The story of Daiichi – Ranbaxy 3500 crore arbitration award….

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In a major setback to the Ranbaxy group, the Delhi High Court, in a recent decision, has upheld the validity of a Rs. 3500 crore arbitral award delivered against Ranbaxy and its principals and paved way for its execution in India, as a decree of the Court.

Why read an arbitration law decision.

Why are we discussing an arbitration decision? Good question! Well, Arbitration is only a  method of adjudication of a dispute; the underlying dispute is always contractual or related to one substantive law or the other. Further, with more and more commercial disputes going to arbitration, the growth of contract law jurisprudence in the last decade or two has been stunted a great deal, since arbitral awards don’t have precedential  value, per se. (By pushing important commercial matters outside the domain of Courts, are we not stultifying the growth of contract/commercial laws). Anyway, it is important to remain abreast of these decisions with a view to stay ahead of the curve as far as the latest in contract/commercial law is concerned.

In this case, though the arbitration took place in Singapore and as per Singapore laws of Arbitration, the governing law was Indian Law i.e the Indian Contract Act. This decision, therefore, should be important reading for the aspirants for the interesting legal questions that arose in this case, including but not limited to – Misrepresentation, fraud, active concealment, recession of voidable contracts, doctrine of election, quantum of damages, permissibility of awarding consequential damages (like loss of opportunity etc) burden of proof in cases of fraud, limitation in cases of alleged fraud, whether a claim of a pre-contract misrepresentation/fraud and tort of deceit can both be exercised; doctrine of waiver, the legality of an arbitral award against minor respondents w.r.t whom no guardian litem is appointed, amongst others.  

Let us start at the start; with a brief snapshot of the factual background, from each side’s perspective : (with an attempt to sift out extra details, while retaining the basic narrative and facts which are necessary to identify and grasp the legal issues)-


  • Daiichi contracted to purchase from the respondents (principal shareholders of Ranbaxy) their entire stake in Ranbaxy for a total transaction value of INR 198 billion, through a Share Purchase and Share Subscription Agreement dated 11.06.2008.
  • The fundamental case of Daiichi is that Ranbaxy and its principal officers made false representations to Daiichi and concealed an extremely important document, known as the Self Assessment Report (“SAR”), and also the genesis, nature and severity of pending investigations by the US Food and Drug Administration (“FDA”) and Department of Justice (“DOJ”) and thereby fraudulently inducing Daiichi to buy its shares. (You would remember that Ranbaxy stock crashed after serious irregularities in relation to data falsification came to light and Ranbaxy was banned from US market by the Fed)
  • The aforesaid SAR was a study commissioned by Ranbaxy’s internal committee itself and disclosed that Ranbaxy had engaged in data falsification to obtain regulatory approvals for hundreds of drug products in dozens of countries around the world. This SAR report ended up with the US FDA/DOJ through a whistleblower, which led to enquiries by the FDA and issuance of a warning letter. All in all, Daiichi claimed that Ranbaxy was majorly exposed to sanctions due to this, but this was brushed aside in the talks as a ‘routine regulatory exercise’. Daiichi claimed that had it not been for this concealment, they would not have purchased the shares of Ranbaxy at all.
  • Daiichi claims that it lost a major part of the value of the company because of this; had to expend a lot of money to enter into a settlement with the US authorities; and finally, was constrained to sell the shares to another buyer for a much lesser value than the value which the shares would have commanded, had Ranbaxy not committed the fraud that it allegedly did.

Ranbaxy (its principals/sellers)-

  • No active concealment since Daiichi was well aware of the ongoing FDA/DOJ investigations; with news being there in the public domain and also on the FDA’s website.
  • Specific queries concerning the FDA enquiry were raised and answered to the satisfaction of Daiichi;
  • Daiichi had access to all documents during the due-diligence process (in what is known in due diligence parlance as the ‘data room’) and therefore, had means of discovering the gravity of the situation and imminency of the sanctions; 
  • A specific representation/warranty/indemnity concerning these investigations was mooted by Daiichi, but dropped later.
  • The SAR did not constitute a ‘material document’ and there was no duty to disclose;
  • Finally, the claim was time barred as it was filed more than 3 years after the closure of the share purchase transaction. Further, Daiichi could have, with reasonable diligence, discovered the matters complained of, at any rate around 2009. Not having done so, their claim is barred by limitation.
  • Lastly, no loss has been suffered by Daiichi since the shares purchased have been sold further to a third party (SUN Pharma) for a profit i.e above the price paid to the respondent.
  • It was further argued on behalf of some minor respondents that the arbitral award against them is bereft of legality since they were minors and no guardian was appointed to defend the litigation on their behalf; thereby rendering the award insofar as it concerns them, non-enforceable and in violation of the Indian Law.
  • The AT had got it all wrong on the question of quantum of damages. Despite the fact that Daiichi did not avoid the contract and went ahead with it, the award seeks to place Daiichi in the ‘but for’ position, which could have been done only if the contract was avoided or in an action of breach of contract, for damages.
  • The AT had gone-on to award consequential damages which was specifically ruled out within the contract of the parties.
  • The AT had gone all wrong as it awarded damages though Daiichi had admittedly sold the company subsequently at a higher value to SUN Pharma, than the purchase price it had paid to Ranbaxy.

In this background, the Arbitral Tribunal (“AT”) framed issues relating to:

  1. Fraud/Misrespresentation/Active concealment.
  2. Waiver on part of Daiichi in giving up the indemnity/warranty/representation concerning risk facing the company;
  3. Section 17 of the Contract Act.
  4. Issue of limitation.
  5. Damages, if any.

The three member AT was split. Two arbitrators ruled in favour of Daiichi and one against. Since this was an International Commercial Arbitration (“ICA”) matter came to the High Court for enforcement, wherein objections were filed by Ranbaxy, seeking to resist enforcement. The Court was essentially re-examining the same issues as before the AT, although mindful of the fact that the Court sitting in the jurisdiction of deciding enforceability of an ICA arbitral award looks at the matter through a very narrow scope of scrutiny and not as a court of appeal reviewing the entire matter. The Court was mindful of not stepping into the realm of re-appreciation of evidence. Treading this cautious path, the following is a summarisation of the major findings; as to how the court dealt with these issues. (I am confining the discussion largely to issues of contract/limitation law/issues concerning minors in litigation)- 

Major findings-

  1. Since Daiichi did not rescind/avoid the contract and elected to go ahead with it, there is no application of the principle of restitution (restitutio ad integrum) (Section 19 r/w Section 75 of the Contract Act) and the matter would have to be governed solely by Section 19 (2nd part) – the part which seeks to place the innocent party in the same position had the representations been true (picture it like this : A sells B a company with the representation that company owns 5 cars as assets, whereas it has only 2, the innocent party can either turn around the transaction by seeking to be placed in the position that he would have, had the contract not been entered-into at all, in other words, rescind/avoid the contract and seek restitution – i.e B gets his money back and A, his company (with the 2 miserable cars and not 5) ; or elect to go ahead with the contract and retain the company, in such case, Section 19 2nd part kicks-in and B  gets the value of 3 cars which he did not get). 
  2. The Court ruled that the field of pre-contract misrepresentation having been covered by Section 19 of the Contract Act, there can be no claim in tort on the basis thereof. 
  3. The Court discussed the principles of damages in cases of fraudulent misrepresentation as highlighted in Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd, which is the locus classicus on the subject. These principles are largely applicable in cases of tort of deceit and can be summed up as follows: 

(1) the defendant must make reparation from all damage coming directly from the transaction.

(2) foreseeability is irrelevant

(3) the full price paid can be recovered, minus any benefits he received resulting from the transaction

(4) a general rule is that benefits include changes in market price, but this is not to be inflexible to prevent full compensation

(5) that general rule does not apply when misrepresentation continues to operate after acquisition, inducing the claimant to retain the asset, or the claimant is locked into holding the property

(6) consequential loss is recoverable…

(7) …subject to mitigation once fraud is discovered.

4. However, the court quickly added that :  the Indian Contract Act is exhaustive on the areas that it deals with and it is not permissible to import the principles of english law, unless the provision is such that it cannot be fully understood without aid to English law and the english law, sought to be relied upon, is consistent with the language of the provision. The Court found it unnecessary to go into english authorities as the question could very well be decided by reference to the plain language of Section 19 ICA. The Court held that reference cannot be made to principles relating to determination of damages in case of tort of deceit, in the presence of specific provision in this regard in the shape of section 19 of the ICA. Though, the court observed that the quantification of damages in either principle may be the same since the idea is to put the plaintiff back in the same position he would have been had the wrong not been committed i.e if the representations were true. 

5. The Court held that consequential damages, in the Indian context, are nothing but those postulated in the second rule stated in Hadley v. Baxendale and one which stands statutorily incorporated in Section 73 of the ICA. The Court held that AT, in this case, had not awarded any special damages on the basis of any special circumstances in the contemplation of both the parties. Further, the Court held that the phrase ‘consequential damages’ has to be read conjointly along with the other phrases used in the clause of the the contract (the one which forbade grant of consequential damages) which were : punitive, exemplary and multiple. The Court did this by regard to the principle of ‘Noscitur a Sociis’, which is a  rule of interpretation or construction of an otherwise unclear statute, contractor estate document (such as a trust or a will): that  the meaning of an unclear word may be known from accompanying words.  The court held that the word “consequential” would take its colour from other phrases used in the clause, namely “punitive, exemplary and multiple”. The Court observed that in this case, the damages (the difference between purchase price paid to Ranbaxy and the purchase price begotten from subsequent purchaser SUN Pharma (discounted by Weighted Average Cost of Capital “WACC” of 4.44% to obtain present value as on November, 2008) was the damages needed to put Daiichi in the same position as if the representations made were true. Therefore, the AT did not travel beyond the mandate of Section 19 of the ICA. 

(WACC, simply put, is Weighted average cost of capital – which means the minimum return earned on company assets in order to meet the cost of capital! You assign weights to equity as well as debt , multiply that weight by cost of debt/ equity in order to get WACC. In simple words, it is the minimum return expected on company assets in order to meet its obligations towards debts, equity etc)

6. On the question of limitation, the Court relied on Section 17 of the Limitation Act to hold that the limitation would begin to run only when Daiichi discovered or with reasonable diligence could have discovered the fraud. It was argued quite emphatically by Ranbaxy that the factum of SAR and gravity of on-going investigations could have been discovered when SAR was mentioned in the meeting dated 11.03.2009. However, the Court rejected this argument on the premise that a mere mention of SAR could not suggest the true significance and import of the on going investigations. Further, the Court observed that Daiichi had to establish that it took steps to find out about the FDA/DOJ investigations, like any other prudent investor, and secondly, that it was not able to discover the relevant information earlier, because of factors which are exceptional, namely the existence of SAR being actively concealed. Here, the AT concluded that there was some time that was spent in the transition of management, and till Malvinder’s (erstwhile principal of the company) management of Ranbaxy stepped out, the management was ineffective and had not successfully transited. Before this, none of the persons concerned disclosed the necessary facts to the new management that had to come in. The Court applied the test that : Daiichi had acted in a way that a company in its position would act if it had adequate but not unlimited staff and resources and motivated but not excessive sense of urgency. This is a test of reasonableness and a sense of proportion. The Court agreed with the the AT when the latter held that there were no emergency trigger bells before that date that would have justified an escalation of the matter or the mounting of a full-blown fraud plea. The Court further held that ‘limitation’ is a mixed question of fact and law’ and the Court, sitting in the very limited jurisdiction of Section 48 of the Arbitration Act, could not have gone into a finding of fact once again. 

7. However, the Court found the findings of fraud against minors in contravention to the laws in India having regard to Sections 183 of the ICA, which manifests that a minor cannot employ an agent to commit a fraud. Therefore, the finding of the AT to the effect that the minors had committed fraud through agents i.e the principal/major officers of Ranbaxy was bad in law. The powers u/s 8 of the Hindu Minority and Guardianship Act do not extend to committing acts of fraud on behalf of the minors. The Court held that it is part of fundamental policy of indian law to protect a minor. This is manifest in Order 32 of the CPC and the elaborate procedure laid down thereunder. The Award was held to be unenforceable against them, but enforceable against the other officers of Ranbaxy.



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