NUJS Memo Respondent

Team 11R

3RD NATIONAL LAW SCHOOL INTERNATIONAL ARBITRATION MOOT COURT COMPETITION,

2010

COURT OF INTERNATIONAL ARBITRATION, GREGARIA CITY, GREGARIA

Mallory Advisory Services Ltd.………………………………………………………Claimant

v.

Shawcross Solutions Pvt. Ltd…………………………………………………….Respondent 1

Comet (Shawcross) Solutions Pvt. Ltd…………………………………………...Respondent 2

(Arb/Cas/0410/2009)

MEMORANDUM for RESPONDENT

-Table of Contents-

0BTABLE OF CONTENTS

TABLE OF ABBREVIATIONS.....................................................................................................IV

INDEX OF AUTHORITIES..........................................................................................................VI

TREATIES..............................................................................................................................VI

STATUTES.............................................................................................................................VI

CASES...................................................................................................................................VI

TREATISES.............................................................................................................................X

ARTICLES.............................................................................................................................XI

STATEMENT OF JURISDICTION..............................................................................................XII

QUESTIONS PRESENTED........................................................................................................XIII

STATEMENT OF FACTS..........................................................................................................XIV

SUMMARY OF ARGUMENTS.................................................................................................XVII

ARGUMENTS ADVANCED...........................................................................................................1

I. RESPONDENT 1 IS NOT BOUND BY THE ARBITRATION CLAUSE CONTAINED IN THE

CONTRACT BETWEEN RESPONDENT 2 AND CLAIMANT......................................................1

A. Any attempt to hold Respondent 1 bound to arbitrate is rendered untenable

by the doctrine of privity and the requirement of consent in arbitration...................1

B. The corporate veil between Respondent 1 and Respondent 2 cannot be lifted.. 2

II. IN ANY EVENT, THE ACTION IS BARRED BY VIRTUE OF EX TURPI CAUSA NON ORITUR

ACTIO, SINCE MR. ROMANOVICH’S FRAUDULENT ACTS ARE ATTRIBUTABLE TO

CLAIMANT, AND CLAIMANT CANNOT BASE ITS ACTION ON WHAT IS (IN LAW) ITS OWN

FRAUD.....................................................................................................................................3


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-Table of Contents-

A. Claimant cannot base its action upon an illegal act committed by it..................3

B. Mr. Romanovich’s fraudulent acts are attributable to Claimant........................4

III. THE FRUGALIAN SALE OF GOODS ACT IS INAPPLICABLE, SINCE THE

TRANSACTION IN QUESTION CONSTITUTES A “LICENCE” AND NOT A “SALE”. IN ANY

EVENT, NEITHER RESPONDENT 2 NOR RESPONDENT 1 IS IN BREACH OF SECTIONS 15

AND 16 OF THE ACT, SINCE COMET IS NOT DEFECTIVE.....................................................5

A. The Frugalian Sale of Goods Act is inapplicable..................................................5

1. Respondents admit that Comet is a “good” under the Frugalian Sale of Goods

Act..................................................................................................................................6

2. The transaction between the parties amounted to a license and not a sale........6

3. The transaction cannot be viewed as a conditional sale.....................................8

B. Arguendo, neither Respondent 1 nor Respondent 2 is liable under sections 15

and 16 of the Frugalian Sale of Goods Act....................................................................9

1. Respondents are not liable under Section 15.....................................................9

a. The sale is not a sale by description..................................................................9

b. In the alternative, non-adherence with the description is not evident from the

factual matrix...........................................................................................................10

2. Respondents are not liable under Section 16...................................................14

a. The sale was by trade name and hence implied terms under Section 16(1) are

of no application......................................................................................................14

b. Alternatively, the good was fit for its particular purpose................................15

IV. RESPONDENTS ARE NOT LIABLE FOR BREACH OF CONTRACT UNDER THE

FRUGALIAN CONTRACT ACT..............................................................................................15

V. ARGUENDO, THE LIABILITY OF RESPONDENTS DOES NOT EXTEND TO

COMPENSATING CLAIMANT FOR THE LOSSES SUSTAINED BY IT BY INVESTING IN


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-Table of Contents-

TRUISM................................................................................................................................16

A. The rule of Hadley v Baxendale as adopted by Indian courts has to be applied

in the present case..........................................................................................................16

1. The choice of Frugalian law by the parties mandates application of the Hadley

v Baxendale rule notwithstanding later developments English law.............................17

2. Departure from the Hadley v Baxendale rule will render the award

unenforceable and even liable to be set aside in Frugalia............................................18

B. Under the rule of Hadley v Baxendale, Respondents cannot be held liable for

the losses sustained by Claimant by investing in Truism...........................................19

C. Arguendo, even if the subsequent developments in English law were to be

taken into account, the Respondents cannot be held liable for the losses sustained

by Claimant by investing in Truism.............................................................................19

CONCLUSION AND PRAYER FOR RELIEF................................................................................21


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-Table of Abbreviations-

1BTABLE OF ABBREVIATIONS

¶/¶¶………………………………………………………………………………...Paragraph(s)

§…………………………………………………………………………………………Section

AIR…………………………………………………………………………..All India Reporter

All ER………………………………………………………………..All England Law Reports

Anr. …………………………………………………………………………………….Another

Art. ……………………………………………………………………………………...Article

Bom. …………………………………………………………………………………..Bombay

Cal……………………………………………………………………………………...Calcutta

CD……………………………………………………………………………….Compact Disk

CEO……………………………………………………………………Chief Executive Officer

Co. ……………………………………………………………………………………Company

Com. ………….………….………….………….………….………….…………..Commercial

ed./eds. ………………………………………………………………………………..Editor(s)

edn. ……………………………………………………………………………………...edition

ER……………………………………………………………………………...English Reports

EULA……………………………………………………………End User License Agreement

EWCA Civ. ……………….......................Court of Appeal, Civil Division (England & Wales)

EWHC…………………………………………………………England and Wales High Court

F.3d ………………………………………………………………..Federal Reporter, 3rd series

Fam. ………….………….………….………….………….………….………….……..Family

Ibid. ……………………………………………………………………………………..Ibidem


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-Table of Abbreviations-

Inc. ………………………………………………………………………………..Incorporated

Ltd. …………………………………………………………………………………….Limited

Mad. ……………………………………………………………………………………Madras

No. ……………………………………………………………………………………..Number

NYU……………………………………………………………………..New York University

Oct. …………………………………………………………………………………….October

Ors…………………………………….………….………….………….………….……Others

PTC…………….………….………….………….………….……Patent and Trademark Cases

Rep. ………….………….………….………….………….………….………….……..Reprint

SC………….………….………….………….………….………….…………...Supreme Court

SCC………….………….………….………….………….………….…..Supreme Court Cases

Sd/-…………….………….………….………….………….………….………….……Signed

SLR…………………………………………………………………...Singapore Law Reporter

Supp. ………….………….………….………….………….………….…………...Supplement

U.N.T.S. ………….………….………….………….……………United Nations Treaty Series

UKHL………….………….………….………….………….United Kingdom House of Lords

UNCITRAL………….………….…...United Nation Commission on International Trade Law

USA/US………….………….………….………….………….……..United States of America

v. ………….………….………….………….………….………….………….…………Versus

Vol. ………….………….………….………….………….………….………….……..Volume

Y. B. Com. Arb. ………………………………………..Yearbook of Commercial Arbitration


-v-

-Index of Authorities-

2BINDEX OF AUTHORITIES

9BTREATIES

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958,

New York, 330 U.N.T.S. 3.....................................................................................................1

10BSTATUTES

French Code Civil......................................................................................................................3

German Bürgerliches Gesetzbuch..............................................................................................3

Indian Companies Act, 1956......................................................................................................2

Indian Evidence Act, 1872.......................................................................................................10

Indian Sale of Goods Act, 1930...............................................................................5, 6, 8, 9, 14

New Zealand Illegal Contracts Act, 1970..................................................................................3

United States Restatement (Second) of Contracts.....................................................................3

11BCASES

AIB Group (UK) Plc. v. Martin, [2001] UKHL 63....................................................................7

Arnold v. North American Chemical Co., 232 Mass. 196..........................................................8

Banque Arabe et Internationale d’Investissement v. Inter-Arab Investment Guarantee Corp,

(1996) XXI Y. B. Com. Arb. 13 (Ad Hoc, UNCITRAL, 1994)............................................1

Barnard v. Kellogg, 77 U.S. 383 (1870)..................................................................................12

Bauer & Cie v. O'Donnell, 229 U.S. 1 (1913)...........................................................................8

Box v. Jubb, [1879] 4 Ex. D. 76...............................................................................................20


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Bridas SAPIC v. Turkmenistan, 345 F.3d 347, 358 (5th Cir. 2003)..........................................1

Burrows v. Rhodes and Jameson, [1899] 1 QB 816..................................................................4

Central Bank of India v. Hartford Fire Insurance Co., AIR 1965 SC 1288.........................7, 9

Centrotrade Minerals and Metal Inc. v. Hindustan Copper Limited, (2006) 11 SCC 245.....17

Chandelor v. Lopus, (1603) 79 ER 3.......................................................................................12

Chartbrook Homes Ltd. v. Persimmon Homes Ltd., [2007] 1 All ER (Comm.) 1083.............10

Commissioner of Sales-Tax, Eastern Division, Nagpur v. Husenali Adamji and Co., AIR

1959 SC 887...........................................................................................................................8

Deutsche Genossenschaftsbank v. Burnhope, [1995] 4 All ER 717..........................................7

Dunlop Pneumatic Tyre Co. v. Selfridge and Co., [1914-15] All ER Rep. 333........................1

Food Corporation of India v. Babulal, (2004) 2 SCC 712......................................................16

G. Ramachandra Reddy and Co. v. Union of India and Anr., AIR 2009 SC 2629.................17

Gray v. Thames Trains Ltd. and Another, [2008] EWCA Civ. 713..........................................3

Hadley v. Baxendale, [1843-60] All ER Rep. 461.............................................................16, 19

Hardy v. Motor Insurers' Bureau, [1964] 2 All ER 587............................................................4

Hashem v. Shayif, [2008] EWHC 2380 (Fam)...........................................................................2

Holman v. Johnson, (1775) 98 ER 1120....................................................................................3

Investors Compensation Scheme v. West Bromwich Building Society, [1998] 1 All ER 98....10

Jackson v. Royal Bank of Scotland, [2005] UKHL 3...............................................................19

K/S Lincoln v. C. B. Richard Ellis Hotels Ltd., [2009] All ER (D) 38 (Oct).............................3

Kalyani Breweries Ltd. v. State of West Bengal and Ors., (1997) 7 SCC 738......................6, 8

Karnataka Pawn Brokers' Association v. State of Karnataka, ILR 1993 Kar. 240...................8


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KR v. Royal & Sun Alliance Plc.,[2007] 1 All ER (Comm.) 161..............................................4

Laidlaw v. Organ, 15 U.S. 178 (1817).....................................................................................12

Lancashire County Council v. Municipal Mutual Insurance Ltd., [1996] 3 All ER 545...........4

Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1914-15] All ER Rep. 280........4

M. C. Chacko v. State Bank of Travancore, AIR 1970 SC 504.................................................1

M.P. Electricity Board v. Shail Kumar, AIR 2002 SC 551.....................................................20

Madhya Pradesh Mines Ltd v. RB Shriram Durga Prasad Ltd., (1972) 3 SCC 180...............16

Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 3 All ER

918..........................................................................................................................................4

Ouchterloney Valley Estates Ltd. v. State of Kerala, (1965) 1 SCR 803...................................8

Pannalal Jankidas v. Mohanlal & Anr,. AIR 1951 SC 144.....................................................16

Pioneer Shipping Ltd. v. BTP Tioxide Ltd., [1981] 2 All ER 1030...........................................6

Popatlal Shah v. State of Madras, AIR 1953 SC 274................................................................6

Prenn v. Simmonds, [1971] 3 All ER 237................................................................................10

Rabin v. Gerson Berger Association Ltd., [1986] 1 All ER 374................................................9

Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises, (1999) 9 SCC

283........................................................................................................................................17

Rajkot Municipal Corporation v. Manjulaben Jayantilal Nakum and Ors., (1997) 9 SCC 552

..............................................................................................................................................16

Ranbirsingh Shankarsingh Thakur v. Hindusthan General Electric Corporation Ltd. and

Anr., AIR 1971 Bom. 97........................................................................................................9

Reckitt and Coleman of India Ltd. v. M. P. Ramachandran, (1999) PTC 741 (Cal.)..............12

Reckitt and Coleman v. Kiwi, (1999) PTC 393........................................................................12


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Richards v. Lothian, [1913] AC 263........................................................................................20

Royal Brunei Airlines Sdn Bhd v. Tan, [1995] 3 All ER 97.......................................................4

Safeway Stores v. Simon John Twigger and Ors., [2010] EWCH 11 (Com.)............................4

Salomon v. A. Salomon & Co. Ltd., [1895 – 99] All ER Rep. 33..............................................2

Shogun Finance Ltd. v. Hudson, [2004] 1 All ER 215..............................................................9

Sirius International Insurance Co. v. FAI General Insurance Ltd., [2005] 1 All ER 117........7

Sorabjee Hormusha v. V. M. Ismail AIR 1960 Mad. 520..........................................................9

State of Gujarat v. Variety Body Builders, AIR 1976 SC 2108.................................................7

State of Kerala v. Cochin Chemical Refineries, AIR 1968 SC 1361.......................................16

State of Madras v. Gannon Dunkerley and Co., (Madras) Ltd., AIR 1958 SC 560..................8

State of Maharashtra, Bombay and Ors. v. Britannia Biscuits Co. Ltd. and Ors., (1995) Supp.

(2) SCC 72..........................................................................................................................6, 8

State of Punjab v. Modern Cultivators, Ladwa, AIR 1965 SC 17...........................................20

State of Tamil Nadu v. Srinivasa Sales Circulation, (1996) 10 SCC 648..................................6

Steel Authority of India Ltd. v. Gupta Brother Steel Tubes Ltd., (2009) 10 SCC 63...............17

Stone & Rolls (In Liquidation) v. Moore Stephens (A Firm), [2009] UKHL 39...................3, 4

Tata Consultancy Services v. State of Andhra Pradesh, AIR 2005 SC 371..............................6

Transfield Shipping Inc. v. Mercator Shipping Inc., [2008] 4 All ER 159..............................20

United Breweries Ltd. v. State of Andhra Pradesh, (1997) 3 SCC 530.................................6, 8

United Project Consultants Pte Ltd. v. Leong Kwok Onn, [2005] 4 SLR 214...........................4

Venture Global Engineering v. Satyam Computer Services Ltd. and Anr., AIR 2008 SC 1061

..............................................................................................................................................18

Vitol BV v. Compagnie Europeene des Petroles, [1988] 1 Lloyd’s Rep. 574...........................7


-ix-


12BTREATISES

Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration,

4th edn. (Sweet and Maxwell, London: 2004)........................................................1, 2, 17, 18

Bernard Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class

Actions (Kluwer Law International, The Hague: 2005).........................................................1

Bethany MacLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and

Scandalous Fall of Enron (Penguin, USA: 2003)................................................................13

Bryan Garner, ed., Black’s Law Dictionary, 7th edn. (West Publishing Co., St. Paul: 1999)....3

Emmanuel Gaillard and John Savage (eds.), Fouchard, Gaillard, Goldman on International

Commercial Arbitration (Kluwer Law International, The Hague, Boston, London: 1999). 1,

17

H. E.Guest, ed., Chitty on Contracts, Vol. 1, 27th edn. (Sweet & Maxwell, London: 1994)..16

J. Beatson, Anson’s Law of Contract, 27th edn. (Oxford University Press: 1998)...................15

Jean-François Poudret and Sébastien Besson, Comparative Law of International Commercial

Arbitration (Sweet and Maxwell: 2007)................................................................................1

Kim Lewison, The Interpretation of Contracts, 4th edn. (Sweet & Maxwell, London: 2007)..6,

9, 10

Margaret L. Moses, The Principles and Practice of International Commercial Arbitration

(Cambridge University Press, 2008)......................................................................................1

Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law

International: 2001)................................................................................................................1

N. Bhadbhade, ed., Pollock and Mulla on the India Contract Act, Vol. I, 12th edn.

(Butterworths, Delhi: 2001).................................................................................................10

P. Ramanatha Aiyer, The Law Lexicon, 2nd edn. (Wadhwa & Co., Nagpur: 2004)...................6


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13BARTICLES

Barry W. Boehm and Kevin J. Sullivan, “Software Economics: A Roadmap” (Association for

Computing Machinery, New York: 2000)...........................................................................12

E. Kumar Sharma, “The Great Satyam Robbery”, Business Today, January 20, 2009,

available at http://businesstoday.intoday.in (Last visited: May 12, 2010)...........................13

P. R. Balasubramanian, Tomas Isakowitz, Rob Kauffman, and Raghav K. Madhavan,

“Exploiting Hypertext Valuation Links for Business Decision Making: A Portfolio

Management Illustration”, NYU Working Paper No. IS-91-20 (July, 1991), available at

http://ssrn.com/abstract=1289043 (Last visited: May 13, 2010).........................................13


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-Statement of Jurisdiction-

3BSTATEMENT OF JURISDICTION

.

Shawcross Solutions Pvt. Ltd. the first Respondent in the instant case and Comet (Shawcross)

Solutions Pvt. Ltd., the second Respondent in this matter, have the honour to submit this

Memorial before the Tribunal in the Court of Arbitration, Gregaria, in pursuance of Clause 13

of the End User License Agreement between Claimant and Respondent 2 and in furtherance

of Section 16 of the Gregarian Arbitration Act, 1995, while expressing reservations to the

jurisdiction of this Tribunal, with respect to Respondent 1.


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-Questions Presented-

4BQUESTIONS PRESENTED

The following questions have been presented before the Tribunal for its determination:

1. Whether the Tribunal has jurisdiction over Respondent 1 and whether it can be bound

to the arbitration agreement.

2. Whether Mr. Romanovich’s acts can be attributed to Claimant, thereby barring

Claimant’s action by virtue of the principle ex turpi causa non oritur actio.

3. Whether Respondents have breached Sections 15 and 16 of the Frugalian Sale of

Goods Act, 1932.

4. Whether Respondents are liable for breach of contract under the Frugalian Contract

Act, 1872.

5. Whether Respondents are liable to pay damages for losses suffered by Claimant.


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-Statement of Facts-

5BSTATEMENT OF FACTS

I

Mallory Advisory Services Ltd. [hereinafter “Claimant”] is a public limited company

incorporated in the State of Frugalia, and engaged in the business of investment and portfolio

management. Shawcross Solutions Pvt. Ltd. [hereinafter “Respondent 1”] is a private limited

company incorporated in the State of Rotundia. Comet (Shawcross) Solutions Pvt. Ltd.

[hereinafter “Respondent 2”] is its wholly owned subsidiary incorporated in Frugalia. The

parent and the subsidiary are engaged in the business of software development.

II

Mr. Romanovich, owning 80% of Claimant’s shares, was the majority stakeholder. Entitled to

nominate 7 of 10 directors, he never sat on the Board himself. The 1990s were immensely

profitable for Claimant, especially when Mr. Felix became the Chairman and the CEO. He

made high-risk investments but the recession in 2007 proved to be his downfall. Mr. Felix

was removed from his post in Claimant as per the condition put forward by the Government

of Frugalia in return for aiding Claimant.

III

Mr. Romanovich thereafter got himself elected as the Chairman of the Board, and also took

over as CEO on April 1, 2008. Even though he was inexperienced in management, he wanted

to implement a scientific approach to investment. He heard about the software “Comet” when

he was looking for an investment management software. In the process of development by

Respondent 1, it was regarded as “unquestionably the best investment management software

in the world”. He informed Claimant’s Board of Directors of his intention to enter into a

contract with Respondent 1 instead of Macrohard Inc., manufacturing Blackhawk, a well-

known investment management software. After much consideration, the Board unanimously

authorised him to proceed with enquiries and take further action after the Board’s consent.

IV

On August 14, 2008, Mr. Romanovich wrote to the CEO of Respondent 1 informing him of

the exact features of the software that he required for Claimant. He required a software that


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would recommend whether Claimant should sell or purchase a particular share on a given

day. He believed that this would act like an advanced warning system and reduce high-risk

investment, which was the primary cause of Claimant’s downfall under Mr. Felix. In reply,

Respondent 1 informed him that “Comet” fulfilled all those requirements and offered to enter

into a deal with him quoting a price of $ 45 million. The Board of Directors with the

exception of one Member were agreeable to the proposal put forward by Mr. Romanovich to

enter this contract. Respondent 1 decided to enter into a contract with Claimant through

Respondent 2, a wholly owned subsidiary, to be incorporated in Frugalia, to avoid choice of

law controversy regarding cross border contracts and also to afford Respondent 1 tax

advantages. It transferred the copyright in Comet to Respondent 2, sent personnel so that

Respondent 2 could provide support services to Claimant and completed all accompanying

legal formalities required for this contract. Respondent 1 did not participate in the actual

signing of the contract, which was signed by Respondent 2.

V

The Board of Directors was not very convinced with Mr. Romanovich’s idea to contract with

little-known Respondent 1. Their requests for direct discussion with executives of

Respondent 1 were denied by him, and the Board eventually agreed to the deal in order to not

upset the de-facto power behind the company.

VI

Both Claimant and Respondents were eager to conclude the deal before the end of the

financial year. Therefore, Respondent 2 hastily completed the final stages of development of

“Comet”, which involved the drafting of the End User Licence Agreement [hereinafter

“EULA”]. The software and EULA were sent to Mr. Romanovich on the same packaged CD.

The EULA did not address the question of compensation or damages in case of breach.

VII

Once “Comet” was installed in Claimant’s system, there was no corresponding improvement

in the company’s performance. Soon, Comet was found to be only ordinary in its

performance and another software, Blackhawk was definitely better. Comet’s inefficiency

was proved when it did not warn the Company about its investment in Truism, one of the


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leading software companies in Frugalia, which went bankrupt soon after. Most of the market

experts commented that on a close analysis of Truism’s accounts and growth path, it was a

highly risky venture to invest in.

VIII

Allegations were made against Mr. Romanovich regarding a bribe he received of $25 million

from Respondent 1 and the Government immediately started investigating the matter. The

Government relieved him of his responsibilities once it was found that the allegations against

him were true. Money was indeed transferred by one of the officials of Respondent 1 to Mr.

Romanovich’s bank account soon after the conclusion of the contract. It was also found that

the CEO of Respondent 1 was his business associate who had previously been held for

embezzlement. Mr. Romanovich and the CEO of Respondent 1 were arrested and Mr.

Romanovich disclosed that both of them knew about the inefficacy of Comet. He further

disclosed that the basic purpose of the sale of Comet was to acquire benefit for both. After

this disclosure his name was removed from Claimant’s register. The trial of both the CEOs is

pending in their respective countries.

IX

Following this, Mr. Felix was reappointed as the CEO of Claimant. He found that Claimant

had grossly overpaid for Comet. Although Comet had none of the special features that were

asked for, was not defective, and was basically an ordinary investment management software.

Nevertheless, in October 2009, Claimant initiated arbitration proceedings against Respondent

1 and Respondent 2 for recovery of the purchase price of “Comet”, damages for the loss

resulting from the investment in Truism, and for the consequential loss of reputation.

X

Both Claimant and Respondents (without prejudice to their objection to jurisdiction)

appointed arbitrators under the contract, and the party-appointed arbitrators appointed the

President of the Tribunal. The arbitral tribunal, issuing Procedural Order No. 1, fixed a date

for hearing arguments.


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-Summary of Arguments-

6BSUMMARY OF ARGUMENTS

I. RESPONDENT 1 IS NOT BOUND BY THE ARBITRATION CLAUSE CONTAINED IN THE

CONTRACT BETWEEN RESPONDENT 2 AND CLAIMANT.

The doctrine of privity being a fundamental law of contract and the requirement of consent

being the cornerstone of arbitration, to adhere to the doctrine of privity and in the absence of

consent, Respondent 1 cannot be bound to this arbitration.

The corporate veil between Respondent 1 and Respondent 2 cannot be lifted since there exist

no compelling reasons such as fraud or abuse of corporate form.

II. IN ANY EVENT, THE ACTION IS BARRED BY VIRTUE OF EX TURPI CAUSA NON ORITUR

ACTIO, SINCE MR. ROMANOVICH’S FRAUDULENT ACTS ARE ATTRIBUTABLE TO

CLAIMANT, AND CLAIMANT CANNOT BASE ITS ACTION ON WHAT IS (IN LAW) ITS OWN

FRAUD.

Applying the defence of ex turpi causa, since Claimant, acting through Mr. Romanovich,

concluded the contract with Respondent 2 in order to fraudulently acquire money, it cannot

claim damages arising out of the same contract.

Mr. Romanovich being the ‘directing mind and will’ behind the Claimant Company, his acts

are directly attributable to Claimant.

III. THE FRUGALIAN SALE OF GOODS ACT IS INAPPLICABLE, SINCE THE TRANSACTION IN

QUESTION CONSTITUTES A “LICENCE” AND NOT A “SALE”. IN ANY EVENT, NEITHER

RESPONDENT 1 NOR RESPONDENT 2 IS IN BREACH OF SECTIONS 15 AND 16 OF THE ACT,

SINCE COMET IS NOT DEFECTIVE.

The parties have expressly stated that the transaction is a license and not a sale. The Tribunal

should not disregard this manifest intention of the parties. Moreover, even if the terms of the

contract were to be examined ignoring this stipulation, it is evident that what has passed to

Claimant under the contract is a very limited right to use the software and not title over it.


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-Summary of Arguments-

Therefore the transaction is not a sale and the Sale of Goods Act is inapplicable. Even if the

said Act were applicable, Respondents are not liable under Sections 15 or 16 as no

description or prior purpose was stated in the contract. Prior communications are excluded

from consideration under Clause 12 of the contract. Moreover, applicability of Section 16 is

precluded by proviso to Section 16(1) as the alleged sale was under the trade name of the

good. Assuming that pre-contractual communications constituted binding description or

statement of particular purpose for which the goods are to be fit, Comet conforms to both.

IV. RESPONDENTS ARE NOT LIABLE FOR BREACH OF CONTRACT UNDER THE FRUGALIAN

CONTRACT ACT, 1872.

Contractual obligations are to flow from the text of the contract and not from negotiating

history. Therefore, the communication of Mr. Romanovich did not create any obligation upon

Respondents. Even assuming that this communication was to be treated as a contractual term,

it has already been submitted that the particulars of this communication have been fully

complied with.

V. ARGUENDO, THE LIABILITY OF RESPONDENTS DOES NOT EXTEND TO COMPENSATING

CLAIMANT FOR THE LOSSES SUSTAINED BY IT BY INVESTING IN TRUISM.

Assuming that Respondents are liable, the extent of the liability should be determined as per

the rule of Hadley v. Baxendale as applied by Frugalian and Indian courts disregarding later

developments in English law. Departure from this rule will be disregarding the express

stipulation of parties that the contract is governed by law of Frugalia. Moreover, this will

make the award patently illegal and liable to be set aside in Frugalia. Applying rule of Hadley

v. Baxendale, it is submitted that the fraud in Truism and the consequences thereof could not

have been reasonably foreseen by Respondents while entering into the contract. Even if the

subsequent developments in English law are to be taken into account, Respondents are not

liable to compensate Claimant for losses arising from investing in Truism as these losses are

attributable to the fraud in Truism, an event beyond the control of Respondents.


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-Arguments Advanced-

7BARGUMENTS ADVANCED

I. 14BRESPONDENT 1 IS NOT BOUND BY THE ARBITRATION CLAUSE CONTAINED IN

THE CONTRACT BETWEEN RESPONDENT 2 AND CLAIMANT.

Claimant seeks to extend obligations under Clause 13 of the EULA to Respondent 1 based on

the theory of veil-piercing. Respondents argue that the doctrine of privity and requirement of

consent of parties to arbitrate render the said contention untenable [A]. Moreover, the

corporate veil between Respondent 1 and Respondent 2 cannot be lifted [B].

A. 19BAny attempt to hold Respondent 1 bound to arbitrate is rendered

untenable by the doctrine of privity and the requirement of consent in

arbitration.

The doctrine of privity of contract posits that only parties to a contract may claim under or be

claimed against the contract. F

1F Therefore, by application of this doctrine, only parties to an

arbitration agreement can be bound to arbitrate under it. F

2F Moreover, consent of parties is a

necessary prerequisite for arbitral proceedings F

3F and the tribunal derives its jurisdiction from

such consentF

4F.

1 Dunlop Pneumatic Tyre Co. v. Selfridge and Co., [1914-15] All ER Rep. 333; M. C. Chacko v. State Bank of Travancore, AIR 1970 SC 504.

2 Banque Arabe et Internationale d’Investissement v. Inter-Arab Investment Guarantee Corp, (1996) XXI Y. B. Com. Arb. 13 (Ad Hoc, UNCITRAL, 1994); Bernard Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions (Kluwer Law International, The Hague: 2005), 3, 7; Jean-François Poudret and Sébastien Besson, Comparative Law of International Commercial Arbitration (Sweet and Maxwell: 2007), ¶ 239.

3 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, New York, 330 U.N.T.S. 3, Art. II(1); Bridas SAPIC v. Turkmenistan, 345 F.3d 347, 358 (5th Cir. 2003); Margaret L. Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press, 2008), 33; Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th edn. (Sweet and Maxwell, London: 2004), ¶ 1-08.

4 Jean-François Poudret and Sébastien Besson, Comparative Law of International Commercial Arbitration (Sweet and Maxwell: 2007), ¶¶ 155, 240; Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th edn. (Sweet and Maxwell, London: 2004), ¶¶ 1-06, 1-09; Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law International: 2001), 56; Emmanuel Gaillard and John Savage (eds.), Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, The Hague, Boston, London: 1999), ¶ 477.


-1-


An attempt to impose upon a third entity an obligation to arbitrate based on a contract it never

gave its consent to is not valid in law as it is founded in vacuum and not on the consent of the

parties and operates against the aforementioned principles. F

5F

In the instant matter, Respondent 1 is not a party to the contract referred to as the EULA. F

6F

The text of the EULA expressly mentions Respondent 2 by name F

7F but nowhere does it

mention Respondent 1.

Summarising, Respondents contend that Respondent 1 is not bound by the arbitration clause

contained in the EULA entered into between Respondent 2 and Claimant.

B. 20BThe corporate veil between Respondent 1 and Respondent 2 cannot be

lifted.

As a general principle of company law, a limited liability company such as Respondent 2 is

an entity separate and distinct from its shareholders. F

8F Admittedly, courts have, in certain

cases extended this liability under the heading of ‘piercing the corporate veil’, however, this

must be done only in exceptional circumstances when one company has control over the

other and there was impropriety in the sense that the company structure was used to avoid

liabilityF

9F (emphasis supplied). Both these factors must be fulfilled.F

10

In the instant case, although Respondent 1 can be said to exercise control over Respondent 2

since they shared a parent-subsidiary relationship, however, it cannot be argued that

Respondent 2 was set up merely to avoid liability. Respondent 1 created Respondent 2 as a

wholly owned subsidiary in Frugalia, F

11F which is not illegal under the laws of Frugalia. F

12F The

5 Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th edn. (Sweet and Maxwell, London: 2004), ¶ 3-01.

6 Problem File, ¶ 10.

7 Problem File, Annexure II, ¶¶ 2-4, 7-10, 12.

8 Salomon v. A. Salomon & Co. Ltd., [1895 – 99] All ER Rep. 33.

9 Hashem v. Shayif, [2008] EWHC 2380 (Fam).

10 Ibid.


12 See Frugalian Companies Act; see also, Indian Companies Act, 1956.


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purpose behind Respondent 1 forming a separate company in Frugalia was avoiding choice-

of-law controversies which might arise out of a cross-border transaction. F

13F

Therefore, Respondents submit that in the absence of abuse of corporate form, the corporate

veil between Respondent 1 and Respondent 2 cannot be lifted to bind Respondent 1 to this

arbitration.

II. 15BIN ANY EVENT, THE ACTION IS BARRED BY VIRTUE OF EX TURPI CAUSA NON

ORITUR ACTIO, SINCE MR. ROMANOVICH’S FRAUDULENT ACTS ARE

ATTRIBUTABLE TO CLAIMANT, AND CLAIMANT CANNOT BASE ITS ACTION ON

WHAT IS (IN LAW) ITS OWN FRAUD.

Respondents submit that in the event that this tribunal possesses the requisite jurisdiction,

Claimant’s action is nevertheless barred first, due to the application of the principle ex turpi

causa non oritur actio [A] and second, because Mr. Romanovich’s fraud is attributable to

Claimant [B].

A. 21BClaimant cannot base its action upon an illegal act committed by it.

The doctrine of ex turpi causa that no person shall be permitted to benefit from his own

wrong, has been followed in several judgments over time F

14F and is recognised worldwide. F

15F It

is based on a related principle that no court will lend its aid to a man who founds his cause of

action upon an immoral or an illegal act. F

16F

An immoral act may be subjective and difficult to define, however, an act, if found to be

violating the law of the land or “forbidden by law” is said to be ‘illegal’. F

17F


14 Holman v. Johnson, (1775) 98 ER 1120, 1122; Gray v. Thames Trains Ltd. and Another, [2008] EWCA Civ. 713; Stone & Rolls (In Liquidation) v. Moore Stephens (A Firm), [2009] UKHL 39; K/S Lincoln v. C. B. Richard Ellis Hotels Ltd., [2009] All ER (D) 38 (Oct).

15 French Code Civil, Arts. 6, 1128, 1131, 1133, 1172; German Bürgerliches Gesetzbuch, §§ 134, 138; United States Restatement (Second) of Contracts, § 178(1); see generally New Zealand Illegal Contracts Act, 1970.

16 Holman v. Johnson, (1775) 98 ER 1120.

17 Bryan Garner, ed., Black’s Law Dictionary, 7th edn. (West Publishing Co., St. Paul: 1999), 750.


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Mr. Romanovich was convicted for embezzlement under the laws of Frugalia. F

18F Therefore, he

clearly committed an act “forbidden by law”. Since Mr. Romanovich’s actions are directly

attributable to Claimant, F

19F the rule of ex turpi causa is applicable in the instant case and

Claimant’s action is thus barred.

B. 22BMr. Romanovich’s fraudulent acts are attributable to Claimant.

A company’s liability may be based on primary or general rules of attribution. F

20F In Safeway

Stores v. Simon John Twigger,F

21F the Court held that for the purpose of applying the ex turpi

causa defence, a company must be held liable through primary rules of attribution, F

22F which

was differentiated from vicarious liability. F

23F Although a director may be called an agent of a

company for some purposes, F

24F in certain cases, where a director or employee is the ‘directing

mind or will’ of a claimant company, that company will be deemed to be ‘personally’

liable.F

25F In other words, the liability will be primary instead of vicarious. Where those

managing the company are using it as a vehicle for fraud, or where there is only one person

who is managing all aspects of the company's activities, there is no difficulty in identifying

the fraud as the fraud of the company.F

26

Mr. Romanovich was the majority shareholder in Claimant, holding 80% of the shares. F

27F He

was also Chairman of the Board of Directors and CEO of the company while the transaction


19 Infra Contention II(B).

20 Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 3 All ER 918; Stone & Rolls (In Liquidation) v. Moore Stephens (A Firm), [2009] UKHL 39.

21 Safeway Stores v. Simon John Twigger and Ors., [2010] EWCH 11 (Com.).

22 See Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 3 All ER 918.

23 Burrows v. Rhodes and Jameson, [1899] 1 QB 816; Hardy v. Motor Insurers' Bureau, [1964] 2 All ER 587; Lancashire County Council v. Municipal Mutual Insurance Ltd., [1996] 3 All ER 545; United Project Consultants Pte Ltd. v. Leong Kwok Onn, [2005] 4 SLR 214.

24 Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1914-15] All ER Rep. 280.

25 Safeway Stores v. Simon John Twigger and Ors., [2010] EWCH 11 (Com.).

26 Royal Brunei Airlines Sdn Bhd v. Tan, [1995] 3 All ER 97; KR v. Royal & Sun Alliance Plc.,[2007] 1 All ER (Comm.) 161.



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with Respondents took place. F

28F He appointed 7 of the 10 directors, F

29F and his de facto power

on the Board was recognised. F

30F Therefore, it may be inferred that Mr. Romanovich was the

“directing mind and will” of the company.

As a result, the fraudulent acts of Mr. Romanovich are attributable to Claimant.

Concluding, Claimant cannot bring an action for breach of a contract which was concluded

by fraud of Mr. Romanov, whose actions are directly attributable to Claimant.

III. 16BTHE FRUGALIAN SALE OF GOODS ACT IS INAPPLICABLE, SINCE THE

TRANSACTION IN QUESTION CONSTITUTES A “LICENCE” AND NOT A “SALE”. IN

ANY EVENT, NEITHER RESPONDENT 2 NOR RESPONDENT 1 IS IN BREACH OF

SECTIONS 15 AND 16 OF THE ACT, SINCE COMET IS NOT DEFECTIVE.

It is submitted that the transaction between the parties was in nature of a “license” and not a

“sale”. Therefore, the Frugalian Sale of Goods Act is inapplicable in the instant case [A].

Alternatively, neither of the Respondents is liable under the said Act as Comet was not

defective and fully matched the description mutually agreed between the parties [B].

A. 23BThe Frugalian Sale of Goods Act is inapplicable

For the Frugalian Sale of Goods Act to apply, the transaction in question should be a

“sale”,F

31F defined as a “contract whereby the seller transfers or agrees to transfer the property

in goods to the buyer for a price”. F

32F Although the software is a ‘good’ under the Act [1], the

transaction is a licence and does not amount to a sale [2], not even a conditional sale [3].

1. 28BRespondents admit that Comet is a “good” under the Frugalian Sale

of Goods Act.

28 Problem File, ¶6.



31Frugalian Sale of Goods Act, 1932, Preamble, §§ 4, 5, 15, 16; see also Indian Sale of Goods Act, 1930, Preamble, §§ 4, 5, 15, 16.

32 Frugalian Sale of Goods Act, 1932, §4(1); see also Indian Sale of Goods Act, 1930, § 4(1).


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The Frugalian Sale of Goods act defines “goods” as “every kind of moveable property other

than actionable claims and money”. F

33F In Tata Consultancy Services v State of Andhra

Pradesh, it was held that off the shelf software falls within this definition. F

34F “Comet” is an off

the shelf softwareF

35F and hence it is admitted that it is a “good” in the meaning of the

Frugalian Sale of Goods Act.

2. 29BThe transaction between the parties amounted to a license and not a

sale.

It is submitted that not every transaction where goods pass from one person to other

constitutes a sales contract. F

36F For a transfer to be a sale, the parties must have intended the

title in the good to have passed. F

37F A mere permission to use constitutes a “license” and not a

“sale”F

38F and in such a transaction, the Sale of Goods Act is of no application. As the contract

forms a private transaction between the parties, their intention at the time of entering into the

contract determines the true nature of the contract. F

39F In gathering the intention of the parties

to a contract, the text of the contract is to be accorded primacy F

40F and where the text is clear,

no subsidiary means of interpretation are to be adopted F

41F.

33 Frugalian Sale of Goods Act, 1932, §2(7); see also Indian Sale of Goods Act, 1930, § 2(7).

34 Tata Consultancy Services v. State of Andhra Pradesh, AIR 2005 SC 371.


36 See generally, Kalyani Breweries Ltd. v. State of West Bengal and Ors., (1997) 7 SCC 738; United Breweries Ltd. v. State of Andhra Pradesh, (1997) 3 SCC 530; State of Maharashtra, Bombay and Ors. v. Britannia Biscuits Co. Ltd. and Ors., (1995) Supp. (2) SCC 72.

37 Ibid; State of Tamil Nadu v. Srinivasa Sales Circulation, (1996) 10 SCC 648; Popatlal Shah v. State of Madras, AIR 1953 SC 274.

38 Bryan Garner, ed., Black’s Law Dictionary, 7th edn. (West Publishing Co., St.Paul: 1999), 931, 1337; P. Ramanatha Aiyer, The Law Lexicon, 2nd edn. (Wadhwa & Co., Nagpur: 2004), 1121, 1708.

39 Supra note 36; Pioneer Shipping Ltd. v. BTP Tioxide Ltd., [1981] 2 All ER 1030; Kim Lewison, The Interpretation of Contracts, 4th edn. (Sweet & Maxwell, London: 2007), ¶¶ 2.02, 2.03, 2.05.

40 Deutsche Genossenschaftsbank v. Burnhope, [1995] 4 All ER 717; Sirius International Insurance Co. v. FAI General Insurance Ltd., [2005] 1 All ER 117; AIB Group (UK) Plc. v. Martin, [2001] UKHL 63; Vitol BV v. Compagnie Europeene des Petroles, [1988] 1 Lloyd’s Rep. 574, 576; State of Gujarat v. Variety Body Builders, AIR 1976 SC 2108; Central Bank of India v. Hartford Fire Insurance Co., AIR 1965 SC 1288.

41 Ibid.


-6-


In the present matter, the agreement between the parties is titled “End User License

Agreement”.F

42F It is admitted that a title in itself does not go on to suggest that the transaction

is not a sale, but a license. However, the intention of entering into a license agreement and

not an agreement of sale is manifest in the text of the contract. Parties expressly state that the

transaction is a license and not a sale. F

43F In addition, only rights specified by the contract –

namely, (i) the right to install, use, access, display and run one copy of the software on five

designated computers and (ii) the right to store or install a copy of the Software on a storage

device are transferred to the Claimant and all the remaining rights in respect of the software

are retained by Respondent 2. F

44F Claimant requires the permission of Respondent 2 to even

install the software on additional computers. F

45F The computers on which the software was

installed was to be notified to Respondent 2 and the latter was free to collect technical

information.F

46F Further, on each computer only one processor was to run the software at a

given time.F

47F Also, the software could not be rented or sold without prior permission of

Respondent 2.F

48

These terms in the contract clearly indicate that what was transferred to Claimant was a right

use the software in accordance with set terms and conditions and not the title in the software

itself. Thus, it is clear that the parties intended to enter into a license agreement and not an

agreement of sale. Hence, the Frugalian Sale of Goods Act is inapplicable to the present

dispute.

3. 30BThe transaction cannot be viewed as a conditional sale.

42 Problem File, Annexure II.

43 Problem File, Annex II, ¶ 4.

44 Problem File, Annex II, ¶¶ 3, 4.

45 Problem File, Annex II, ¶ 3(a), (d).


47 Problem File, Annex II, ¶ 3(c).



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It is admitted that a sale can be conditional or unconditional. F

49F The mere imposition of

conditions does not reduce a contract of sale into a license agreement. F

50F However, where the

conditions imposed are such that no intention to effect transfer of title can be inferred, the

transfer does not amount to a sale even in cases where the contract is termed a sale. F

51F Title is

defined as the union of all elements (as ownership, possession, and custody) constituting the

legal right to control and dispose of property.F

52

In this case, the contract, in addition to terming itself a license F

53F and expressly stating that no

sale was intended,F

54F places such restrictions on the use of the software by Claimant F

55F and its

passing on title to a third party F

56F that no incidence of title in the Claimant is evident. As the

Claimant, through the contract, has not received any of the rights incidental to title in a

good,F

57F Claimant cannot be said to have acquired title in the good. As no title has passed, no

sale, not even a conditional sale can be said to have occurred.

B. 24BArguendo, neither Respondent 1 nor Respondent 2 is liable under sections

15 and 16 of the Frugalian Sale of Goods Act.

Assuming but not conceding that the Sale of Goods Act applies in the present matter, it is

submitted that Respondents are not liable under Section 15 of the Frugalian Sale of Goods

Act [1] or Section 16 of the said Act [2].49 Frugalian Sale of Goods Act, 1932, § 4; see also Indian Sale of Goods Act, 1930, § 4; Ouchterloney Valley Estates Ltd. v. State of Kerala, (1965) 1 SCR 803; State of Madras v. Gannon Dunkerley and Co., (Madras) Ltd., AIR 1958 SC 560; Commissioner of Sales-Tax, Eastern Division, Nagpur v. Husenali Adamji and Co., AIR 1959 SC 887.

50 Arnold v. North American Chemical Co., 232 Mass. 196; Bauer & Cie v. O'Donnell, 229 U.S. 1 (1913); Karnataka Pawn Brokers' Association v. State of Karnataka, ILR 1993 Kar. 240.

51 Kalyani Breweries Ltd. v. State of West Bengal and Ors., (1997) 7 SCC 738; United Breweries Ltd. v. State of Andhra Pradesh, (1997) 3 SCC 530; State of Maharashtra, Bombay and Ors. v. Britannia Biscuits Co. Ltd. and Ors., (1995) Supp. (2) SCC 72.

52 Bryan Garner, ed., Black’s Law Dictionary, 7th edn. (West Publishing Co., St.Paul: 1999), 1130.

53 Problem File, Annex II,




57 Ibid.


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1. 31BRespondents are not liable under Section 15.

For liability to arise under Section 15, first, the transaction has to be a sale by description and

second, the good should not be in conformity with the descriptions. F

58F In the present matter it

is submitted that the discussions between Claimant and Respondent is in nature of prior

negotiations and not a description in the contract [a]. Alternatively, if the discussions

between the parties can be said to have laid down description to be adhered to by the good, it

is submitted that the said description has been fully adhered to [b].

a. 35BThe sale is not a sale by description.

It is well accepted that where a contract is in writing, no evidence, however strong and

cogent, can be accepted to alter the rights and obligations of the parties as evident in the text

of the contract.F

59F Where the text of the contract is unambiguous, no external or subsidiary

tool of interpretation may be employed. F

60F Even in cases where the contractual language is

ambiguous both Common Law and judicial decisions in India vehemently reject prior

negotiations as a legitimate tool of interpretation. F

61F This is in view of the fact that the

negotiating history merely demonstrates a position adopted by a party at some time in the

past.F

62F It is accepted that these positions are open to change in the course of negotiations and

hence they are not of assistance in interpreting the final contract. F

63

58 Frugalian Sale of Goods Act, 1932, §15; see also Indian Sale of Goods Act, 1930, § 15; Sorabjee Hormusha v. V. M. Ismail AIR 1960 Mad. 520; Ranbirsingh Shankarsingh Thakur v. Hindusthan General Electric Corporation Ltd. and Anr., AIR 1971 Bom. 97.

59 Shogun Finance Ltd. v. Hudson, [2004] 1 All ER 215; Rabin v. Gerson Berger Association Ltd., [1986] 1 All ER 374; Kim Lewison, The Interpretation of Contracts, 4th edn. (Sweet & Maxwell, London: 2007), ¶ 3.10.

60 Central Bank of India v. Hartford Fire Insurance Co., AIR 1965 SC 1288; Kim Lewison, The Interpretation of Contracts, 4th edn. (Sweet & Maxwell, London: 2007), ¶¶ 3.10, 8.15.

61 Investors Compensation Scheme v. West Bromwich Building Society, [1998] 1 All ER 98; Prenn v. Simmonds, [1971] 3 All ER 237; Chartbrook Homes Ltd. v. Persimmon Homes Ltd., [2007] 1 All ER (Comm.) 1083; Kim Lewison, The Interpretation of Contracts, 4th edn. (Sweet & Maxwell, London: 2007), ¶ 3.08; N. Bhadbhade, ed., Pollock and Mulla on the India Contract Act, Vol. I, 12th edn. (Butterworths, Delhi: 2001), 257.

62 Ibid.

63 Ibid.


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In the instant case, it is admitted that Mr. Romanovich communicated certain features he

expected in the software. F

64F Other than this mention in the initial stages of the negotiation,

these descriptions do not find a mention in the text of the contract F

65F or even in any subsequent

communication between the parties. To the contrary, the contract, by means of an entire

agreement clause, denounces such communications as a source of obligations. F

66F In absence of

mention in the contractual text and in light of an express rejection, it is submitted that the

alleged description in the pre-contractual communication by Mr. Romanovich cannot be

relied on to enhance the contractual obligations of Respondents to beyond what was provided

for in the text of the contract. Therefore, the present contract cannot be said to be a contract

“for the sale of goods by description”. Hence, no liability can be imposed on Respondents

under Section 15 of the Frugalian Sale of Goods Act.

b. 36BIn the alternative, non-adherence with the description is not evident from the

factual matrix.

It is a general principle of law of evidence that the burden of proving a particular falls upon

the party alleging the existence of the said fact. F

67F Therefore, if non-adherence with

description is alleged, it is for Claimant to lead evidence to establish such non-adherence. In

the given factual matrix, non-adherence with any mutually agreed description of the good is

evident.

The communication by Mr. Romanovich which is alleged to constitute a description of the

good merely required the software to (i) analyse market behaviour of every important

company over the past 50 years and based on this (ii) recommend whether Claimant should

sell or purchase a particular share on a given day, more specifically warn against proposed

investments which appear to be risky in light of this analysis. F

68F To establish that the software

did not conform with the alleged description, Claimant has to establish – (i) the software did

not analyse market behaviour of every important company over the last fifty years or (ii) the


65 Problem File, Annex II.


67 Frugalian Evidence Act, § 102; see also Indian Evidence Act, 1872, § 102.



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analysis was faulty or erroneous or (iii) that the advice tendered by the software did not

correlate with the data analysis. None of these is evident from the facts.

All that is evident from the facts are – (i) there was no marked improvement in the market

performance of Claimant subsequent to the installation of the software F

69F, (ii) in the subjective

opinion of Claimant’s officials, the software was no better than a typical investment software

and is not as good as Blackhawk F

70F, (iii) in the subjective opinion of some “pundits”, close

analysis of Truism’s accounts and growth path would have demonstrated the risky nature of

the investmentF

71F.

Neither of the Respondents had guaranteed in the contract or otherwise that the market

position of the Claimant would improve even marginally as a result of the software being

installed, nor was there any representation made to this effect. This did not form any part of

the alleged description. Moreover, the market position of Claimant depends on a number of

variables other than the efficacy of the software. Hence this fact cannot be said to be

indicative of non-adherence of the good with alleged description.

In the subjective opinion of the officials of Claimant, Comet is not better than typical

investment software and is not as good as Blackhawk. F

72F Comet is, and was meant to be, a

typical investment software. Typical investment software analyses data relating to the market

behaviour of various shares and provides advice on investment based on this. F

73F This, and

nothing more, was what Comet was required to do under the alleged description provided by

Mr. Romanovich.F

74F A vendor while dealing with his customer is entitled to claim that his

goods are the best, even if the statement is not necessarily true. F

75F Such statements are


70 Ibid.



73 Barry W. Boehm and Kevin J. Sullivan, “Software Economics: A Roadmap” (Association for Computing Machinery, New York: 2000).


75 Reckitt and Coleman of India Ltd. v. M. P. Ramachandran, (1999) PTC 741 (Cal.); Reckitt and Coleman v. Kiwi, (1999) PTC 393.


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common in the marketplace and a prudent buyer knows that these competing assertions are

not necessarily true.F

76F However, in this case no such representation was ever made by either

of the Respondents to Claimant. It was Mr. Romanovich, the then chairman and majority

shareholder of Claimant, who represented to the board of directors of Respondent that Comet

was far better than other investment softwares including Blackhawk. F

77F Claimant, on its own

free will and its own risk heeded this representation. F

78F This representation was made neither

by nor on behalf of Respondents and hence they are not bound by it. Therefore, this cannot be

said to be a part of any description binding on Respondents.

Further, it is said that the risk in investing in Truism could be understood from a close

analysis of the track record of the company. F

79F An investment software processes data given to

it using mathematical formulae. F

80F A typical market fraud involves manipulation of data. F

81F

Most market frauds involve such effective manipulation of data in such a way that even the

most stringent regulatory regimes take the projected data as genuine. F

82F In this case, there was

a market fraud involving Truism. F

83F This would have projected the financial status of Truism

as better than it really was. Comet, incapable of detecting a market fraud, like most

investment advisors and investment softwares are, would have based its analysis on the

fraudulently falsified data supplied to it and rendered advice on this basis. While a human

observer may have been able to place together past records of Truism and the recent data and,

based on market experience and human intuitions, find the investment too risky. This would

76 Chandelor v. Lopus, (1603) 79 ER 3; Laidlaw v. Organ, 15 U.S. 178 (1817); Barnard v. Kellogg, 77 U.S. 383 (1870).




80 P. R. Balasubramanian, Tomas Isakowitz, Rob Kauffman, and Raghav K. Madhavan, “Exploiting Hypertext Valuation Links for Business Decision Making: A Portfolio Management Illustration”, NYU Working Paper No. IS-91-20 (July, 1991), available at http://ssrn.com/abstract=1289043 (Last visited: May 13, 2010).

81 Bethany MacLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Penguin, USA: 2003); E. Kumar Sharma, “The Great Satyam Robbery”, Business Today, January 20, 2009, available at http://businesstoday.intoday.in (Last visited: May 12, 2010).

82 Ibid.



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have involved discounting current market data and bringing in subjective elements into the

analysis. Such analysis is possible for a human analyst and not for a software which applies

set formulae to past and present data. Claimant, used to the advantages and disadvantages of

such a system of investment planning in the past, F

84F weighed them against the advantages and

disadvantages of a software-based investment planning strategy and consciously shifted to

the latterF

85F. The failure of Comet to engage in a subjective analysis of the circumstances

reflects the disadvantages, in general, of software based investment planning strategy as such

and not non-adherence by Respondents to any description mutually agreed regarding the

good.

In light of the above, it is submitted that even if the pre-contractual communication of Mr.

Romanovich as to the expected qualities of the software constituted a description that the

good was to conform to, the facts do not establish non adherence with such description.

2. 32BRespondents are not liable under Section 16.

It is submitted that the Respondents are not liable under Section 16 of the act. Terms implied

under Section 16 have no application in the present case as the good was sold by its “trade

name”. In the alternative, the good was in conformity with the terms implied under Section

16 by the particular purpose for which the good was required.

a. 37BThe sale was by trade name and hence implied terms under Section 16(1) are

of no application.

Section 16(1) imposes an implied condition of fitness of goods for a particular purpose when

such purpose has been made known by the buyer to the seller and the buyer relied on the skill

and judgment of the seller to ensure that the good was suited for such purpose. F

86F However,

proviso to this section expressly excludes such implied warranty in case of a “contract for the

sale of a specified article under its patent or other trade name”. F

87F



86 Frugalian Sale of Goods Act, 1932, § 16(1); see also Indian Sale of Goods Act, 1930, § 16(1).

87 Ibid.


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In the present case, Mr. Romanovich from the very beginning knew of Comet by its trade

name.F

88F While replying to queries about the investment software, Respondent stated, “Comet

is just what you are looking for” F

89F, referring to Comet by its trade name. The End User

License Agreement also refers to Comet by its trade name. F

90F Thus at every stage of the

transaction, the software was referred to by its trade name. The contract was hence a

“contract for the sale of a specified article under its patent or other trade name” and implied

warranty under Section 16(1) is inapplicable.

b. 38BAlternatively, the good was fit for its particular purpose.

It has already been submitted that all that Mr. Romanovich asked for was a typical investment

software.F

91F It has also been shown that there exists nothing on the facts to demonstrate that

Comet did not meet the requirements of a typical investment software. F

92F It has further been

shown that the failure of Comet to advice on the risks involved in the Truism investment does

not reflect on the quality of Comet as an investment software. F

93F Therefore, it is submitted that

the even assuming that the implied terms under Section 16(1) apply, such terms have not

been breached.

Therefore, Respondents are not liable to Claimant under section 16 of the Frugalian Sale of

Goods Act.

Concluding, it is submitted that Respondents are not in breach of the Frugalian Sale of Goods

Act.




91 Supra Contention III(B)(1)(b).

92 Ibid.

93 Ibid.


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IV. 17BRESPONDENTS ARE NOT LIABLE FOR BREACH OF CONTRACT UNDER THE

FRUGALIAN CONTRACT ACT.

A contract is said to be breached when a party does not fulfil its obligations under the

contract.F

94F Therefore, to establish a breach, it is necessary to first show the existence of the

obligation alleged to have been breached. It has already been submitted that no obligations

can be cast upon a party based on prior negotiations and other factors outside the contract if

such obligation does not flow from the contract itself. F

95

It has already been submitted that even assuming that the communication of Mr. Romanovich

created binding obligations upon Respondents, the said obligations have not been breached. F

96F

Thus, Respondents have not breached any obligation evident in the text of the agreement or

even those obligations alleged to have been created by the pre-contractual communication of

Mr. Romanovich. Hence, it is submitted that the Respondents are not liable for the breach of

contract.

V. 18BARGUENDO, THE LIABILITY OF RESPONDENTS DOES NOT EXTEND TO

COMPENSATING CLAIMANT FOR THE LOSSES SUSTAINED BY IT BY INVESTING

IN TRUISM.

It is submitted that the rule of Hadley v. BaxendaleF

97F as accepted by Indian judicial

pronouncementsF

98F should be applied to the present case [A]. Applying the said rule,

Respondents are not liable for the losses incurred by Claimant by investing in Truism [B].

Even applying current English case law, Respondents are not liable for losses accrued to

Claimant for investing in Truism [C].

94 Bryan Garner, ed., Black’s Law Dictionary, 7th edn. (West Publishing Co., St.Paul: 1999), 182; J. Beatson, Anson’s Law of Contract, 27th edn. (Oxford University Press: 1998), 565.

95 Supra Contention III(B)(1)(a).

96 Supra Contentions III(B)(1)(b), III(B)(2)(b).

97 Hadley v. Baxendale, [1843-60] All ER Rep. 461.

98 Food Corporation of India v. Babulal, (2004) 2 SCC 712; Rajkot Municipal Corporation v. Manjulaben Jayantilal Nakum and Ors., (1997) 9 SCC 552; Madhya Pradesh Mines Ltd v. RB Shriram Durga Prasad Ltd., (1972) 3 SCC 180; State of Kerala v. Cochin Chemical Refineries, AIR 1968 SC 1361.


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A. 25BThe rule of Hadley v Baxendale as adopted by Indian courts has to be

applied in the present case.

The rule is Hadley v Baxendale states that a party breaching a contract is liable only for such

consequences of the breach as were reasonably foreseeable at the time of the entering into the

contract.F

99F This rule has been accepted by judicial pronouncements in India. F

100F Thus, in

Frugalian law, which is in pari materia with Indian lawF

101F, the award of damages for the

breach of contract is governed by the rule of Hadley v Baxendale. It is submitted that the

Tribunal should apply this rule in the present matter, in deference to the choice of law

expressed by the parties [1] and in interest of rendering an enforceable award in the present

matter [2].

1. 33BThe choice of Frugalian law by the parties mandates application of the

Hadley v Baxendale rule notwithstanding later developments English law.

Arbitration is a contractual dispute resolution process and party autonomy is one of the

fundamental tenets of arbitration. F

102F It is respectfully submitted that an arbitral tribunal is a

creation of the contract between the parties and hence it is impermissible for such a tribunal

to disregard express stipulations in the contract. F

103F In the present matter, the parties have

chosen law of Frugalia to govern their contract. F

104F Hence, the consequences of breach of that

contract also have to be determined under the said system of law. It has already been

submitted that the award of damages for breach of contract in Frugalian law is governed by

99 Ibid; Hadley v. Baxendale, [1843-60] All ER Rep. 461; H. E.Guest, ed., Chitty on Contracts, Vol. 1, 27th edn. (Sweet & Maxwell, London: 1994), ¶ 26-023.

100 Pannalal Jankidas v. Mohanlal & Anr,. AIR 1951 SC 144; Rajkot Municipal Corporation v. Manjulaben Jayantilal Nakum and Ors., (1997) 9 SCC 552.


102 Centrotrade Minerals and Metal Inc. v. Hindustan Copper Limited, (2006) 11 SCC 245; Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th edn. (Sweet and Maxwell, London: 2004), ¶ 1-11; Emmanuel Gaillard and John Savage (eds.), Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, The Hague, Boston, London: 1999), ¶¶ 45-45.

103 Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises, (1999) 9 SCC 283; Steel Authority of India Ltd. v. Gupta Brother Steel Tubes Ltd., (2009) 10 SCC 63; G. Ramachandra Reddy and Co. v. Union of India and Anr., AIR 2009 SC 2629.



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the rule laid down in Hadley v Baxendale.F

105F Therefore, the Tribunal is bound to give effect

to the choice of law expressed by the parties by applying the rule in Hadley v Baxendale in

computation of damages.

2. 34BDeparture from the Hadley v Baxendale rule will render the award

unenforceable and even liable to be set aside in Frugalia.

It is well accepted that an arbitral tribunal must make every effort to render an award that is

enforceable.F

106F In Frugalian law an arbitral award, including a foreign award, can be set aside

under Section 34 of the Arbitration and Conciliation Act, 1996 on the ground of public policy

if the award is patently illegal. F

107F Patent illegality may be determined with reference to the

applicable law or with reference to the contract between the parties. F

108F

If the Tribunal were to depart from the position of Frugalian law on award of damages, the

Respondents would be left with no choice but to approach courts in Frugalia seeking setting

aside of the award as it disregards both the law of Frugalia and the contract of the parties.

Respondents will also be forced to seek an injunction from courts in Frugalia restraining

Claimant from seeking enforcement of the award so set aside in any other jurisdiction. F

109F As

Claimant is incorporated in Frugalia and carries on business in that country, F

110F such an

injunction mandating personal compliance of the Claimant will render the award virtually

unenforceable in any jurisdiction.

Therefore, it is submitted that with a view to render an enforceable award in the instant

dispute, the Tribunal should apply the rule of Hadley v. Baxendale.

105 Supra Contention V(A).

106 Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th edn. (Sweet and Maxwell, London: 2004), ¶ 1-12.

107Venture Global Engineering v. Satyam Computer Services Ltd. and Anr., AIR 2008 SC 1061.

108 Ibid.

109 See generally Venture Global Engineering v. Satyam Computer Services Ltd. and Anr., AIR 2008 SC 1061.

110 Problem File ¶ 1.


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B. 26BUnder the rule of Hadley v Baxendale, Respondents cannot be held liable

for the losses sustained by Claimant by investing in Truism.

Respondents are not liable for the losses sustained by Claimant with respect to its investment

in Truism Limited. Under the Hadley v. Baxendale F

111F test, a seller is only liable for such

damages which arise according to the usual course of things or such damages which may

reasonably have been in the contemplation of both parties at the time they made the contract

as the probable result of the breach.

The major reason for the failure of Claimant’s investment was the fraudulent transactions

carried on by the CEO of Truism. F

112F Comet was never intended to prevent investments of this

kind. The main purpose of Comet was to avoid risky investments, which it gauged by

analyzing the market data of that company. Truism was a very successful start-up company

and was cited as the perfect example of entrepreneurial brilliance. F

113F Considering its

successful history, Comet did not identify Truism as a risky venture. The reason for Truism

turning bankrupt was the fraudulent activities of its CEO. F

114F Comet could never have

predicted this. The above chain of events could not have arisen in the usual course of things

nor could it have been reasonably contemplated at the time of contract. Therefore,

Respondents are not liable to compensate Claimant for losses suffered by it consequent to

investing in Truism.

C. 27BArguendo, even if the subsequent developments in English law were to be

taken into account, the Respondents cannot be held liable for the losses

sustained by Claimant by investing in Truism.

111 Hadley v. Baxendale, [1843-60] All ER Rep. 461; see also, Jackson v. Royal Bank of Scotland, [2005] UKHL 3.

112 Problem File ¶ 14.

113 Ibid.

114 Ibid.


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Even assuming that later developments in English law have to be taken into account, the

Respondents are not liable to compensate claimant for losses incurred by it by investing in

Truism. Recent developments in English law on damages and remoteness of damage are

reflected in Transfield Shipping v. Mercator Shipping.F

115F It was held in that case that “the

question of remoteness cannot be isolated from consideration of the purpose of the contract

and the scope of the contractual obligation” and that “if, on the proper analysis of the contract

against its commercial background, the loss was within the scope of the duty, it cannot be

regarded as too remote, even if it would not have occurred in ordinary circumstances”.

However that case and the principle laid down is inapplicable in the present factual matrix.

Transfield was decided in the context of a delay of a ship necessitating the re-negotiation of

an onward charter to the prejudice of the charterer. In other words, the loss though not

necessarily foreseeable at the time of contracting was certainly and directly attributable to the

actions of the respondents in that case.

In this case, the losses accruing to Claimant are attributable to the fraud in Truism and not to

the Respondent. Moreover, common law admits third party intervention as a defence even in

cases of heightened liability like strict liability. F

116F In this case, the loss would not have

occurred had the fraud in Truism not occurred. Hence, even under the test of Transfield

Shipping v. Mercator Shipping, Respondents cannot be held liable.

Concluding, it is submitted that Respondents are not liable to compensate Claimant for any

losses accrued to it for use of the software Comet.

115 Transfield Shipping Inc. v. Mercator Shipping Inc., [2008] 4 All ER 159.

116 Box v. Jubb, [1879] 4 Ex. D. 76; Richards v. Lothian, [1913] AC 263; State of Punjab v. Modern Cultivators, Ladwa, AIR 1965 SC 17; M.P. Electricity Board v. Shail Kumar, AIR 2002 SC 551.


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-Conclusion and Prayer for Relief-

8BCONCLUSION AND PRAYER FOR RELIEF

In light of the facts of the case, issues raised and arguments advanced, Counsel for

Respondents respectfully requests the Tribunal to determine:

1) The Tribunal lacks jurisdiction over Respondent 1, since it is not party to the

agreement that contains the arbitration clause.

2) In any event, the action is barred by virtue of ex turpi causa non oritur actio, since

Mr. Romanovich’s fraudulent acts are attributable to Claimant.

3) The Frugalian Sale of Goods Act is inapplicable, since the transaction in question

constitutes a “licence” and not a “sale”. In any event, neither Respondent 1 nor

Respondent 2 is in breach of ss. 15 and 16 of the Act, since Comet is not defective.

4) Alternatively, neither Respondent 1 nor Respondent 2 is liable for breach of contract

under the Frugalian Contract Act, 1872.

5) In any event, Respondents are not liable to pay damages for the erroneous investment,

or for the losses resulting there from.

All of which is respectfully affirmed and submitted

Sd/-

Counsel for Respondents


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Documents

NUJS Memo Respondent