm that delivered the opinion, alleging that its failure to disclose the investigation constituted negligent misrepresentation. The judge agreed, finding that under the circumstances the transactional lawyer, in preparing the opinion, had a duty to conduct an appropriate investigation (or withhold the opinion) and that his investigation had fallen short of what was required by customary practice. Asking the litigator, who had not even been advised that the firm was giving an opinion, for his assessment of the matter and relying on his "guesstimate" was, in the judge's view, insufficient. Thus, the firm was held liable for negligent misrepresentation. 11. Greycas v Proud.129 In this case, money was to be lent on the security of farm equipment owned by the borrower. The lender required the borrower to provide a lawyer's attestation as to the state of Article 9 filings against the equipment. That is, before making the loan, the lender wanted an opinion that the farm equipment was not previously encumbered by security interests in favor of others. The lawyer rendered an opinion that there were no such prior encumbrances. However, the lawyer actually was ignorant on this subject. He made no search himself, simply taking the client's word that the equipment was free and clear. When the client later defaulted on the loan, and the lender discovered that the farm equipment was previously encumbered, the lender sued the lawyer. The court held that the lawyer was liable for having 128 Dean Foods Co. v. Pappathanasi, 18 Mass. L. Rptr. 598, 2004 WL 3019442 (Mass. Super. Dec. 3, 2004). 129 Greycas v Proud, 826 F.2d 1560 (7th Cir. 1987)



made a negligent misrepresentation to a person to whom he had undertaken to provide a professional assessment. 12. Kline v. First Western Government Securities, Inc.130 This case involved a series of legal opinions rendered by law firm which was serving as counsel to First Western Government Securities, a business which promoted tax shelters. First Western came to the law firm and asked the firm to render an opinion on the federal income tax consequences of participating in the tax shelter program. In substance, the opinions stated that participation in First Western's program would result in ordinary loss (or grain) for the participants and First Western used these opinions in its marketing of the tax shelter program. The opinions included numerous factual assumptions and were apparently replete with warnings and disclaimers, both as to the assumed facts and the legal conclusions. The plaintiffs in the case participated in First Western's tax shelter program and deducted losses based on their participation. The IRS took issue with the deductions and prevailed after lengthy litigation. The plaintiffs sued the law firm on the grounds that it had misrepresented facts. The court held that when a law firm knows or has good reason to know that the factual description of a transaction provided by another is materially different from the actual transaction, it cannot escape liability simply by including in an opinion letter a statement that its opinion is based on provided facts. It held that an attorney cannot rely on information or assumptions if the attorney has actual knowledge of facts that under the circumstances would make such reliance unreasonable.

130 Kline v. First Western Government Securities, Inc., 24 F. 3d 480 (3d Cir. 1994). MEMORIAL FOR THE APPELLANTPAGE 50

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