Most merger, acquisition and private equity transactions have exclusion clauses that exclude or restrict the contractual liability of the parties involved. This could either be by imposing time limits for instituting claims, narrowing or qualifying the definition of loss, or by restricting the parties' recourse to rights or remedies.
The Delhi High Court's recent ruling in the case involving Japanese drugmaker Daiichi Sankyo Co. Ltd and former Ranbaxy owners Malvinder and Shivinder Singh can have implications on drafting exclusion and limitation of liability clauses from a seller’s perspective.
Mode of interpretation
The courts tend to interpret exclusion clauses strictly. For instance, there is ambiguity regarding the application of the rule of 'contra proferentem' to a contractual agreement. The rule says that a clause cannot be interpretated against the party which proposed or drafted the clause.
However, the courts have recently clarified that this rule cannot be automatically applied to an exclusion clause unless the construction of such a clause is ambiguous.
There is an increasing trend among the courts to do away with the applicability of this rule for interpreting an exclusion clause and respect the commercial risk allocation agreed upon by the contracting parties.
Ruling in Daiichi Sankyo case
The Delhi High Court, in the Daiichi Sankyo case, was interpreting the scope of the arbitration clause which provided that: “The Arbitral Tribunal could not award punitive, exemplary, multiple or consequential damages.”
It was argued before the court that the phrase 'consequential damages' would necessarily mean damages akin or similar to punitive, exemplary or multiple damages.
The court accepted this contention. It observed that the phrase 'consequential damages' would have to be read jointly with the other phrases used in the clause, namely, punitive, exemplary and multiple damages and stated, therefore, that it could not have been intended to exclude damages which are meant to put a party to the same position.
The court eventually applied the doctrine of 'noscitur a sociis', which indicates that a word must be interpreted by referring to its accompanying words. So, the court held that the word 'consequential' would have to take its colour from other words in the clause, namely, punitive, exemplary and multiple.
Drafting exclusion clauses: Seller-side perspective
In every M&A transaction, there is an attempt to exclude consequential, indirect, remote and punitive losses. Set out below is a draft boilerplate exclusion clause:
“Notwithstanding anything contained in this Agreement, no party shall be entitled for any consequential, punitive, incidental or exemplary losses for breach of any of the terms under this Agreement.”
Given the 'noscitur a socii' interpretation accorded by the Delhi High Court, sellers may consider inserting a phrase to avoid a joint reading of the phrases mentioned in the exclusion clause and according a higher threshold to the scope and ambit of the phrase 'consequential loss'.
The phrase that may be inserted by the seller to negate the Daiichi interpretation of exclusion clauses is: “Each word in this clause shall be interpreted in isolation and not with reference to any other words or phrases set out herein.”
Limitation of liability clauses: Key takeaways
Further, sellers should not assume that the contract law’s “rule of reasonableness” necessarily applies to broadly worded indemnification provisions which may purport to indemnify buyers for any and all losses that arise from a breach of a seller’s representation and warranty obligation. Sellers should consider clarifying the application of the rule of reasonableness to an indemnification claim.
Given that there is a strong argument to indicate that an indemnity is a debt obligation, sellers should also consider expressly providing for a duty to mitigate obligation in their indemnification provisions.
It is important to bear in mind that courts view their role in contract disputes to merely of an umpire who ascertains the intention of the parties to an executed contract. Therefore, it is the actual words the parties use that will result in defining those intentions. Hence, it is all the more important to be very precise and provide certainty while drafting all important exclusion and limitation of liability clauses.
All of this re-emphasises the importance of a well-drafted anti-reliance clause. This clause must be an explicit statement of anti-reliance necessarily made by the buyer as an acknowledgement and reliance only on the seller’s representations contained in the agreement for undertaking the M&A deal and non-reliance on any representations given outside of the agreement.
Bharat Anand is a partner and Satish Padhi is a senior associate at law firm Khaitan and Co.