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Saturday, Dec 28, 2002

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The Polaris episode — Commercial transactions at risk?

K. Ramesh

L'AFFAIRE Polaris Software Labs throws up new dimensions in what is popularly called `risk management', particularly in the international commercial opportunities.

Simply put, a contract is a promise by one party and a counter-promise by another. A commercial contract deals with purely business or commercial transaction. Any contract, as long as the parties fulfil their respective promises, is discharged by performance. The contract is breached if one party does not fulfil its obligations, fully or partly. The remedies available to the aggrieved party as provided for in the Law of Contract, aretwo: One, if the contract is capable of performance, the breaching party could be compelled to do so as agreed. Or, two, if the contract cannot be performed, the aggrieved can sue the breaching party for damages.

But the point to be understood is that this fundamental scheme of the law of contracts is uniform across countries — India, Singapore, the UK, the US and so on. In the Polaris case, it is to be noted that Bank Artha Graha did not insist on the software company specifically performing the contract, but sought damages. The basic principle that the aggrieved party to the commercial contract can sue the breaching party for damages has three important considerations, in the context of international commercial or business contracts. These are place of suing, forum, and extent of damages.

The place of suing attains significance in international contracts primarily due to the cultural aspects of the countries to which the contracting partners belong. Interestingly, the fundamental law itself could be acceptable to parties, though procedures, enforcement and its effectiveness and consequent investment in time and cost could vary depending on the legal system/enforcement in different countries of their origin. It is for this purpose that most multinational contracting parties choose a neutral country as the forum for litigation, for resolving their disputes. Some also elect at their option, a different country law as "governing (or applicable) law" for their contract.

In commercial matters, money is a function of time, and for this reason, it is common for the parties to submit themselves to arbitration instead of resolving their disputes/differences through long-drawn court proceedings. This is the second important legal aspect in international contracts.

An arbitral tribunal is elected by the parties themselves and could be conducted in a time-bound way, as per the procedures agreed to by parties themselves. Countries such as London and Singapore offer involved institutional framework with sufficient expertise on commercial matters, so that the decision (called `award') is not delayed. Typically, such arbitration is called "International Commercial Arbitration" (ICA). To facilitate international flow of investment and trade, a model law on this aspect was created by the United Nations Commission on Trade and Allied Laws (Uncitral), based on which many countries, including India, have brought up their local enactment in line with global uniform requirements. In addition, most countries are signatories to the New York Convention, which mandates the local courts of the member countries to give credence to and respect the demands of such Treaty.

The primary focus of the Convention and the uniform law on ICA is not to make local courts interfere with the arbitral proceedings as bargained by parties, as these are `commercial' matters best dealt by the parties concerned. In fact, one of the primary requirements of the New York Convention is that the dispute or differences between the parties shall be `commercial' for it to be governed by it.

Finally, what does the law of damages say? In the absence of clear understanding on this by the contracting parties, damages are measured by the principle that the aggrieved party should be put in the same position, had the contract been performed. This is something to be proved in law. An aggrieved party always makes out a case for direct and other collateral or consequential damages and asks for the moon. To counter any such attempt, the parties may freeze or limit the liability to an agreed sum. In the Polaris case, news report suggest that the amount agreed was at $6,62,000only, although Bank Artha Graha is said to have demanded about 18 times of this amount at $10 million.

The damages are quantified at a certain known amount.

More important, the matter being a regular civil, commercial dispute the parties elected to arbitration, at Singapore. This being so, the imputed criminal flavour is not only inappropriate, and as such legally untenable, but brings out the intention of one party to intimidate the other party. The basic premise is that if an issue for any reason is fraught with fraud or offence against society it has be tried before the criminal courts or other public forum, and, for the same reason, it cannot be subject to arbitration, being a private tribunal.

To put it otherwise, once the parties to a commercial contract themselves elect to resolve their dispute/differences, though arbitration, the scope and extent of such commercial issues cannot take on a criminal character. The former one is offence against society, and hence criminal. The latter is purely private commercial transaction, as between contracting parties. They are mutually exclusive.

Practically, parties which do not see the desired outcome from anarbitration tend to go to criminal courts to pressure the other party. But the Indian judiciary has been discouraging this. In one case, the Madras High Court held that in any breach of an agreement, one party comes with a plea that the other has committed breach of the agreement, and in doing so, uses words like `cheating', `fraud', `dishonesty', etc. The court would not agree to charging the breaching party with fraud merely because the other contracting party uses such expressions and attempts to proceed on that basis.

Reportedly, Bank Artha Graha has filed criminal complaints of `fraud', `embezzlement' and `deception' against the executives in their personal capacities. In corporate set up, it is inconceivable that individual officers extend themselves, personally, for any contractual dealings of their employer-company. In company contracts, the executives only take up obligations and receive benefits on behalf of the company, and execute documents in their capacity as `authorised agents'. It remains to be seen how far the actions of Bank Artha Graha stand legal scrutiny. Legally, every company is obliged to indemnify its directors/officers for the loss incurred for their bona fide actions in the normal course of business.

In international business situations, the breach of commercial contracts is at best disappointed commercial expectations, to be dealt with within the commercial contractual framework that created such relationship between parties. Any attempt to attribute criminal motives, would not only fail legally, but also create, in the long-term, suspicion and instil fear in the global business community, leading to greater damage to local business opportunity.

(The author is a Chennai-based practising advocate and a fellow of the ICAI.)

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