1 ARBAP205.07 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION APPLICATION NO. 205 OF 2007 IL&FS Investment Managers Limited. ... Applicants Vs 1. Primus Retail Private Limited & 4 ors. ... Respondents Mr. Chirag Balsara with Mr. Shahezad Kazi i/b M/s. Negandhi Shah & Himayatullah for the Applicants. Mr. Gautam Mehta with Mr. Hamid Kadiani i/b ALMT Legal for the Respondents. CORAM : S.J. VAZIFDAR, J. DATED : 15TH JULY, 2010. P.C. : 1. This is an application under section 11 of the Arbitration and Conciliation Act, 1996, for the appointment of an Arbitrator. 2. The parties executed a document dated 30th January, 2007, titled “Indicative Term Sheet”. The execution of the agreement is admitted. 2 ARBAP205.07 That it contains an arbitration clause is also admitted. The relevant portions of the agreement read as under : “The intent of this term sheet (“Term Sheet”) is to describe, for negotiation purposes only, some key terms of a possible investment by Funds managed by IL&FS Investment Managers Limited (“IIML”) or (“the Investor”) in the equity capital / preference capital of Primus Retail Private Limited (“PRPL”) or (the “Company”). This document is not intended to be a binding agreement between the Investor and the Company with respect to the subject matter hereto, except for the paragraph immediately below regarding Confidentiality, Clause 64 relating to Exclusivity and Drop-dead fees and Clause 65 relating to Arbitration. A binding agreement will not occur unless and until all necessary corporate approvals have been obtained and the parties have negotiated, approved, executed and delivered the appropriate definitive agreements. Until execution and delivery of such definitive agreements, all parties to the term sheet shall have the absolute right to terminate all negotiations for any reason without liability thereof. ................ 7) Proposed Transaction: (a) Proposed Structure of the Investment: Subject to the conditions outlined hereunder and to be set out in the SSA, the Investor shall invest up to Rs.450 mn in the Company. (b) Instrument: (i) 10,000 Equity shares of face value Rs.10/- @ Rs. 10/- each up to a total investment amount of Rs.0.1 mn 3 ARBAP205.07 (ii) Redeemable Optionally Convertible Preference Shares (ROCPS) up to a total amount of Rs.449.9 mn. ............ (64) Exclusivity & Drop Dead Fee: After signing this term sheet, the Company / Promoters undertake that they shall not approach other investors for the investment mentioned in Clause (6) and as per the terms of this Term Sheet for a period of 60 days from date of signing of this term sheet. Notwithstanding the above in case the Company and / or Promoters decide not to pursue the proposal after signing the term sheet, then the Company or the Promoter shall pay 0.5% of the transaction amount, over and above the out of pocket expenses as mentioned in clause (61) (65) Dispute Resolution by Arbitration: Dispute resolution by way of arbitration shall be in Mumbai, India, under the Arbitration and Conciliation Act of 1996. Governing Laws shall be the laws of India.” 3. A final, binding and concluded agreement was arrived at between the parties only as regards the confidentiality clause and clauses 64 and 65. There was no concluded contract as regards the rest of the agreement, including as to the extent of investment to be made by the Applicant in the Respondent. 4 ARBAP205.07 4. The opposition to this application is on the ground that it was superseded by virtue of two subsequent agreements dated 14th February, 2007 and 9th April, 2007. The submission is not well founded. 5. The agreement dated 14th February, 2007 was entirely different in its scope and content. It was in relation to a bridge loan pending the possible definitive agreement to be executed as contemplated is the “Indicative Term Sheet” dated 30th January, 2007. It referred to the agreement dated 30th January, 2007, but did not affect it in any manner. The recitals also state that the proposed investment is to be in the form of ROCPS and equities which is what is contemplated in the agreement dated 30th January, 2007. Recitals F and G are important and read as under :- (F) Prior to the execution of the Definitive Agreements, the Promoters and the Company have requested the Investor to make an advance payment in respect of the proposed Investment so as to meet certain financing requirements of the Project, on the specific understanding that the money so advanced to the Company by the Investor would be refunded to the Investor along with interest at 5 ARBAP205.07 the rate of 18% (Eighteen percent) per annum from the date of disbursal upto the date of refund to the Investor in full, in the manner specified in this Agreement, in the event the Investor at its sole discretion decides against making the Investment in the Company and/or the Definitive Agreements are not executed and/or the conditions precedent as detailed in the Definitive Agreements are not complied with on or before 31st March, 2007 unless extended with the mutual consent of the Parties to this Agreement (“Effective Date”). (G) The Investor and the Company have agreed to enter into this Agreement for the purposes of recording the terms and conditions upon which the Investor would make an advance payment in respect of the proposed Investment and the terms and conditions for the refund of the said advance payment to the Investor in the event in the event the Investor as its sole discretion decides against making the Investment in the Company and/or the Definitive Agreements are not executed and/or the conditions precedent as detailed in the Definitive Agreements are not complied with on or before the Effective Date.” The recitals themselves establish beyond doubt that the scope of this agreement was only to furnish a bridge-loan to the Respondent pending the execution of the definitive agreement. No other explanation is possible. Any other view would be contrary to the express language of the agreement itself. 6. Clause 1 of the agreement contains the definitions of the various terms. The term “Investment” is defined thus :- 6 ARBAP205.07 “Investment means the proposed investment of up to Rs. 45,00,00,000/- (Rupees Forty Five Crore only) by the Investor in the Company in accordance with the Definitive Agreements. For the purpose of clarity the Parties agree that the Investor shall not be bound to make the Investment and the Investment shall be at the sole discretion of the Investor, as specified in this Agreement.” This agreement merely referred to and did not deal with the agreement dated 30th January, 2007. It certainly did not even purport to be the definitive agreement. The reference was necessary as the bridge loan pertained to and was for the period prior to execution of the definitive agreement referred to in the agreement dated 30th January, 2007. The definition makes it clear that the agreement dated 30th January, 2007 was very much in existence and it is only pursuant thereto and not pursuant to the agreement dated 14th February, 2007 that the definitive agreement was to be entered into between the parties. 7. The doubt, if any, in this regard is removed by clause 2. The relevant part of clause 2.1 and clause 2.2 read as under :- 7 ARBAP205.07 2. ADVANCE PAYMENT 2.1 Subject to the terms and conditions contained in this Agreement, the Investor shall make a payment of Rs 10,00,00,000 (Rupees Ten Crores only) to the Company as advance towards share subscription in respect of the proposed Investment by the Investor in the Company ("Advance") ................... 2.2 Notwithstanding anything to the contrary contained elsewhere, the Parties agree that the payment of the Advance shall not be deemed to be a commitment on the part of the Investor to invest in the Company and the Investor shall, at its sole discretion, have the right but not an obligation to invest in the Company on the fulfillment of the Conditions Precedent on or before the Effective date, to the full satisfaction of the Investor. However in the event the Investor makes the Investment after completion of the Conditions Precedent no interest will be payable on the Advance and the Advance will be adjusted against the Investment.” Clause 2, therefore, makes it clear that the advance of Rs. 10,00,00,000/- had nothing whatsoever to do with the agreement dated 30th January, 2007, except to the extent that it was a bridge-loan facility pending the definitive agreement to be entered into pursuant to or in furtherance of the agreement dated 30th January, 2007. 8. It is also important to note that this agreement contains an 8 ARBAP205.07 independent arbitration clause. This arbitration clause would obviously apply only to the agreement dated 14th February, 2007 and not to the agreement dated 30th January, 2007. The fact that the bridge-loan may subsequently be adjusted against any other amounts, including towards a definitive agreement, in the event of it being entered into, would not denude it of its independent existence. Till such adjustment, it remains a separate transaction altogether. 9. It was then submitted that the agreements dated 30th January, 2007 and 14th February, 2007 were, in turn, substituted by an agreement dated 9th April, 2007. I do not agree. 10. The agreement dated 9th April, 2007 is a similar bridge-loan agreement for an amount of Rs.10,00,00,000/-. Whether it was an additional advance of Rs.10,00,00,000/- or was related to the advance of Rs.10,00,00,000/- under the agreement dated 14th February, 2007 makes little difference for the purpose of this application. The recitals of this agreement also make it clear that this was only a bridge-loan agreement. Recital A states that the details of the project and the financials will be set out in the business plan which shall be 9 ARBAP205.07 formulated on or before the date of the signing of the definitive agreements. The proposed investments under the agreement dated 30th January, 2007 are again referred to. Recital B states that prior to the execution of the definitive agreements, the Respondent had requested the Applicant for an advance. This was also a bridge-loan facility which was to be returned with interest at the rate of fifteen per cent per annum. There was no question of any ROCPS or equity shares in respect of this bridge-loan facility. That the amounts to be advanced under this agreement had nothing whatsoever to do with the agreement dated 30th January, 2007, is evident from clause 2 of this agreement, which is identical to clause 2 of the agreement dated 14th February, 2007. 11. Mr. Mehta submitted that the terms and conditions of the three agreements were entirely different. 12. This submission, far from supporting the Respondent, in fact, establishes the case against it. The terms and conditions of the agreement are bound to be different for they deal with different transactions. The subsequent agreements do not even purport to vary 10 ARBAP205.07 the agreement dated 30th January, 2007. More important, they endorse the fact that the definitive agreement is still to be negotiated and arrived at as stated in the agreement dated 30th January, 2007. The recitals of the agreement dated 14th February, 2007, for instance, state that the Applicant had entered into a non-binding Term Sheet in this regard. The non-binding Term Sheet obviously was a reference to the agreement dated 30th January, 2007. 13. Mr. Mehta further submitted that there are certain terms in the subsequent agreements which are at a variance from the terms of the agreement dated 30th January, 2007. For instance, the proposed investment of Rs.45,00,00,000/- under the agreement dated 30th January, 2007 is reduced to Rs.20,00,00,000/- under the agreement dated 9th April, 2007. 14. This fact is also of no assistance whatsoever to the Respondent. Under the agreement dated 30th January, 2007, it was made expressly clear that other than the confidentiality clause and clauses 64 and 65, there was no concluded agreement between the parties as to the other terms and conditions set out therein. The other terms and conditions 11 ARBAP205.07 would be dependent upon the definitive agreement which was proposed to be entered into. Each of the agreements expressly made it clear that nothing contained therein would bind the parties till a definitive agreement is entered into. Clause 7 of the agreement dated 30th January, 2007 also made it expressly clear that the investment of Rs.45,00,00,000/- in the Respondent was only “proposed”. Thus, the mere fact that the parties may have agreed thereafter to reduce it would make no difference to the binding nature of the agreement dated 30th January, 2007, insofar as it pertained to the confidentiality clause and clauses 64 and 65 therein. 15. In the circumstances, the submission that the agreement dated 30th January, 2007 stood novated by virtue of the agreements dated 14th February, 2009 and 9th April, 2009 is rejected. 16. The Arbitration Petition is allowed. Mr. Justice S.P. Bharucha (Retd. Chief Justice of India) is appointed as a sole Arbitrator. The operation of this order is stayed upto 16th August, 2010.