Five key takeaways from the Ranbaxy-Daiichi DisputeJune 14 2018
On January 31, 2018, the Delhi High Court delivered a landmark judgment in the area of commercial contracts by upholding an award of an arbitral tribunal made in Singapore in the commercial arbitration between the previous owners of Ranbaxy Laboratories Limited and the Japanese multi-national pharmaceutical company, Daiichi Sankyo Company Ltd.
In this matter, the arbitral tribunal constituted under the International Chamber of Commerce had in the year 2016, ordered the previous owners of Ranbaxy, Malvinder Singh and Shivinder Singh (“Singh Brothers”) to pay Rs. 3500 crore to Daiichi in damages on grounds of fraudulent misrepresentation and concealment of material facts while selling their shareholding in Ranbaxy to Daiichi in 2008.
It was held that the Singh Brothers had concealed the investigations by the United States Food and Drug Administration (“FDA”) and Department of Justice (“DOJ”) against Ranbaxy in the United States of America at the time of the deal, which Daiichi came to know of only in the year 2009.
The tribunal also held that the mere facts that Daiichi did not have an indemnity claim in the agreement, would not preclude it from claiming damages under Section 19 of the Contact Act, 1872. The procedural law for arbitration was the Singaporean Law and the Indian Law was the governing law of contract. Before analyzing the key legal issues involved in the dispute, it would be beneficial to understand the factual background in brief:
The entire dispute arose when Daiichi purchased the entire shareholding of the Singh Brothers in Ranbaxy, which was worth Rs. 19,800 crore under a Share Purchase and Share Subscription Agreement (“SPSSA”) in June 2008. Immediately after the deal, in 2009, Daiichi discovered that Singh Brothers made false representations to them by concealing a document known as the Self-Assessment Report (“SAR”) and also about the genesis, nature, and severity of pending investigations by the FDA and DOJ against Ranbaxy, thereby fraudulently inducing the petitioner to acquire the shares.
The SAR was prepared by a former employee of Ranbaxy who found out that the company had resorted to data falsification and fabrication in order to obtain quick regulatory approval for hundreds of drug products in dozens of countries around the world. A copy of this document was provided to the US Authority by a whistleblower.
Ranbaxy had represented the ongoing investigations as a routine regulatory exercise to Daiichi. Daiichi had suffered direct and indirect losses as a result of entering into the SPSSA and therefore, claimed damages under Section 17 of the Indian Contract Act, 1872. It is pertinent to note that during the pendency of the arbitration proceeding, Daiichi sold its stakes in Ranbaxy to Sun Pharmaceuticals Industries Ltd for a sum of Rs. 22,670 crore.
Legal & Contractual Issues
This dispute involved a number of legal issues which were dealt with by the arbitral tribunal as well as the Delhi High Court. Five of these issues are summarized below-
- Who was at fault during due diligence stage?
The tribunal held that as per the legal position, Daiichi, being the claimant, was to discharge a higher burden of proof with respect to actual dishonesty/misrepresentation by the respondent, the Singh Brothers, beyond reasonable doubt. The evidence on record established that the Singh Brothers were guilty of fraud since they were aware that their representations would be relied upon by the claimant and would induce it to enter into an SPSSA and they still actively concealed the genesis, severity, and nature of the SAR.
Further, such representations also satisfy the elements of Section 17 of the Indian Contract Act, which deals with intent to deceive to induce another party into a contract by inter alia, active concealment of a fact.
Takeaway: Any intentional or non-intentional concealment of “known” facts will constitute “concealment of fact” under Section 17. Going a step ahead, it establishes a strong ground for asserting “Seller’s” obligation to disclose the relevant facts during due diligence.
2. Whether the absence of an indemnity provision precludes the claimant from making a case of fraud?
The tribunal found that the claimant did not have a right to indemnity under the agreement. However, it concluded that an act of fraud cannot be avoided by any express or implied agreement as per the Indian Contract Act. Therefore, the claimant is not precluded from filing a claim for fraud merely because it had forgone the right to indemnification under the agreement.
Takeaway: Absence of “indemnity agreement” will not refrain the Claimant from claiming the indemnity for loss arising out of an established misrepresentation.
3. Whether the claimant has suffered any actionable loss, direct or indirect, as a result of the alleged fraud and whether the claimant is entitled to recover damages?
While dealing with the issue of damages suffered by Daiichi, the tribunal concluded that the claimant was defrauded and the measure of damages recoverable under Section 19 is that the aggrieved shall be put in the position in which he would have been if the representations made had been true. This is similar to the measure of damages recoverable for fraudulent misrepresentation under general tort principles.
Unlike contractual damages, damages on a tortious basis aim to restore the parties to their pre-contractual position i.e. if the misrepresentation had not been made. The arbitral tribunal held that the claimant is entitled to recover damages equal to the difference of amount paid by Daiichi to acquire Ranbaxy in 2008 and the equivalent value, as of 2008, of the consideration that Daiichi received in 2015, following the merger of Ranbaxy into Sun Pharmaceuticals Industries Limited, less any benefits it had received.
It was stated by the tribunal that the claimant would have never entered into the SPSSA had it not believed and relied upon the representations and assurances made by the Singh Brothers. It was also held that Daiichi suffered losses caused by the fraud committed by the Singh Brothers which led to the claimant’s entry and closing of the SPSSA. This also resulted in Daiichi’s loss of opportunity of other investments.
Takeaway: Measure of damages recoverable under Section 19 is to put the aggrieved party in the same place as at pre-transaction, including any loss suffered due to future loss of profit or prospects- by this it seems that the scope of such damages will be higher than the general indemnity right under the Indian Contract Act which excludes indirect or consequential losses.
4. Whether Daiichi’s claim is time-barred under the Indian Limitation Act, 1963?
The arbitral tribunal relied upon Section 17(1) of the Limitation Act, 1963 which states that ‘period of limitation’ of 3 years starts once the plaintiff has discovered the fraud or could, with reasonable diligence, have discovered it. It was decided that the burden of proof lies on the claimant. The tribunal was convinced that since the time the claimant exercised control over Ranbaxy’s Board, it acted with reasonable diligence, formed committees and even sought to be directly involved in the FDA and DOJ discussions.
Thus, it was established by the claimant that the fraud could not have been discovered earlier without taking exceptional measures, which it could not have been expected to take. It was concluded that the claimant did not discover and could not have discovered the fraud before November 19, 2009. The arbitration proceedings were initiated on November 14, 2012. Therefore, Daiichi’s claim is not barred by limitation.
Takeaway: Limitation period under the Limitation Act, 1963 starts triggering upon the first instance when the knowledge of the “trigger event” comes to the knowledge of the claimant “beyond any reasonable doubt”.
5. Whether the claimant acted with reasonable diligence?
The tribunal noted that it is satisfied from the records that the claimant did not discover the fraud even as a result of its majority control of the Board and could not have with reasonable diligence discovered the fraud before November 2009. It noted that this was due to poor communication and management within Ranbaxy under the leadership of Mr. Malvinder Singh and his associates. It was observed by the Arbitral Tribunal that mere control over the Board of Ranbaxy did not create a situation in which the claimant with reasonable diligence could have discovered that the Singh Brothers have fraudulently misrepresented the genesis, severity, and nature of the US investigations.
The tribunal was satisfied that the claimant acted in a way that a company in its position would act. The Arbitral Tribunal was of the view that the claimant did not discover and could not with reasonable diligence have discovered the fraud before November 19, 2009.
Takeaway: The obligation of the Sellers and promoters appear to extend not only during diligence or transaction stage, but post-transactional as well. Needless to say, this is for exceptional circumstances of fraud or gross misconduct.
The protection of indemnification is set forth in most commercial contracts to reduce chances of dispute between the parties. The Delhi High Court has now settled that the absence of an indemnity provision does not preclude a claim against fraud. Under the Indian contractual law landscape, this judgment also sets a precedent that the standard of awarding damages in cases of fraud reaches beyond the contractual principles of direct damages and in such cases, indirect damages can also be enforced.
Lastly, as regards enforcement of foreign awards, Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 states that the enforcement could be refused only if the award was contrary to: (i) fundamental policy of India; (ii) interest of India; and (iii) justice or morality. In recent years, the scope of ‘fundamental policy of India’ has been narrowed down by the Indian courts to allow easier enforcement of foreign awards in a series of judgments. The most notable is the one rendered by the Hon’ble Supreme Court in Shri Lal Mahal Limited vs. Progetto Grano Spa. Time and again, we have witnessed various debates and discussion over the enforceability of foreign awards in India.
The Delhi High Court in this judgment has put an end to all the discussions by reaffirming that mere contravention of an Indian statute would not result in breach of the fundamental policy of Indian law and holding that it would take only a breach of substantial principle on which Indian law is founded to have the award set aside.
Rajesh Begur is the managing partner of ARA Law.
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