2. FACTUAL BACKGROUND
1. ABC is a company duly incorporated and existing under the laws of India and is engaged
in the business of providing services of modifying and/ or adapting automobile vehicles in
India.
2. XYZ is a company duly incorporated and existing under the laws of Columbia and is
engaged in the manufacture and distribution of two/ three wheeler automobiles (“XYZ
Products”) in Colombia. The XYZ Products are sold and distributed in Colombia and India
(“Territory”).
3. XYZ intends to avail services of ABC in order to modify and adapt the XYZ Products.
4. ABC and XYZ enter into technical services agreement, wherein ABC agrees to work
exclusively for XYZ (“TSA”) in the Territory. The contract value (consideration to be paid
for the services to ABC) is Rs 5,000,000 out of which Rs 2,500,000 is already paid to ABC
for satisfactory completion of phase-I of the services(to be completed during first 1.5
years) and balance is payable on the completion of phase-II of services(to be completed
in next 1.5 years). Post 3 years, XYZ had to launch its modified products in the market.
The key provisions of TSA are as follows:
(i) ABC will exclusively work for XYZ during the term of the TSA which is 3 years and
cannot provide similar services to any other automobile company in the Territory
for a period of 3 years post termination of the TSA.
(ii) ABC gives the following specific representations and warranties as a part of the
TSA:
(a) To the effect that it is the owner of certain patents in accordance with the
provisions of the Indian Patents Act, 1970 with respect to certain technologies
in the automobile sector;
(b) ABC will perform the services under the TSA as per the best industry practices
and with utmost diligence;
(Collectively the “ABC Representation and Warranty”)
(iii) XYZ will have the right to terminate the TSA after giving a notice of 7 days to ABC
if there is a breach of ABC Representation and Warranty;
(iv) ABC will be liable to pay a penalty of INR 10,000,000 upon termination of the TSA
if such termination is due to the breach of any representation and warranty or
obligation of ABC;
3. (v) ABC had a confidentiality obligation to XYZ with respect to any information that it
becomes aware of as part of providing services under the TSA. The confidentiality
obligation would survive 3 years post termination; and
(vi) In addition to the penalty payable to ABC, ABC will also indemnify XYZ for all
claims,damages, losses,costs,penalties etc. incurred or borne by XYZ arising out
of breach of any ABC Representation and Warranty by ABC.
5. During Phase-II of TSA, around 2 year and 11 months from inception of TSA, XYZ comes
to know that ABC at the time of execution of Agreement had only applied for patents and
was not the owner. It was only one month back (around 2 year 10 months from inception)
that ABC became owner of the patent. Also XYZ alleges that the services that were
provided by ABC as a part of Phase-II are not as per the “best industry practices” and that
ABC has not exercised “utmost diligence” in providing services as a result of which
modified products are not to the satisfaction of XYZ as they do not meet performance
criterion and hence cannot be launched at the end of three years as initially envisaged by
XYZ. Consequently, XYZ terminates the TSA in accordance with the provisions thereof
immediately on completion of 2 year 11 months of the TSA.
6. Post termination of the TSA, ABC enters into an agreement with a competitor XYZ namely,
DEF for modifying DEF’s two wheeler vehicles.
ISSUES
In view of the aforementioned background, ABC has raised the following queries:
1. Whether termination of TSA by XYZ is valid and proper?
2. Whether XYZ can, during the term of the TSA, restrict ABC from entering into an
agreement with any other company engaged in the automobile sector including DEF?
3. Whether XYZ can claim a penalty of INR 10,000,000 upon the termination of the TSA?
4. Are there any other remedies that XYZ can claim against ABC?
5. Are any approvals or permissions required by ABC for making any payments under the
contract or upon its termination?
RESPONSE TO THE QUERY
1. Whether the termination of TSAby XYZ is valid and proper?
.
4. The TSA provides that XYZ will have the right to terminate the TSA after giving a notice
of 7 days to ABC if there is a breach of ABC Representations and Warranty. Although
XYZ invoked this provision 2 years and 11 months after the Agreement came into force,
it is stated that XYZ came to know, only about one month back, that ABC at the time of
execution of the Agreement had only applied for the patents and was not the owner.
Although before this came to their knowledge, ABC had obtained the patent 1 month
back. Clearly there was a misrepresentation at the time of the execution of the
Agreement. In view of this XYZ had the right to terminate the TSA after giving a notice of
7 days to ABC. In the facts it has been mentioned that XYZ terminated the TSA in
accordance with the provisions thereof. It is, therefore, assumed that the Agreement was
terminated after giving notice as provided in the TSA. In view of this, termination of TSA
by XYZ would be valid and proper.
2. Whether XYZ can, during the term of the TSA, restrict ABC from entering into an
agreement with any other company engaged in the automobile sector including
DEF?
The query does not flow from the facts given above. In this case the agreement with the
other firm was made after the initial contract was terminated. However, XYZ can during
the term of the TSA restrict ABC from entering into an agreement with any other
automobile company as the clause (i) with regard to this in the TSA states “ABC will
exclusively work for XYZ during the term of the TSA which is 3 years and cannot provide
similar services to any other automobile company in the Territory for a period of 3 years
post termination of the TSA”.
In view of the above, XYZ can, during the term of the TSA, restrict ABC from entering into
an agreement with any other company engaged in the automobile sector including DEF
3. Whether XYZ can claim a penalty of INR 10,000,000 upon termination of the TSA?
As per the TSA, ABC will be liable to pay a penalty of INR 10,000,000 upon termination of
the TSA if such termination is due to breach of any Representation or Warranty or
obligation of ABC. In this case, there has been a misrepresentation by ABC about the
ownership of patent at the time of execution of TSA.
However under section 74 of the Indian Contract Act, 1872, if the contract contains an
amount to be paid in case of breach by way of penalty, the party complaining of the breach,
5. in this case XYZ, would be entitled to receive reasonable compensation not exceeding the
amount so named. Therefore, XYZ will be required to approach the court for compensation
for breach of contract.
4. Are there any other remedies that XYZ can claim under ABC?
Besides the compensation for the breach of contract where penalty has been stipulated
for under section 74 of the Indian Contract Act, 1872, the Act also provides for
compensation for loss or damage caused by breach of contract under section 73 and also
for compensation for any damage which might be sustained through the no fulfillment of
the contract under section 75 of the Indian Contract Act. In the TSA, in addition to the
penalty payable to ABC, ABC has also indemnified XYZ for all claims, damages, losses,
costs, penalties etc. incurred or borne by XYZ arising out of breach of any ABC
Representations and Warranties by ABC.
It has also been stated that services provided by ABC were not as per Best Industry
Practices and that ABC had not exercised utmost diligence in providing services. As a
result modified products were not to the satisfaction of XYZ as they did not meet
performance criteria and hence could not be launched at the end of three years as initially
envisaged by XYZ. This would constitute a breach of warranty.
In view of this and indemnity given by ABC, XYZ could claim damages for losses and
costs incurred.
5. Are any approvals or permissions required by ABC for making any payments under
the contract or upon its termination?
The facts mentioned do not suggest any further approval to be required. In this case the
amount to be paid to the foreign company will be a current account transaction and under
FEMA, no further approval may be needed.
