application of english law concepts to corporate finance
TRANSCRIPT
1
Application of English Law Concepts to Corporate Finance Transactions
in Tajikistan
A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree
Shirinbek Milikbekov July 25, 2014
12.435 words (excluding footnotes) Supervisor 1: Mr. James Faulkner
Supervisor 2: Ms. Zhanyl Abdrakhmanova
2
CONTENT:
1. Introduction ……………………………………………………………………………...3
2. General Clauses of English Contract Law Often Used In Tajik Corporate Finance
Transactions ……………………………………………………………………………..6
2.1. Brief Overview of Sources and Theories of English Law of Contract…………6
2.2. Classification of Contractual Statements and Rules of Construction under English
Law .………………………………………………………………………………8
2.3. Often Used Clauses of English Law……………………………………………..9
2.3.1. Conditions Precedent……………………………………………………..9
2.3.2. Representations…………………………………………………………..14
2.3.3. Warranties………………………………………………………………..23
2.3.4. Indemnity…………………………………………………………………30
3. Similar Concepts of Tajik Legislation…………………………………………………35
3.1. Brief Overview of Legislation of Tajikistan on Corporate Finance
Transactions…………………………………………………………….35
3.2. Similar Concepts…………………………………………………………38
3.2.1. Concept of Conditions Precedents………………………………………38
3.2.2. Concept of Representations and Warranties……………………………..42
3.2.3. Concept of Indemnity……………………………………………………50
4. Conclusion……………………………………………………………………………….52
Bibliography
3
1. Introduction
Nearly twenty three years have passed since Tajikistan inhaled a breath of independence
and stepped into a notion once completely alien to it denoted market economy. Since this
significant historical event certain improvements were achieved on the legislative basis with the
aim of facilitating the overall adaptation process. Specifically concepts of private property,
business entities, etc. were enacted in the newly adopted Civil Code. These developments
gradually cultivated the entrepreneurial spirit in the country. Multiple entities were established in
the form of limited liability companies and joint stock companies allowing the accumulation of
resources aligned with limiting the personal liability of shareholders. Subsequently most
successful ones were able to obtain access to external resources from investment banks and other
financial institutions promoting private initiatives in the country.
However, such an access to funds, regardless of its type, either debt or equity, was not
without a tradeoff for local business and investors. For business this compromise took the form
of completely unknown concepts of a foreign law being incorporated into their contracts. For
investors, a due consideration of the merits of the local provisions and regulations has compelled
them to adhere to the law affording maximum protection and tested numerous times in practice,
which is English law.
Number of justifications both on practical, as well as historical reasons exist that can
explain such a choice.1 In the meantime, such application of English law in local deals might
itself endanger the protection of investors’ rights in a dispute. First of these risks is related to the
peremptory effect of mandatory rules of the legislation of Republic of Tajikistan. Recent practice
shows that investors has been successful in using English law and its respective clauses in local
1Practice Note - International Transactions: a Russian and English Law Comparison, Ian Ivory and Anton Rogoza
(2011) available at http://uk.practicallaw.com/1-504-0104?q=&qp=&qo=&qe=#a327818
4
corporate finance transactions on a limited basis only, usually in compliance with superseding
mandatory rules of Tajik law.2
Another reason for the limited application of English law is anchored in the issues of
enforcing investors’ rights, as most of local companies hold mainly their assets within Tajikistan.
Local courts are rather reluctant to enforce foreign judgments and overall lack experience on this
matter. Even though in 2011 Tajikistan acceded to the New Convention on Recognition and
Enforcement of Foreign Arbitral Awards the practice is not established yet, thus inducing parties
to design also forum selection clauses in favor of Tajik courts.
In light of the foregoing, the aim of this study is to examine the most frequently used
clauses of English law in local corporate and facility agreement accompanied with comparative
analysis of similar provisions available under the legislation of the Republic of Tajikistan. As a
result we want to have a deliverable answering the following questions: What merits induces
investors to opt incorporation of examined clauses in local contracts? What effective
substitutions exist under local law? If such concepts do not exist under local law, what
suggestion can be given for their effective incorporation in contract along with enforcement of
rights contained in them?
The present paper is among the first works providing for comparative analysis of English
law and Tajikistan legislation related to corporate finance transactions. Its target audience can
vary from practitioners dealing with international finance transactions, along with students and
courts. Hence, it might serve as an effective platform for obtaining a clearer grasp of the most
frequently encountered clauses of English Law of contract and drawing parallels with local
legislation.
2 Article 1198 of the Civil Code of Republic of Tajikistan
5
Due to the practical nature of the present work and lack of a specific academic literature of
Tajik legal scholars on the examined matter the methodology employed is as follows. First, an
internet search is to be conducted to define authoritative definitions of frequently used English
law clauses followed by in-depth study of cases revealing their essence and practical use, along
with academic discussions and comments. Second, we assess the advantages and disadvantages
of these clauses in the light of alternative concepts already established under the legislation of
Tajikistan. Finally, we reveal our findings based on the comparative analysis, and if necessary,
give recommendations on the improvement of corporate finance legislation of Tajikistan. It is
worth noting at this stage that most of academic and practical work related to the study is
available from Russian sources and practitioners. Despite minor distinctions, legal provisions of
Russia and Tajikistan share a common history and basis, thus these sources are equally reliable
and valid.
Based on the methodology employed, the paper is structured in the following way. At the
outset we briefly cover the history and peculiarities of the English law of Contract, followed by a
detailed analysis of selected English law concepts often encountered in Tajik corporate finance
transactions. Then, we identify similar provisions already established under the legislation of the
Republic of Tajikistan. Finally, based on the preceding comparative analysis, if applicable, we
provide recommendations for the improvement of the corporate and finance legislation of
Tajikistan in the conclusion.
6
2. General Clauses of English Contract Law Often Used in Tajik Corporate Finance
Transactions
2.1. Brief Overview of Sources and Theories of English Law of Contract
The English law of contract has a long history, however most prominent efforts to its
consolidation took place predominantly in the XIX century. It was in that time that the concept
of contract along the doctrine of ‘classical law of contract’ was developed based on the works of
treatise writers like Anson, Powell, Newland, and Colebrook.3 According to Whiteman although
classical law of contract was based on the court decisions the synthesis of those decisions into a
coherent body of law was done by treatise writers.4
Despite these numerous consolidation attempts in works of Horwitz, Gilmore and Atiyah,
the theoretical basis of law of contract remains confusing and Atiyah in this regard
acknowledges that ‘modern contract law probably works well enough in the great mass of
circumstances but its theory is in a mess’.5 Many theories were elaborated to form this basis,
such as the social contract theories of Thomas Hobbes or natural-law theories of Samuel
Pufendorf.6 Without criticizing the viability of such theories, it is worth noting that a central
place among them is undoubtedly allocated to the ‘theory of will’. Richard Stone notes on the
aspects of the freedom of contract as embracing two dimensions, first ‘party freedom’ which is
expressed in the person’s choice to enter into contract or not, and the second ‘term freedom’
meaning the freedom to decide on the contractual content containing the respective obligations.7
It is generally acknowledged that the classical law of contract, as well as the theories
elaborated on its basis, lay the foundation of the English law of contract in way that it is known
3 The Modern Law of Contract, Richard Stone, 7
th edition, p 3 (2008)
4 Contract: A Critical Commentary Law & Social Theory, John Whiteman p 49 (1996)
5 Contract Law, Ewan McKendrick, Marise Cremona, p 3 (2000)
6 A Historical Introduction to the Law of Obligations, D.J.Ibbetsonpages 200-244 (2001)
7 The Modern Law of Contract, Richard Stone, 7
th edition, p 4 (2008)
7
to us nowadays. Thus all the aforementioned serve as a comprehensive introduction to one of the
main sources of English law of contract, which is common law. Other sources of contract law are
statutes, such as Unfair Contract Terms Act 1977, Misrepresentation Act 1967, etc, as well as
international conventions and provisions related to European integration of UK.8
However, despite the multiplicity of sources, the common law remains the essential source and
still provides the fundamental rules governing all aspects of the law applicable to contracts
generally.9 This particular fact of the English contract law i.e. rich historical record of cases
endows it with the complete and developed nature it possesses nowadays and its widespread use
in the global context as well.
2.2. Classification of Contractual Statements and Rules of Construction under
English Law
As we briefly considered the main sources of English law of contract and its underlying
theories, it would be appropriate to examine classification of contractual statements and rules of
interpretation of contracts before we cover specific clauses.
Statements of parties or in other words their undertakings included in the contract are
divided in English law into representations, which induce a party to enter into contract, and terms
as specific undertakings to be performed.10
Such distinction of statements has historical reason as
damages were granted in early XIX century only for misrepresentation in a very narrow range of
circumstances.11
Currently the importance of such a distinction has weakened and primarily
serves for determining remedies available for breach of these statements12
, which will be
discussed in greater detail below.
8 Unfair Terms in Consumer Contracts Regulations 1994,1999
9 Chitty on Contracts: General Principles (Vol. 1), 31
st edition, p 4 (2012)
10 Smith and Keenan’s English Law, Denis Keenan, 13
th edition, p 289 (2001)
11 Contract Law, Ewan McKendrick p. 181
12 The Modern Law of Contract, Richard Stone, 7
th edition, p 247 (2008)
8
If ambiguity exits regarding the construction of a statement i.e. whether it is a mere
representation or a term of a contract, courts would resolve this issue with the consideration of
following aspects: the intention of parties; the importance of the truth of the statement; the time
lapse between the making a statement and final consensus; whether a party making a statement
was in better position to ascertain the truth of the statement; and whether the statement was
omitted when the agreement was embodied in a written contract.13
However, whether the
statement is a representation outside the contract or a term is ruled on each case individually
based on its facts and circumstances along with the criteria listed above.
English courts use the following rules of construction of contractual terms, which can be
illustrated as follows:14
13
Chitty on Contracts: General Principles (Vol. 1), 31st edition, pp 908-909 (2012)
14 A Quick Guid: Interpretation of Contracts under English Law, Ashurst Quickguides (2012), available at
www.ashurst.com
Starting Point:
Actual words
used
What is the ordinary
meaning of words?
Set against
background and
commercial context
If meaning is
unclear
Resolve doubt
against the benefiting
party (contra
preferentem)
Are words part of a
common category?
Two rival
interpretations:
which gives the most
commercial result?
If meaning is
still unclear,
court may apply
terms if:
Reasonable and
equitable
Obvious
Does not contradict
express terms
Necessary to give
‘business efficacy’
Capable of clear
expression
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2.3. Often Used Clauses of English Law
2.3.1. Conditions Precedent
Corporate finance transactions will often contain a clause denoted ‘conditions precedent’.
So what is the meaning of this clause, what does it pursues and what are the consequences of not
complying with its stipulations? These questions will be answered throughout this subchapter.
However it seems appropriate to first identify the position of this clause within general principles
of the law of contract, before we proceed with its interpretation within the context of transactions
we are examining.
At the outset it is essential to consider the different meanings of the word ‘condition’ in
English law. Kim Lewison notes the following on multiplicity of interpretation of the word
‘condition’:
‘In English law the word ‘condition’ may mean (i) a requirement which must be
satisfied before any contract comes into existence; (ii) a requirement which must be
satisfied before a party can be liable to perform his obligations under the contract; (iii)
a term of the contract; (iv) an important term of the contract, breach of which will
amount to a repudiation of the contract; (v) a requirement which if satisfied will
automatically bring the contract to an end; or (vi) a requirement which if stratified will
entitle one party to bring the contract to an end’.15
So which of the explanation provided relates to our case? It would be logical to opt
definition (ii) as a requirement which must be satisfied prior to holding another party liable for
performance of his obligations. These conditions are also known in English law as conditions
precedent.
15
The Interpretation of Contracts, Sir Kin Lewison, 5th
edition, p 725 (2011)
10
According to Osborn’s Concise Law Dictionary, a condition precedent is defined as one
which delays the vesting of a right until the happening of an event.16
A more elaborative
definition is given by Sir Kim Lewison explaining the condition precedent as a condition that
shall be realized before any biding contract is concluded, or condition which does not prevent the
existence of a binding contract, but suspends performance of obligation/s under it until a
condition is fulfilled, or describes a contractual obligation that must be performed by one party
before another contractual obligation of the counterparty arises.17
The first and third explanations provided by Lewison i.e. fulfillment of condition precedent
for the sake of effectuating the contract (contingent condition precedents) and condition
precedent as obligation of one party to be performed before claiming performance from the other
(promissory), are derived from the case Trans Trust SPRL v Danubian Trading Co Ltd (1952).
This case involved a sale contract containing a provision on the obligation of the buyer to open a
letter of credit in favor of seller. As the buyer failed to do so, the seller sued the former for
damages due to breach of contract. Lord Denning reasoned the following in this regard:
‘Sometimes it is a condition precedent to the formation of a contract, that is. It is a
condition which must be fulfilled before any contract is concluded at all…If no credit is
provided, there is no contract between the parties. In other cases a contract is concluded
and the stipulation for a credit is a condition which is an essential term of the contract.
In those cases the provision of the credit is a condition precedent, no to the formation of
a contract, but to the obligation of the seller to deliver goods. If the buyer fails to
provide the credit, the seller can treat himself as discharged from any further
16
Osborn’s Concise Law Dictionary, Mick Woodley (editor), 11th
Edition, p 104 (2009) 17
The Interpretation of Contracts, Sir Kin Lewison, 5th
edition, p725 (2011)
11
performance of the contract and can sue the buyer for damages for not providing the
credit’. 18
As contingent conditions pertain to the contract formation and we will not deal with them
here, while promissory conditions precedent are the ones used in corporate finance transactions.
This is basically caused by the intrinsic feature of the examined contracts to be performed on two
stages i.e. signing and completion, which is performance of actual undertakings prescribed in the
contract. For the debt finance fulfilment of conditions precedent will give a signal for the lender
to provide the loan amount19
while for equity investment the execution of the respective
documents will entail the change of ownership for shares, etc.
Conditions precedent to corporate finance transaction will depend on the structure of the
transaction, theamount provided, etc. and can be classified into documentary and factual.20
Examples of documentary conditions precedent can be an obligation to provide constitutional
documents of the company, resolutions of management body for approval of transaction, third
party consents, financial statements21
, competition and regulatory approval, tax clearances,
approvals of shareholders, approval for transfer of licenses and others.22
Factual conditions
precedent may relate to a confirmation that no event of default has occurred or that
representations and warranties given are true and accurate.23
As it is obvious from the above conditions precedent are used as a convenient tool for
investors and lenders to secure their position and add certainty to their respective obligations.
The consequence of nonfulfillment of conditions precedent depending on the interpretation by
18
Trans Trust SPRL v Danubian Trading Co Ltd (1952) available at www.westlaw.com 19
Principles of Corporate Finance Law, Eilis Ferran , p 325, (2008) 20
Conditions Precedent to Lending, available at http://lexisweb.co.uk/sub-topics/conditions-precedent-to-lending 21
Drafting for Corporate Finance: What Law School Doesn’t Teach You, Carolyn E.C.Paris, p 166 (2007) 22
Mergers and Acquisitions: A Practical Guide for Private Companies and their UK and Overseas Advisers,
Jonathan Reuvid (Consultant Editor) p 190 (2008) 23
Principles of Corporate Finance Law, Eilis Ferran , p 326, (2008)
12
court entails differing consequences if the wording of the contract fails to clearly define them as
promissory. It may suspend rights and obligations of both parties until fulfillment of conditions
precedent – parties are not liable; or assumption of immediate unilateral obligation subject to a
condition, fulfillment of which leads to binding bilateral contract – the party assuming obligation
is liable; immediate entrance into agreement by both parties, where obligations are fully or
partially suspended until fulfillment of conditions – no party is liable for breach of obligations
that are being subject to a condition.24
The preceding consequences, as noted before, apply if the contract itself does not describe
them as promissory. But how can the court determine whether the condition precedent is
promissory or contingent? In this regard Lord Wilberforce in case Bremer Handelsgesellschaft
Schaft v Vanden Avenne Izegem noted that the distinction line between condition precedent and
other terms lies in the form of the clause, its relation to other terms of the contract and general
consideration of law.25
Hence, as we can see greater weight has been imposed on the drafting of
the clause and its relation toward the whole contract.
The importance of the ‘proper construction of contract’ was notably stressed in case Total
Gas Marketing ltd v Arco British Ltd, where Total brought action for termination of contract
with Arco, for sale-purchase of gas. Clause 2.8.1of the contract stipulated that the agreement is
conditional on the seller becoming party to allocation agreement by a certain date, which Arco
failed to fulfill. The question before the court was whether the condition precedent suspends or
terminates the contract. It held that in this case where the time of delivery of gas was clearly
defined and Arco failed to comply with it, the claimant had right to terminate it.26
24
Chitty on Contracts: General Principles Vol. 1, H.G.Beale (general editor), p 596 (1999) 25
Bremer Handelsgesellschaft Schaft v Vanden Avenne Izegem (1978) available at www.westlaw.com 26
Total Gas Marketing ltd v Arco British (1998) Ltd available at www.publications.parliament.uk
13
In corporate finance contracts parties tend to regulate the non-fulfillment of conditions
precedent within the contract, which makes it more certain to parties. This is done primarily
because of costs incurred usually prior to the completion of the deal, such as expenses for hiring
lawyers and auditors to carry out the due diligence of the company, etc. Therefore,
consequences of not complying with these conditions are written within the contract, but the
remedy that is available under the English law, as we can observe from the preceding analysis, is
basically termination of the agreement and a claim for damages if the injured party proves that
the condition precedent is promissory.
14
2.3.2. Representations
A representation is a statement of fact made by one party to another before or at the time of
a contract, of some matter or circumstance relating to the contract.27
In some literature
representation is denoted as inducement28
, as the main goal of stating a fact or belief is to induce
a counterparty to enter into contract.
The concept of representation must be seen against the common law doctrine of ‘caveat
emptor’, according to which it is the obligation of the buyer to ‘reasonably examine property
before purchase and take responsibility for its conditions’.29
Thus, the seller is exempt from
obligation to disclose information if the buyer does not exercise diligence in ascertaining the
object of his purchase and other respective rights attached to it. In the words of Blackburn J in
case Smith v Hughes (1871) ‘whatever may be the case in a court of morals, there is no legal
obligation on the vendor to inform the purchaser the he is under a mistake, not induced by the act
of the vendor’.30
This statement also describes that the notion of ‘good faith’ is not assumed for
contract formation, as it is usually the case in civil law countries.
There is an exception to the doctrine of ‘caveat emptor’ under English statutory law aimed
at the securities transactions. This is Section 397 of the UK Financial Services and Markets Act
2000, which states that a person who knowingly provides a misleading forecast or makes
misleading statement or conceals any material facts to induce another person to enter an
agreement is guilty of an offence punishable by fine or imprisonment.31
However, this is a rare
case where the obligation to disclose information is stipulated under law. In all other cases it is
27
Osborn’s Concise Law Dictionary, 11th
edition, Mick Woodley, p 357 () 28
Smith & Keenan’s English Law, 13th
edition, Denis Keenan, pp 289-290 (2001) 29
Definition retrieved from http://www.law.cornell.edu/wex/caveat_emptor 30
Misrepresentation, Mistake and Non-Disclosure, 3rd
edition, John Cartwright, p 733 (2012) 31
Financial Services and Markets Act 2000 available at http://www.legislation.gov.uk/ukpga/2000/8/contents
15
primarily the obligation of the buyer to take all necessary measures to secure his position and
one of such measures under the English contract law is representation.
Thus, representation is the statement of fact, usually pre-contractual or that made on the stage
of negotiating the deal. However not every representation made at the pre-contractual stage
entitles the injured party to a remedy. In order for representation to be actionable in court the
following criteria must be satisfied:
a) Representation must be a statement. Generally speaking, there should be an active
behavior of a contractor inducing the other party to conclude a contract and therefore,
case of silence and non-disclosure of some facts are not considered a breach under
English law, unless it is stipulated so under statutory provisions or cases of a fraud.
b) Statement relates to an existing fact or past event. According to this second condition
statements of opinion or those related to future intentions and promises are excluded. So
the fact shall be real or relate to some event already occurred in past. This is basically to
ensure that facts are accurate and not misleading.
c) Statement induces the contract. According to this third condition, which concentrates on
the perception of the statement by the representee, it must be proved that the latter
actually showed reliance on the statement.
d) Awareness of the defectiveness of a statement. According to this condition, the
representee must also show that he was not aware of any deficiencies in the statement.
Otherwise he loses the chance for remedy.
16
e) Influence of statement on decision: This condition is pretty much self-explanatory, as the
representee must show that it was the false statement that affected his decision to enter
the contract. 32
If the abovementioned conditions are satisfied, then a party that suffered from
misrepresentation is entitled to claim for damages or rescission of the contract, as such contracts
are considered voidable.33
Damages for misrepresentations will be awarded on the tort level, so
as to put the injured party in the position they were in before the contract formation.
In equity investment agreements as well as debt financing, the importance of a diligent
consideration of all material facts related to the transaction and the company is highly
significant. This may be the determining fact for the investor/lender for entitlement to bring
claims for damages or pursue other reliefs available. Moreover, in equity investment, from the
commercial perspective, the correctness of representation plays a significant part in adjusting the
sale price for shares, as it diminishes the asymmetry of information among parties, allowing
them to adopt more of a value increasing investment decisions.34
The question that now arises is for what facts usually representations are given by the target
company/borrower in our particular types of contracts. Eilis Ferran lists the following
representations intrinsic to debt financing contracts:
- Capacity of the borrower and authority of directors and officers to enter into
agreement;
- Compliance with applicable laws and regulations;
- Compliance with other contractual obligations of the company;
32
Smith & Keenan’s English Law, 13th
edition, Denis Keenan, pp 274-277 (2001) 33
34
Mergers and Acquisitions: A Practical Guide for Private Companies and their UK and Overseas Advisers,
Jonathan Reuvid (Consultant Editor) p 186 (2008)
17
- Accuracy of the information on the company that was supplied in the course
of negotiations, including confirmation that no facts or circumstance have
been omitted so as to render the information supplied as misleading;
- Financial position of the company and that the financial reporting furnished
represents a true and fair view of its financial positions;
- Claims against the borrower, whether pending or threatening that may have an
adverse effect on the company’s performance;
- Occurred event of default;
- Securities agreement concluded by the company.35
However, this list is not exhaustive and representations may be given to every aspect of
the company’s activity.
As we already mentioned, representations are considered pre-contractual statements
aimed at inducing a party to enter a contract. However it has been a usual practice in corporate
finance transaction to include them into the body of the contract, with exclusion of any oral
representations through and ‘entire agreement clause’. In Pennsylvania Shipping Co v
Compagnie Nationale de Navigation (1936) Branson J noted that the incorporated representation
on the heating of the ship sold ‘merged in the higher contractual right’ and thus the claimant
obtained the right not only to rescind the contract on the basis of misrepresentation, but also to
claim damages for breach of contract.36
The question that needs clarification now is what are the
consequences of stating a false fact, or in other words consequences of misrepresentation.
At the outset of discussing the remedies for misrepresentation, it is worth noting that
common law and statutory provisions in English law differ in terms of approaches to availability
35
Principles of Corporate Finance Law, Eilis Ferran , pp 236-327 (2008) 36
Contract Law, 4th
edition, Ewan McKendrick, Marise Cremona (editor), pp 178-179 (2000)
18
of particular types of remedy and imposition of the burden of proof. These issues will be dealt
with in details under each particular type of misrepresentation. However at this point it is
sufficient to stress that two remedies are available under English law for misrepresentation i.e.
first, rescission, which is available irrespective of the type of misrepresentation and second,
tortuous damages. The aim of remedies for misrepresentation is basically restitution or in other
words putting the parties in a position that existed before the contract was concluded.
Both of the mentioned remedial measures are subject to several restrictions. The
following bars exist under English law for rescission: (a) affirmation of the contract by the
representee even after the misstatement was revealed by the latter; (b) lapse of time; (c)
impossibility of restitution; and (d) third party rights.37
Some authors also include inequity under
section 2(2) of Misrepresentation Act 1967 as the fifth bar38
, but this bar may be also placed
under impossibility of restitution or third party rights. In regard to damages there are also certain
restrictions for this type of remedy. They are (a) remoteness39
; (b) mitigation of damages40
;
contributory negligence41
and time lapse.
Remedies for ‘Innocent Misrepresentation’
Prior to analysis of remedies available for innocent misrepresentation, we must first
define what is understood under this concept. A purely innocent misrepresentation is a false
statement made by a person who had reasonable grounds to believe that the statement was true,
not only when he made it but also at the time the contract was entered into.42
37
The Modern Law of Contract, 7th
edition, Richard Stone, p 352-356 (2008) 38
Contract Law, 2nd
Edition, Mindy Chen – Wishart, p 227 (2008) 39
Hadley v Baxendale (1854) available at www.westlaw.com 40
British Westinghouse Electronic and Manufacturing Co Ltd. v Underground Electric Railways Co of London Ltd
(1912) available at www.westlaw.com 41
Law Reform (Contributory Negligence) Act 1945 42
Smith & Keenan’s English Law, 13th
edition, Denis Keenan, p 278 (2001)
19
Remedies under innocent misrepresentation according to the common law are rescission
and indemnity.43
Damages are not recoverable in case of innocent misrepresentation under
common law approach as the representee must show either fraud or negligence constituents in
order to recover damages.44
The statutory approach differs from that of common law, in that it affords more favorable
conditions for the representee in case of innocent misrepresentation. According to the wording of
section 2(1) of Misrepresentation Act 1967 the representor may still be held liable in case of
innocent misrepresentation as it was a fraudulent, ‘unless he proves that he had reasonable
grounds to believe and he did believe up to the time the contract was made that the facts
represented were true’. This shift of burden, as well as treatment of innocent misrepresentation
as fraudulent, which is also known as the ‘fiction of fraud’45
makes the statutory approach more
representee – friendly and gives the representee right to claim damages as well.
Another relevant provision for innocent misrepresentation under the Misrepresenation
Act 1967 is the substitution of rescission by payment of damages under section 2(2). This section
states that ‘where a person has entered into a contract after a misrepresentation has been made to
him otherwise than fraudulently…the court or arbitrator may ….award damages in lieu of
rescission, if of opinion that it would be equitable to do so’. Cases like Floods of Queensferry
Ltd v Shand Construction Ltd (2000)46
and Zanzibar v British Aerospace Ltd (2000)47
established
the application of the mentioned provision in practice as substitutive measure for rescission when
the representee loses the latter right.
Remedies for Negligent Misrepresentation
43
Newbigging v Adam (1886) available at www.westlaw.com 44
Smith & Keenan’s English Law, 13th
edition, Denis Keenan, p 278 (2001) 45
Contract Law, 2nd
Edition, Mindy Chen – Wishart, p 219. (2008) 46
Queensferry Ltd v Shand Construction Ltd (2000) available at www.westlaw.com 47
Zanzibar v British Aerospace Ltd (2000) available at www.westlaw.com
20
Negligent misrepresentation became subject to actions only when House of Lords in
Hedley Byrne v Heller broadened liability for this particular type of misrepresentation based on
‘special relationship concept’ imposing a duty of care on the representor.48
This case was also
the first precedent that allowed damages recovery.
McKendrick defines the scope of Hadley Byrne as consisting of two factors: apart from
‘special relationships’, first the extent of special knowledge of the representor, which might lead
to reliance from representee’s part and second, the purpose of the statement i.e. when the
representor makes statements with intention of the representee to rely upon them. If these factors
are present in a case then the representee may rescind the contract.49
It is worth noting that
actions based on common law are tort based, but case Esso Petrolium v Mardon showed that it
may also apply to misstatements related to contracts.50
The common law approach as to granting damages under negligent misrepresentation are
subject to the following reductions:
- Remoteness of damages i.e. limitation of damages to losses that the
representor could reasonable foresee; and
- Contributory negligence i.e. the actions or inaction of the representee that
contributed to increase of losses.51
Section 2(1) of the Misrepresentation Act 1967 equally applies to negligent
misrepresentation by virtue of the ‘fiction of fraud’ concept. Burden of proof, as discussed
above, differs between these two approaches, but the remedies granted by courts are the same.
48
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963) available at www.westlaw.com 49
Contract Law, 4th
edition, Ewan McKendrick, Marise Cremona (editor), p 275 (2000) 50
Esso Petrolium v Mardon (1976) available at www.westlaw.com 51
Contract Law, 2nd
Edition, Mindy Chen – Wishart, p 217 (2008)
21
The representee may rescind the contract and/or claim for recovery of reliance damages subject
to the named restrictions.
Remedies for Fraudulent Misrepresentation
The common law requirements for qualification of fraudulent misrepresentation are laid
down in case Derry v Peek. According to this case the representee bears the burden of proving
that representor misstated facts (i) knowingly; (ii) believing in its falsity; or (iii) recklessly not
caring on its falsity or validity.52
Actions for rescission and damages for fraud are brought based on tort for deceit, and as
English courts traditionally treated cases of deceit strictly, the limitation bars for damages and
rescission in this case do not apply.53
However a common opinion is shared by most of authors
that the success of proving fraudulent misrepresentation under the mentioned approach of the
common law is hard to achieve.54
The difficulty of proving deceit before the court served as basis for establishment of a
more favorable and simplified approach of the section 2(1) in the Misrepresentation Act. As J.
Cartwright mentions, ‘the aim of the 1967 Act was to simplify and enhance protection for the
victims of contract-inducing misrepresentation by lowering the qualifying conditions for
damages in tandem with awarding the most advantageous measure of damages’.55
As we already stated above that rescission as primary remedy is available for all types of
misrepresentation, however payment of damages differ depending on whether the action is
brought under common law or on a statutory basis. The following table gives a comprehensive
52
Derry v Peek (1889) available at www.westlaw.com 53
Treitel: The Law of Contract, 12th
edition, Edwin Peel, p 374 54
See Contract Law, 4th
edition, Ewan McKendrick, Marise Cremona (editor), p 273; also Smith and Keenan’s
English Law, 13th
edition, Denis Keenan, p 292 (2001) 55
Contract Law, 2nd
Edition, Mindy Chen – Wishart, p 223 (2008)
22
overview of statutory and common law approaches regarding payment of damages for negligent
and fraudulent misrepresentations.56
Bars
Common Law Misrepresentation
Act 1967
Fraudulent m-n Negligent m-n Negligent and
Fraudulent
1. Proof of
causation
Not required Required Not required
2. Remoteness
Limit
Not required Required Not required
3. Claim for
devaluation of
property after the
contract
formation
Allowed Not allowed Allowed
4. Claim for loss of
opportunity
Allowed Not allowed Allowed
5. Reduction of
claim for
contributory
negligence
Not applied Applied Not applied
6. Exemplary
damages
Allowed Not allowed Allowed
7. Limitation of
Claim
6 years from discovery 6 years from making
of statement
The principle of remedy for misrepresentation, as we mentioned above is to put the
parties in a position that existed before they entered into the contract. The table below gives the
calculation method used for damages in case of misrepresentation related to equity finance
transactions:57
Basis for claim
of damages
Price
paid
for
shares
(A)
Value of shares if
no
misrepresentation
was made
(B)
Actual price of
shares with
misrepresentation
(C)
Calculation
method
Damages
awarded
56
Contract Law, 2nd
Edition, Mindy Chen – Wishart, p 220 (2008) 57
Sredstva Pravovoy Zashiti Kommercheskikh Sdelok v Angliyskom Prave, Richard Woods and Yulia Zayceva, p.34
Legal Insight #7, (2013)
23
Misrepresentation 1,500 1,000 500 A-C 1000
2.3.3. Warranties
‘A warranty is an express or implied statement of something which the party undertakes
shall be part of the contract, and though part of the contract yet collateral to the express object of
it.’58
Like representation a warranty is a statement of fact, but as we already discussed in
classification of inducements and terms, it is a term of a contract under general principles of
English contract law. The warranty concept was invented in order to claim for expectation
damages arising from contract breach in case of innocent misrepresentation, which were not
available under tort actions. However irrespective of the fact that Misrepresentation Act 1967
has changed that tendency, warranties are still used, especially in corporate finance transactions
under English law.59
Gradual division of terms into conditions and warranties tells us that English law imposes
less significance on warranties, thus they are also denominated sometimes as collateral terms.
This terminology was introduced merely to separate fundamental obligations i.e. condition from
less vital terms such as warranties.60
The distinction between these two terms of contract was
introduced in case Bettini v Gye. The court held that Bettini, the singer who could not attended
several days of rehearsals and subsequently was replaced by another singer, was in breach of
warranty and that the contract could not be terminated because the singer breached a warranty
that does not ‘go to the root of the contract’.61
As the definition suggests warranties may be expressed i.e. incorporated into the body of
the agreement or implied. Implied warranties derive from such sources as statutes, customs and
58
Stroud’s Judicial Dictionary of Words and Phrases, Volume 3, Daniel Greenberg, 7th
edition, p 2938 (2006) 59
Contract Law, 2nd
edition, Mindy Chen – Wishart p 401 (2008) 60
Smith and Keenan’s English Law, Denis Keenan, p 292 (2001) 61
Bettini v Gye (1876) available at www.westlaw.com
24
court decision with the view of reaching a result that party intended to achieve while entering
into contract, which is also called ‘businesses efficacy’.62
Within the context of equity investment and debt financing the function of warranty
resembles that of representation, that is to increase the awareness of the investor/lender of
material facts related to the project. As noted, the purchaser’s diligence regarding the
transactions is vital due to lack of statutory protection and the caveat emptor doctrine. However,
from the seller’s/borrower’s perspective warranties also limit their liability within the boundaries
of already disclosed information.63
Darryl J Cooke highlights the importance of warranties in a corporate finance transaction
pursuing two main objectives. They are the reliability of information obtained by investors from
directors and second to increase the commitment of directors. 64
According to the author,
directors of the target company will be more restricted in their decisions to adversely affect the
transactions, if they have already warranted about its performance on negotiation level.
Warranties given for corporate finance transactions under English law will typically
cover the following facts: accuracy of financial information; ownership of assets; nature and
extent of contracts with other counterparties; absence of any disputes or events of default;
employment and pension arrangements; extent to which there have been any recent material
changes to the target’s business; intellectual property rights; appropriate licenses; share structure
and ownership of the company.65
However these examples are not exhaustive and the list may
well go beyond that covering every aspects of the company’s activity.
62
Smith and Keenan’s English Law, Denis Keenan, pp 294-310 (2001) 63
Disclosure in M&A Transactions: UK &US Perspectives, Carol Osborn and Jeremy Saideman, p 3 (2013)
available at www.bryancave.com 64
Private equity: Law and Practice, Darryl J Cooke, 3rd
edition p 109 (2008) 65
Mergers and Acquisitions: A practical Guide for Private Companies and their UK and Overseas Advisers,
Article: Legal Documentation: Purchase of A Company (Share Sale) David Wilkinson, p 189 (2008)
25
In equity investment contracts warranties are usually expressed one-time in disclosure
letter. By giving warranties in letters of disclosure, the warrantors (usually the directors,
accountants, etc. of the company who are well aware of the performance of the company) also
limit their liability for potential future disputes. Investors or lenders cannot sue the former for
matters already revealed in the disclosure letters, because they acknowledge the risks they are
being exposed to. 66
For loan agreements warranties may be repeated throughout the lifetime of
the transaction, as the primary aim of the lender is to ensure the solvency of the borrower. Such
warranties are also known as ‘evergreen warranties’.67
As may be inferred from the preceding paragraph, letters of disclosure play a crucial role
in corporate finance transaction, as the entitlement of the investor for a remedy arising out of
breach of warranties depend s solely on them and the wording of the contract. On the other hand
disclosure letters, as we noted above, also protect the company/borrower from disputes
pertaining to the disclosed matters. Thus it seems necessary to examine the disclosure standards
established in English law prior to examining remedies.
There are several disclosure standards employed by English courts in resolving the
question of sufficiency of furnishing information:
Knowledge of buyer
According to the case Eurocopy v Teesdale, the court ruled that the buyer of the complete share
capital of the seller had knowledge of all material facts, thus it would be unfair to allow them
recover damages for breach of warranties already provided in the disclosure letter, irrespective of
the clause in contract waving all the preclusions based on the awareness of the buyer. 68
66
Mergers and Acquisitions: A practical Guide for Private Companies and their UK and Overseas Advisers, Article
Legal Documentation: Purchase of a Company (shares sale) David Wilkinson, p 192 (2008) 67
Principles of Corporate Finance Law, Eilis Ferran, p 327 (2008) 68
Eurocopy v Teesdale (1992) available at www.westlaw.com
26
There is, however, another case on the discussed standard, which provides a slightly
different solution subjecting the disclosures standard to the stipulation of the contract itself. In
the case Infiniteland Ltd v Artisan Contracting Ltd, the buyer – Infiniteland bought from Artisan
– seller three companies. At the due diligence stage of companies Artisan supplied the financial
documents to the buyer, but the accountants of the buyer failed to detect that one of the
companies had suffered losses. The seller argued that the buyer was provided with all necessary
information in disclosure letter, thus he should have been aware of this fact. The court declined
to satisfy the claim for damages, on the grounds that the seller provided all the information and
standard of disclosure in the letter of disclosure must be determined by provisions of the
purchase agreement, and that there is no objective standard of disclosure in this instance. It is
worth noting that the agreement itself did not contain any information on the standard of
disclosure, but said that the seller warrants to buyer ‘save as set in the Disclosure Letter’.69
Fair disclosure
The Infiniteland case has signalled the buyers to pay due attention to the disclosure
standards articulated in their respective contracts70
, thus a faire disclosure standard must be set in
the agreement. The case New Hearts Ltd v Cosmopolitan Investments Ltd reveals that when
phrases like ‘full and fair disclosure’ are included in the agreement ‘mere reference’ to the
source does not exempt the seller from liability to meet the standard. 71
Case Levison v Farin adds another ingredient to this standard, which is specificity of
disclosure. In Levison , the key designer of the fashion company became ill and no new
collection was prepared, which detrimentally affected the company’s performance. According to
the warranty given the value of net assets of the target shall not change adversely from the date
69
Infiniteland Ltd v Artisan Contracting Ltd (2004) available at www.westlaw.com 70
Disclosure: To ‘infiniteland’ and Beyond, Julia Tarvin (2007) available at www.mondaq.com 71
New Hearts Ltd v Cosmopolitan Investments Ltd (1996) available at www.westlaw.com
27
of balance sheet provision and the deal completion. The seller argued that buyer was aware of
poor financial performance of the company and actually was specializing in acquisition of such
company. The court ruled against the seller’s position and held that a general disclosure of the
causes of probable future losses was not disclosure of a quantified reduction in the net assets or
actual rate of the continuing losses. Hence warranties must be specific as well, in order to be
effective.72
Now that we have considered the effectiveness of warranties under the different standard
of disclosure established in English law, it would be appropriate to look at the remedies available
for breach. In compare to misrepresentations, breach of warranty entitles the injured party only
to claim for damages under contract law. However, at this point it must be noted that the contract
itself might empower the breach of warranty to result in repudiation of the contract. A well
drafted contract would prescribed the consequences of non-compliance with warranties and may
entitle the lender in case of debt financing contracts to call for repayment of whole loan at once,
or sue the borrower for debt if he refuses to pay.73
The principle underpinning this remedy for warranty is also different from
misrepresentation. If for misrepresentation the measure of damages was to restore the position of
the innocent party that was prior to conclusion of contract, for breach of warranty the measure is
to put the injured party in position that it would have been if the warranty was not breached.74
The following table gives a visual description of measure of damages for breach of warranties:75
72
Levison and Farin (1976) available at www.westlaw.com 73
Principles of Corporate finance Law, Eilis Ferran, p 328 (2008) 74
See The Modern Law of Contract, Richard Stone, 7th
edition, p 268 (2008) and Smith and Keenan’s English Law,
Denis Keenan, pp 292-293 (2001) 75
Sredstva Pravovoy Zashiti Kommercheskikh Sdelok v Angliyskom Prave, Richard Woods and Yulia Zayceva, p 34
Legal Insight #7, (20013)
28
Basis for
claim of
damages
Price paid
for shares
(A)
Value of shares
if no breach was
made
(B)
Actual price of
shares with breach
of warranty
(C)
Calculatio
n method
Damages
awarded
Breach of
warranty 1,500 1,000 500 B-C 500
The burden of proof for claiming damages is vested on the injured party and this may
create certain difficulties. The quantification of damages shall be based on a causal link among
the breach of contract and losses incurred.76
The causal link along factual aspects, such as
decrease of share value or occurrence of event of default due to breach warranties, must also
comply with requirement of remoteness established in the case Hadley v Baxendale. In this case
a shaft of a mill was broken, which is a core detail of the mill. Baxendale was hired to take the
shaft to the engineer with instructions to do it immediately, but he failed to do so. Due to his
negligence, the mill did not operate for the period of delay and Hadley sued for damages. The
court rejected the claim establishing that an injured party may recover damages ‘arising naturally
from the breach itself or those that are in the reasonable contemplation of the parties’ at the time
of contracting. This was missing in that particular case as Baxendale could not foresee those
damages.77
It is also worth noting that there is another reduction applicable to a damages claim under
warranty in English law, which is the requirement on mitigation of losses. As the wording
suggests the non-breaching party must take appropriate measures to mitigate damages and not
conduce to their increase as this may result in his reduction or negation of his otherwise
recoverable claim.78
Another restriction is of course lapse of time. The limitation period under
76
A Quick Guide: Warranties and Indemnities, Ashurst Quickguides (2010), available at www.ashurst.com 77
Hadley v Baxendale (1854) available at www.westlaw.com 78
Contract Law, 2nd
edition, Mindy Chen – Wishart p 554-557 (2008)
29
contracts is 6 years, if the corporate finance transaction was not executed as deed, in case of
which the limitation period is 12 years.79
79
Limitation Act 1980 available at www.legislation.gov.uk
30
2.3.4. Indemnity
Indemnity is defined as ‘a contract, express or implied, to indemnify against a liability, and
the liability under which is coterminous with the liability it is intended to cover and is
independent of the question whether somebody else is in default or not.’80
The indemnity clause
is an independent obligation of a party, thus legal dictionaries denote it as a separate contract or
as a primary obligation.
Indemnity clauses in English law are considered to be a type of exemption clauses, which is
of essence in course of their interpretation by courts. It is worth noting that English courts
historically were reluctant to hold effective exemption clauses and adopted stringent treatment in
construing them.81
The case George Mitchell Ltd v Finney Lock Seeds Ltd is the classical
example of a stringent treatment of exemption clauses. In this case the claimant ordered 30 lbs of
cabbage seeds from the defendants which were planted by the former in over 63 acres of land.
However six month following the sow, instead of cabbage, the seeds produced green leaves,
which were not fit for consumption. The contract for the supply of seeds contained clause
limiting the liability of the seller to the price of seeds. The English Court of Appeal held that it
was unfair and unreasonable to give effect to the clause. Lord Denning in his last judgment on
the abovementioned case notably explained the attitude of courts toward exemption clauses as
follows:
‘Faced with this abuse of power - by the strong against the weak - by the use of the
small print of the conditions - the judges did what they could to put a curb upon it.
They still had before them the idol, "freedom of contract." They still knelt down and
worshipped it, but they concealed under their cloaks a secret weapon. They used it to
stab the idol in the back. This weapon was called "the true construction of the
80
Stroud’s Judicial Dictionary of Words and Phrases, Daniel Greenberg, 7th
edition, Vol.2 p 1323 (2006) 81
The Interpretation of Contracts, 5th
edition, Kim Lewison, p 578 -581 (2011)
31
contract." They used it with great skill and ingenuity. They used it so as to depart from
the natural meaning of the words of the exemption clause and to put upon them a
strained and unnatural construction. In case after case, they said that the words were
not strong enough to give the big concern exemption from liability; or that in the
circumstances the big concern was not entitled to rely on the exemption clause… If a
shipowner delivered goods to a person without production of the bill of lading, he
could not escape responsibility by reference to an exemption clause. In short,
whenever the wide words - in their natural meaning - would give rise to an
unreasonable result, the judges either rejected them as repugnant to the main purpose
of the contract, or else cut them down to size in order to produce a reasonable result.
But when the clause was itself reasonable and gave rise to a reasonable result, the
judges upheld it...’82
The general classification of exemption clauses was given in the case Photo Production Ltd
v Securicor Transport Ltd. In this case the claimant, an owner of a factory, filed an action for
recovery of loss and damages caused by a fire by the defendant’s employee, which was
rendering security services to the former. The defendant was held liable regardless of exemption
clause for damages in the contract. However in the appeal instance Lord Diplock rendered the
clause valid and gave the following classification of exemption clauses: ‘…exclusion clause is
one which excludes or modifies an obligation, whether primary, general secondary or
anticipatory secondary, that would otherwise arise under the contract by implication of law.
Parties are free to agree to whatever exclusion or modification of all three types of obligations as
the please within the limits that the agreement must retain the legal characteristics of a contract;
82
George Mitchell Ltd v Finney Lock Seeds Ltd (1982) available at www.westlaw.com
32
and must not offend against the equitable rule against penalties…’83
This was the first precedent
that held effective exemption clause and put end to stringent treatment, and replaced it with strict
construction.84
As corporate finance transactions are inherently risky, under English law usually they will
contain indemnity clauses stipulating for promises of the indemnitor to accept liability for losses
incurred by the indemnitee from events revealed on due diligence stage, which can also be
substituted by a decrease in price.85
Basically, indemnity clauses release the indemnitee from
possible losses entailed by occurrence of certain adverse events already known to the investor,
such as commencement of proceedings against the target or the borrower, environmental and tax
claims and etc. But the scope of guarantees under indemnity is not limited and parties may agree
on whatever risk they want to secure. A detailed clause may refer to claims, demands, liabilities,
losses, damages, expenses, costs and so forth.86
Once correctly incorporated in a contract, the indemnity clause appears to be a more
convenient tool to allocate risk rather than representations and warranties that we considered
above. The following are the merits of an effective indemnity clause in contrast to warranties,
representations and a neighboring concept of a guarantee:
- indemnity compensates a party for all loss actually suffered, so the difficulties which
may arise of a warranty claim regarding the quantity of loss is avoided;
- indemnity allows claimant to frame its claim in debt as opposed to breach of
contract;87
83
Photo Production Ltd v Securicor Transport Ltd (1980) available at www.westlaw.com 84
The Interpretation of Contracts, 5th
edition, Kim Lewison, p 580 (2011) 85
Mergers and Acquisitions: A practical Guide for Private Companies and their UK and Overseas Advisers,
Article: Critical Issues in M&A Transactions for SMEs, Gideon Nellen, p 172 (2008) 86
Indemnities Against Breach of Contract as Agreed Damages Clauses, J.W. Carter and Wayne, pp 555-578 Journal
of Business Law 7 (2012), available at www.westlaw.com 87
A Quick Guide: Guarantees and Indemnities, Ashurst Quickguides (2010), available at www.ashurst.com
33
- unlike in case of breach of representations and warranties knowledge of investor on
the risk does not affect the right to be compensated;88
- unlike guarantee indemnity is a primary obligation and thus more robust. 89
Nowadays exemption clauses, as well as indemnity stipulations of contract are held
effective in most cases, but proper attention should be accorded to their drafting. These clauses
are subject to strict construction in the context of the entire contract, strict delimitation of
liability subject to indemnity, precision and in case of ambiguity are interpreted contra
proferentem.90
A recent case on the precise identification of the liability subject to indemnity and construction
of clauses within the context of the whole agreement is K/S Preston Street v Santander (UK) plc
(2012,) where according to paragraph 6.2 prepayment was allowed on a condition that the
borrower will indemnify the bank for any loss incurred due to prepayment of loan. This
paragraph stipulated as follows: ‘in addition to any prepayment costs payable under para.9, the
partnership shall indemnify the bank on demand against any cost, loss, expense or liability
(including loss of profit and opportunity costs) which the bank incurs as a result of the
prepayment…’ The High Court decided that the indemnity allowed the recovery of losses that
were incurred till the day of repayment and thus future losses are not included. The word
‘incurred’ was interpreted by the court strictly, and the point that judge made was that if future
losses felt within the scope of the indemnity than the parties would have used words ‘incurs or to
be incurred’.91
88
Company Acquisitions: Representations, Warranties and Disclosure, Ross McNaughton, Mathew Poxon, (2014)
available at www.paulhastings.com 89
Guarantees and Indemnities: A Quick Guide, Practical Law Company, available at www.uk.practicallaw.com
90 The Interpretation of Contracts, , 5
th edition, Kim Lewison, p 574-612 (2011 )
91 Banking & Finance: Case Law Update, Watson, Farley & Williams (2013) available at www.wfw.com
34
Thus, as the preceding paragraph relating to construction of indemnity clauses suggests,
they should be drafted properly in order for the clause to be effectively enforced. We have noted
earlier that indemnity is usually given to a predetermined risk in comparison to warranties.
Recovery of losses incurred out of an indemnified event are done on ‘pound for pound’
depending greatly on the wording of the indemnity clause i.e. the events it covers, losses,
damages and other costs its specifies.92
This makes indemnity more attractive comparing to
warranties, where the damages must be proven by the injured party.
Under the indemnity clause the indemnitee does not bear the obligation to mitigate his
losses, which is mandatory for claiming damages under warranties. In case Royscott Commercial
Leasing Ltd v Ismail based on former decisions, Lord Justice Hirst noted the following: ‘It is
therefore…implicit in the majority decision that the rules of mitigation do not apply to a claim
for a debt due under a contract as contrasted with a claim for damages for breach of contract’.93
3. Similar Concepts of Tajik Legislation
3.1. Brief Overview of Legislation of Tajikistan on Corporate Finance Transactions
92
Private Company Sales and Acquisitions in the UK and US – Comparison of Legal Process, Will Axtell, Mark
Howard, Hamish Perry (2014) available at www.charlesrussell.co.uk 93
Royscott Commercial Leasing Ltd v Ismail (1993) available at www.westlaw.com
35
There is no specific law on corporate finance transactions under the legislation of the
Republic of Tajikistan. All aspects related to these contracts are regulated within the Civil Code
of the Republic of Tajikistan.
Part 1 of the Civil Code contains provisions on agreements94
, law of obligation95
and
general stipulations on contract law.96
Part 2 of the Civil Code denoted ‘specific types of
obligations’ provides for stipulations regarding sale-purchase contract in general97
which is
equally applicable to share sale-purchase and loan and credit contracts.98
Specific laws on companies and their respective transactions are:
- Law on Limited Liability Companies;
- Law on Joint Stock Companies;
- Law on State Registration of Legal Entities and Sole Proprietors;
- Law on Securities Market and Stock Exchange;
- Law on Competition and Restriction of Monopolistic Activity on Commodities
Market.
According to Article 3 of the Civil Code the civil legislation of the Republic of Tajikistan
is based on the principle of equality of participants, freedom of contract, inadmissibility of
intervention in private affairs, free exercise of civil rights, restoration of violated rights and their
judicial protection.
Among these principles that form the basis of Tajikistan’s civil legislation a special place is
devoted to the principle of freedom of contract. This principle is expanded under Article 453.
Underpinning presumptions of the principle of freedom of contract are the following:
94
Chapter VII of the Civil Code of the Republic of Tajikistan Part I 95
Section III of the Civil Code of the Republic of Tajikistan Part I 96
Subsection II of the Civil Code of the Republic of Tajikistan Part I 97
Chapter XXIX of the Civil Code of the Republic of Tajikistan Part II 98
Chapter XXXX of the Civil Code of the Republic of Tajikistan Part II
36
1) businesses and individuals are free to enter into contractual relations and compulsion is
prohibited;
2) parties are free to choose the terms of their contract. Most of the provisions related to
contracts have a voluntary nature and parties may change them according to their own
interests, except for the mandatory provisions.
3) parties may enter into contract, both regulated and unregulated in the law as far as it does
not contradict the legislation.
4) parties may enter into contract of mixed nature i.e. a contract consisting of features of
different contracts prescribed by the legislation.99
So the scope of freedom of contract is sufficiently broad and the exceptions regarding these
mentioned presumptions are established only within laws themselves. Moreover, in exercising
such freedom, parties are also obliged to adhere to the assumptions of good faith, reasonableness
and fairness set out in Article 10. This obligation is not subject to restriction or limitation under
contract and is assumed by law.
A notable example of the principle of good faith established under the Civil Code is Article
831. Pursuant to the named article, if the repayment of the loan is done on partial basis, and the
borrower fails to repay the loan amount on time, the lender is entitled to claim the repayment of
the whole loan amount including interest. However this rule does not apply if the borrower has
already repaid more than half of the principle amount. In construing this article it may be
inferred that the legislature treats the borrower that has repaid the named amount as acting in
good faith and thus shields him.
99
Grajdanskoe Pravo, 2nd
edition, S.S.Alekseev p 208 (2010)
37
3.2. Similar Concepts
3.2.1. Concept of Conditions Precedent
The Civil Code of the Republic of Tajikistan does not contain analogy of conditions
precedent in a way that is known to English law. The closest concept that resembles in some part
38
the English clause is ‘conditional contract’ stipulated under the Article 182 of the Civil Code.
According to paragraph 1of Article 182 , ‘a contract is recognized to be executed under deferred
condition, if parties subject the emergence of rights and obligations to an unknown event,
occurrence of which is questionable, whether it will take place or not.’
An example of such contract can be a case where the seller agrees to alienate an asset if he
finds an appropriate alternative for it. It is worth noting that such unknown event shall be outside
the control of parties. The Commentary to the Civil Code lists the following qualifying criteria
for such an event:
1) It shall relate to the future;
2) Not depend on the intention or will of the parties;
3) Existence of possibility that such event will or will not occur.100
As it may be inferred from these criteria the event must be independent. It is also
questionable for the courts to recognize conditions subjective in nature, such as satisfactory
result of financial and legal due diligence of the borrower or target company.101
If we recollect
conditions precedent cover a wide range of preliminary issues, from factual to documentary.
There is a general prevailing view among practitioners and legal scholars that parts of the
agreement may not be considered conditional.102
This means the conditional agreement shall be
subjected entirely, thus noncompliance with this particular provisions contract renders it as
unexecuted as a whole.103
Accordingly such void creates issues in corporate finance
100
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
325 (2004) 101
Zachem Rossiyskim Kompaniyam Ispolzovat Normi Agliyskogo Prava v Dogovorakh Kupli-Prodazhi Akiciy I
Doley? (transl.: Why do Russian Companies Need to Use Concepts of English Law in Share and Stock Sale-
Purchase Contracts) D.Zelle, Akcionerniy Vestnik #4(93) (2012) 102
See Conditions Precedent: A Russia and English Law Comparison, Ian Ivory and Anton Rogoza, (2011)
available at www.uk.practicllaw.com and Zachem Rossiyskim Kompaniyam Ispolzovat Normi Agliyskogo Prava v
Dogovorakh Kupli-Prodazhi Akiciy I Doley? D.Zelle, Akcionerniy Vestnik #4(93) (2012) 103
Conditions Precedent: A Russia and English Law Comparison, Ian Ivory and Anton Rogoza, (2011) available at
www.uk.practicllaw.com
39
transactions, particularly where the parties want to ensure compliance with preliminary
conditions before finalizing the transaction, such as obtaining approvals from the management
and regulatory authorities, etc.104
The preceding paragraphs show that conditional contract within the meaning of article 182
is not a good substitution for conditions precedents under English law, however there have been
also suggestions, although theoretical, but can be used in simulating the effect of the English
clause.105
It is a particular type of contract under article 461 of the Civil Code denoted
‘preliminary contract’. Pursuant to the mentioned article, ‘under preliminary contract parties
agree to enter into a contract on transfer of property, execution of works and service (main
contract) on terms, prescribed in the preliminary contract’.
A preliminary contract within the sense of Article 461 acts as the basis for the main
contract. The aim of this contract is to organize the execution of an agreement in future i.e. the
main contract.106
There is a substantial link among the preliminary contract with the main one. It
reflects in formal and contextual requirements that exist for the main contract, hence the
preliminary contract must comply with the form and content i.e. material terms of the main
contract.107
Main contracts in our case are sale-purchase of shares and stocks and loan/credit
contracts under the legislation.
Although the formal requirement seem fairly easy to identify from the provisions of the
Civil Code, material terms might create certain difficulties. Under Tajikistan legislation a
contract is deemed to be executed, provided the parties reach in a prescribed form an agreement
104
Conditions Precedent: A Russian and English Law Comparison, Ian Ivory and Anton Rogoza, (2011) available at
www.uk.practicallaw.com 105
Zachem Rossiyskim Kompaniyam Ispolzovat Normi Agliyskogo Prava v Dogovorakh Kupli-Prodazhi Akiciy I
Doley?, D.Zelle, Akcionerniy Vestnik #4(93) 2012 106
Grajdanskoe Pravo, S.S.Alekseev, 2nd
edition, p 210 (2010) 107
Paragraph 2,3 of article 461 of the Civil Code of the Republic of Tajikistan
40
on all material terms of the contract.108
If these terms are not agreed the contract is simply
considered unexecuted. Material terms are considered those that relate to the subject matter,
terms directly stipulated in the legislation as material or necessary for a particular contract (for
sale-purchase of shares these are quantity, quality and price of shares and the loan material terms
are considered the principal amount, repayment period, etc.), as well as terms agreed by the
parties to be of material nature. So the legislator generally allows parties to enter a term that
might be subsequently considered material from the wording of the contract itself. However, if
we consider the scope of conditions precedent in English law, it would be hard to predict how
courts would react to facts and events that seem at a first glance outside the contract e.g.
confirmation that representations and warranties regarding the solvency or liabilities of the
company are genuine, approval of antitrust authority, etc.
A material term of the preliminary contract in the light of Article 461 is duration, after
expiry of which the parties shall enter into the main contract. Absent such a termbsent the Code
stipulates the term of one year. If the parties do not enter into main agreement within the agreed
period, the contract lapses and the obligations of parties are deemed to be discharged. It is worth
noting that Article 461does not provide for remedies in case if a party refuses to enter into main
contract deliberately. However the Commentaries to the Civil Code note that a party may force
the evading party to enter into the main contract through court, as well as claim for losses
incurred by the operation paragraph 5 of article 477.109
This article list the exceptional cases
where execution of a contract is done on compulsory basis i.e. confronting the presumption of
freedom of contract already discussed earlier.
108
Article 464 of Civil Code of the Republic of Tajikistan 109
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
663, (2004)
41
M.I. Braginskiy and V.V.Vitryanskiy in their book Dogovornoe Pravo (Contract Law)
justify the role of preliminary contracts in giving effect to ‘real contracts’ known in the civil law
doctrine, which along with reaching agreement on the material terms and form of agreement
require the exchange of certain asset, money, etc. Thus, in order for these types of contracts to be
effective, both of these elements need to be fulfilled. Examples of such contracts are corporate
finance transactions we are considering i.e. loan and shale-purchase of shares, where agreement
on terms of these contracts is insufficient, but shall also be followed with provision of the loan
amount or state registration of transfer of shares in the company. According to Braginskiy and
Vitryanskiy the preliminary contract may be used to divide real contracts into two stages
containing separate undertakings both having legal weight and connecting parties before the
transfer of loan amount or registration of shares.110
Regardless of theoretical probability of using preliminary contract practical
implementation of the named concept is not well established. Current practice shows that parties
to corporate finance transactions tend to classify conditions precedent as material terms of their
contract, thus enabling themselves in case of breach to rely on remedies available.
3.2.2. Representation and Warranties
For the following reasons we combine comparative analysis of representations and
warranties in this subchapter: these two concepts are both statements about the facts relating to
the transaction; they both perform the function of disclosing sufficient information on the
110
Dogovornoe Pravo: Obshie Polojeniya, Book 1st (Contract Law: General Provisions), M.I. Braginskiy and
V.V.Vitryanskiy, (2005)
42
borrower or target company; in corporate finance transaction representations are incorporate to
the body of the contract along with warranties, thus obtain the status of a term; and under the
legislation of the Republic of Tajikistan facts outside the contract are not considered in
remedying the injured party.
Representation and warranties are the concepts unknown to the legislation of Tajikistan.
However certain legislative stipulations may be found within the Civil Code that perform similar
functions these clauses pursue. As discussed earlier, representation and warranties are mainly
used in equity and debt finance transactions to obtain information from the target or borrower in
order to disclose material facts surrounding the contract and at the same time they serve as the
basis for remedy in case of breach. The Civil Code contains stipulations requiring the seller to
transfer shares with a good title111
, free from third party claims or encumbrance,112
refusal to
provide the loan amount in case of event of default113
, etc. These stipulations, in essence can be
aligned with implied warranties under the English law. However they are rather narrow in both
quantity and scope. These provisions are mandatory in nature, thus parties are not entitled to
extend or limit their effect and moreover in case of share sale-purchase they relate only to shares,
not to title over the assets of the business to which the latter pertain to.114
Remedy in Form of Decrease in Purchase Price of Shares
The necessity of obtaining relevant information on the target company also allows
assessing risks and thus adjusting the amount of investments. Consequently the information
furnished should fully represent the quality of the company. In respect of qualitative
requirements to goods, which are also applicable to shares, the Civil Code articulates that the
111
Article 491 of the Republic of Tajikistan 112
Article 496 of the Republic of Tajikistan 113
Article 841 of the Republic of Tajikistan 114
Representations, Warranties and Indemnities: A Russian and English Law Comparison, Ian Ivory and Anton
Rogoza (2011) available at www.uk.practicallaw.com
43
seller shall transfer goods with quality complying with the terms of the contract.115
Hence it is
the contract that shall first of all determine the qualities of shares. In this regard it is worth noting
that the voluntary nature of Article 505 of the Civil Code allows parties to draft stipulations
determining terms on the quality of goods i.e. shares. The remedies available under Tajik law as
per the breach of terms on the quality are as follows:
- Commensurate reduction of price;
- Gratuitous elimination of defects within a reasonable time;
- Reimbursement of losses related to elimination of defects in goods.116
In case of a material breach (detection of ineradicable defects, which cannot be remedied
without significant expenditure of time and resources, or which are detected repeatedly, or
reoccur again after their eradication) the purchaser may:
- Repudiate the contract and request for return of the paid purchase price;
- Demand substitution of defected goods; 117
and
- Damages for improper performance of contract.
The preceding requirements to the quality under the Civil Code infer that applicable to
corporate finance transactions the investors may demand the reduction of the purchase price. But
as the wording suggests they lack the broadness that is intrinsic to representations and warranties
under English law. For example, financial performance of subsidiaries or legal relations under
contracts with other counterparties that may eventually have impact on the performance of the
target company are hard to relate to the quality of shares.118
115
Article 505 of the Republic of Tajikistan 116
Par. 1 of Article 511 of the Republic of Tajikistan 117
Par. 2 of Article 511 of the Republic of Tajikistan 118
Zaverenia, garantii i Obyazatelsva Po Vozmesheniyu Ubitkov Po Anglo-Amerikanskomu i Rossiyskomu
Pravu,(transl: Representation, Warranties and Indemnity under Anglo-American and Russian Laws) S.Dmitriev,
Pravo i Ekonomika, #4, (2004)
44
So reduction of price based on defects in the quality of shares is one of the measures of
remedy available under the legislation of the Republic of Tajikistan which is comparatively close
to implied terms of English law. The practical implication may be that representation and
warranties may be drafted as terms relating to the quality of shares, with limitations that exist to
construing what may fall within the scope of quality.119
Remedy in Form of Contract Repudiation
The other category of remedial measure prescribed under the legislation is repudiation of
contract. This can be done on the ground of delusion,120
deceit121
and material change of
circumstances.122
Contracts concluded under delusion and deceit are considered in legal
literature as contracts with defect in will of parties. Such contracts are voidable and are
repudiated on the claim of injured party.123
According to Article 203 of the Civil Code, the court may declare a contract invalid on
the basis of delusion of a material essence, by the claim of a party that acted under such delusion.
Delusion of a material essence is defined by Article 203 as relating to the nature of the contract,
identity or features of the object that significantly reduces the possibility of its intended use. It is
worth noting that motive of the injured party is not considered in such cases e.g. the parent
company was bought primarily for purpose of control over its subsidiary. The commentaries to
the Civil Code describe delusion of material essence, as an outcome where the injured party
realizes that what he obtained was not what he eventually wanted.124
119 Vklyuchenie v Dogovori Zavereniy i Garantiy, (transl.: Inclusion of Representations and Warranties in
Contracts) A.Denisov, Corporativniy Yurist #9, pp 50-54 (2011) 120
Article 203 of the Republic of Tajikistan 121
Article 204 of the Republic of Tajikistan 122
Article 483 of the Republic of Tajikistan 123
Grajdanskoe Pravo, S.S.Alekseev, 2nd
edition, p 123 (2010) 124
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
352 (2004)
45
Most legal scholars and practitioners are unanimous that the problem with repudiating a
contract on the basis of delusion is concerned with proving such defect in will, as the burden of
proof in case of delusion is imposed on the party claiming for repudiation of contract.125
For
example Alyona Kucher on this issue notes that there is no certainty in regard to circumstances
where providing of false information on the target company or concealment of such information
is considered as delusion in the motive of a contract or the quality of the object.126
Moreover
when an injured party fails to prove that delusion existed in the time when contract was
concluded, the Civil Code entitles the defendant to claim for damages.127
However this is a
preventive measure by the legislator, so the concept is not abused and contracts are held
effective.
The other drawback of repudiating contract on the basis of delusion relates to the
consequences of declaring the contract invalid, which is mutual restitution where the parties have
to return everything they obtained from the contract with exception of claims for damages. In
this regard A.Denisov mentions that ‘in practice such restitution does not meet the interests of
the warrantee/representee as the latter’s interest is frequently anchored not in return to its formal
position, but merely in certain adjustment of financial provisions of the contract’. 128
Invalidating a contract on the basis of Article 204 on the ground of deceit is another
remedy that resembles the concept of fraudulent misrepresentation under English law. The
injured party that has been defrauded may bring an action to subsequently invalidate the contract
and claim for damages.
125
Zaverenia, Garantii i Obyazatelsva Po Vozmesheniyu Ubitkov Po Anglo-Amerikanskomu i Rossiyskomu Pravu,
S.Dmitriev, Pravo i Ekonomika, #4, (2004) 126
Representations, Warranties and Indemnity in Russian Law (presentation for the Supreme Arbitration Court of
Russian Federation), Alyona Kucher, slide 6 (2013) retrieved from www.arbitr.ru 127
Paragraph 2 of the Republic of Tajikistan 128
Vklyuchenie v Dogovori Zavereniy i Garantiy, A.Denisov, Corporativniy Yurist #9, pp 50-54 (2011)
46
Article 204 does not give the definition of deceit as well as elements to prove it before
court. However the Commentaries to the Civil Code mention that deceit is used when a party
induces the other to enter into contract on terms favorable to it. 129
It may take form of action,
where a party actively deceives the counterparty with false information on the company, or
inaction, when the former conceals some facts or stays silent on their existence. It is worth
noting that intention of the deceiving party is a crucial element in invaliding a contract on the
ground of deceit, and it is intention that distinguishes it from delusion.130
The drawbacks already discussed for delusion are applicable to deceit as well i.e. the
difficulty of proving deceit itself and consequences of invaliding the contract, which is
restitution. However the restitution for deceit is unilateral.131
Along the restoration of the injured
party’s initial position, as well as collection of damages, all the assets and funds received by the
former from the other party is subject to collection in favor of state. The limitation period for
deceit and delusion is 3 years commencing from the moment when the injured party discovered
or should have discovered these grounds for repudiating the contract. 132
Another mean of repudiating a contract under legislation of the Republic of Tajikistan is
provided in Article 483of the Civil Code denoted as ‘change and termination of contract due to
material change of circumstances’. In compliance to this article parties may terminate a contract
due to material change of circumstances that induced them to enter into contract.
Material change is defined by the Civil Code as change in circumstances to the extent that if
parties could reasonably foresee them they would not have entered into contract or done so on
other terms. The procedure for termination of a contract on the basis of Article 483 is common
129
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
354 Part 1, (2004) 130
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
355 Part 1, (2004) 131
Paragraph 2 of Article 204 of the Civil Code of Republic of Tajikistan 132
Paragraph 2 of Article 206 of the Civil Code of Republic of Tajikistan
47
consent of parties. If absent, a party may refer to the court for repudiating the contract, provided
the following criteria are met:
1) On the stage of conclusion of the contract parties thought these change of circumstances
will not take place;
2) The change is called forth by reasons that the requesting party could not overcome, even
though it acted with due care and circumspection demanded from him in accordance to
the nature of the contract and established custom;
3) Performance of the contract would contradict the interests of the parties, and would cause
the requesting party a damage that would deprive it from what it intended to achieve
while entering into contract.
4) Neither from established customs nor from the substance of the contract it follows that
the risk of change of circumstances shall be borne by the requesting party.
These requirements must be resolved by the court based on each case individually and the
court determines the consequences of termination of such contracts. In determining the
consequence of termination the court must rule on equitable distribution of costs among the
parties, as well issues on the return of funds and assets transferred by parties.133
There are two main drawbacks in choosing to terminate a contract due to material change of
circumstances. First, as is clear from the qualifying requirements, proving such change of
circumstances might be complicated due to burdensome qualifying requirements.134
Second
referring to circumstances already known to parties, court is likely to refuse to satisfy the claim
on the basis that requesting party was aware of the circumstance before entering into contract.135
133
Kommentariy k Grajdanskomu Kodeksu Respubliki Tadzhikistan Chast 1 , Kh.T. Nasirov and N.Shonasridinov, p
693 (2005) 134
Zaverenia, garantii I obyazatelsva po vozmesheniyu ubitkov po anglo-amerikanskomu i rossiyskomu pravu,
S.Dmitriev, Pravo i Ekonomika, #4, (2004) 135
Vklyuchenie v Dogovori Zavereniy i Garantiy, A.Denisov, Corporativniy Yurist #9, pp 50-54 (2011)
48
Remedy in Form of Damages
In case of breach of contractual terms the injured party may claim for damages. Article 423
states that obligor breaching its obligations shall reimburse losses to the obligee. The procedure
and manner in which damages can be claimed is prescribed under Article 15. This provision
stipulates that a person whose right was breached can claim for damages in the full amount i.e. it
may claim both for actual damages already incurred and loss of profit it could obtain had the
breach not taken place. An important point in regard to loss of profit is that it should be
calculated properly so to justify the claim or determined in the contract beforehand.
Damages are awarded under the legislation, provided the injured party can prove the
following qualifying conditions:
1) Wrongfulness of action of the breaching party;
2) Presence of adverse consequences on the injured part;
3) Causal link between the wrongful action and adverse consequences;
4) Fault of the breaching party. 136
It is worth noting that the Civil Code of the Republic of Tajikistan sets restriction regarding
damages claim. Court may reduce the amount of damages claimed in cases stipulated under
Article 453, which resembles the requirement of mitigation of damages and contributory
negligence in English law. Pursuant Article 453, the court may reduce the amount of damages
claimed if the obligee intentionally or negligently contributed to their increase or did not take
reasonable measures for mitigating his losses.
136
Grajdanskoe Pravo, 2nd
edition, S.S.Alekseev, pp 198-199 (2010)
49
3.2.3. Concept of Indemnity
Concept of indemnity does not exist in the legislation of the Republic of Tajikistan. It also
seems impossible to find a close concept. However suggestions have been made depending on
particular features of this clause.
50
Some authors point out that indemnity clause is somehow resembles insurance in way of
having a compensatory nature and that the compensation of damages is linked to occurrence of a
predetermined adverse event.137
Others tried to attach indemnity to the concept of bank
guarantee, due to latter being available at the request of the guaranteed person and submission of
reasonable and limited proof.138
However these are dispersed features of indemnity clause in its
original meaning.
It seems rather possible to imitate the effect of indemnity by the operation of the principle
of freedom of contract.139
However there is a significant risk attached to such application and
mainly with the enforcement of the rights prescribed under the indemnity clause.
First of all losses under the legislation of the Republic of Tajikistan must be proven in
order for the court to award them. As we already described above the injured party shall prove
before the court the wrongfulness of the breaching party’s actions and the consequences
triggered by that, along with causal link between the two. But indemnity under English law does
not require any proof i.e. it is sufficient for the indemnified event to take place in order for the
indemnitee to claim for compensation.
Second, contractual imposition of obligation arising from tort actions or any other action,
such as claims involving issues connected with public authorities like tax matters would rather
be construed as against public policy, thus rendering the clause or the entire agreement void as
contradicting the legislation of Republic of Tajikistan.140
137
Vozmeshenie Imushestvennikh Poter, Andrey Shirokinskiy, p 13 Legal Insight #7, (20013) 138
O Sootnoshenii Tipovikh Usloviy Kontratov po Inostrannomu Pravu I Rossiyskikh Pravovikh Norm, Sergey
Bulgakov, Sliyania & Pogloshenia #1-2, p 40-42 (2010) 139
Garantii, Zavereniya I Obyazatelstava O Vozmeshenii Ubitkov v Sdelkakh Sliyaniy I Poglosheniy, Evgeniy
Glukhov and Inna Shtraykher, Legal Insight #7 p 8 (2013) 140
Article 193 of the Civil Code of Republic of Tajikistan
51
4. Conclusion
The comparative analysis of general contract law clauses under English law and their rival
concepts established in the legislation of the Republic of Tajikistan, allows us to make several
inferences pertaining to their merits that persuade investors to incorporate them in local
corporate finance contract.
52
One of the reasons is that the examined clauses of conditions precedent, representation and
warranties, and indemnity play a crucial role of adding certainty to legal relations among parties
under corporate finance transactions. They serve as effective mechanism for fixing price for
shares or adjusting loan amounts. The similar concepts of the Tajik legislation prove to be less
effective in this regard e.g. for conditional contracts the event triggering their effectiveness shall
be totally out parties’ control. This implies that investors simply waste time and resources on
conducting due diligence of the borrower, if the borrower appears to be insolvent and no claims
can be brought for recovering these losses. Moreover, the Tajik concept of ‘conditional
contracts’ seems useless when it comes to corporate transactions and application of preliminary
contracts also causes doubts when it comes to practice.
Second, the scope of the examined clauses of English law is broad, as greater weight is
imposed on the parties’ autonomy in defining their undertakings under corporate finance
contracts. They may relate also to legal relations of the target or borrower with other
counterparties. The provisions of the Civil Code of the Republic of Tajikistan on contracts,
though mostly of a voluntary nature, are limited by the mandatory norms. This overregulation
confines the autonomy of parties in ensuring their positions under corporate transaction
regardless of the principle of freedom of contract. As we also revealed from the comparison the
implied warranties under the legislation of the Republic of Tajikistan, although to some extent
resembling representations and warranties, have mandatory nature and thus do not affording
flexibility.
Thirdly, corporate finance transactions are risky undertakings for investors. For instance in
cases of share purchase investors also expose their investment to risks already sustained by the
target before the transactions. In this regard the examined clauses of English law are a
convenient tool for shielding the investor from all these adverse consequences, especially the
53
indemnity clause. We failed to find analogy of this clause under the legislation of Tajikistan, as
well as failed in detecting other viable measures of protection of investors. Moreover as we
considered the assumed provision on good faith pertaining to loan agreement, it turned out that
investors are less protected than their counterparties and this is done in the context when
economy of the country could benefit from reversed regulation i.e. more investor-friendly.
In the light of these observations, suggestions may be given to change the current situation,
some of which may require a thorough consideration of maintained theories and practice. These
suggestions are of two types i.e. developing the concepts already in force and introducing certain
changes.
First, it would be advisable to make the concept of ‘conditional agreements’ susceptible to
actions of parties, thus requiring more active engagement at the early stage of corporate finance
contracts along with sanctioning them for failure of complying with their undertakings. By
implementing such approach the effect of conditions precedents can be achieved completely.
Finally the introduction of concepts of warranties and representations to the Civil Code
could have a beneficial impact on the debt and equity market. Such a measure would ensure
good faith of parties at the pre-contractual and completion stages by reducing the risks associated
with furnishing false information and facts, because current provisions that we considered
impose onerous qualifying requirements on injured parties for invalidating contracts. It is worth
noting that Russia is currently introducing these concepts to their Civil Code, and I believe this is
a good signal for Tajikistan’s legislature to also revise maintained regulation. It is useless to say
that the suggestions provided are complicated to achieve, but the effect may prove worth the
effort.
54
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