Reliance-Future Group deal breach of contractual obligation may impact India’s image globally

Future Group breaching the contract with Amazon Inc is set to impact future business partnerships between India-based and international companies. The former’s breach once again brings contract enforcement to the fore. This is one index on which India has performed extremely poorly over the years.

According to the Ease of Doing Business Index Report, enforcing a contract in India can take 1445 days and 30 per cent of the claim value as cost. It also gives 10.3 points out of 18 to India’s quality of the judicial process. Ramanuj Mukherjee, a legal expert, had said the economics of enforcing a contract demands that the cost of enforcing the contract must be lower than the profits one expects to make from the execution of the contract. He explained that if the cost is too high, it may not make sense for a contract to be enforced at all. As such, parties to any contract depend on either benevolence or good relationship etc. to recover their dues. This, in turn ‘increases the number of breaches’ as parties are not afraid of legal consequences. And this leads to a breakdown in a large number of deals causing a lot of loss to businesses and individuals across the entire economy.

The Government of India wants foreign investment in the country but contract breaches, like in the case of Future Group vs.Amazon, are just bad business and sends a wrong impression of the country into the global arena. An official, earlier this year, had said that the idea is to attract and promote foreign investment, but a ‘major issue for investors is the enforcement of contracts’ and speedy dispute resolution. Disputes between foreign companies and Indian businesses means India paying billions of dollars in damages.

Amazon is in a legal battle with Future Group for violating a non-compete contract over the latter’s deal with Reliance Industries. The online retail giant, in August 2019 months before the onset of the COVID-19 pandemic, had bought a 49 per cent stake in Future Coupons for about Rs 1,500 crore. And as of September 30 2020, Amazon has a roughly 4.8 per cent stake in Future Retail, a unit which includes brands like Big Bazaar, Fbb, Easyday Club and Foodhall among others. And now, Amazon is fighting a $3.3 billion deal struck between Mukesh Amani’s Reliance and the retail conglomerate. Amazon, in its lawsuit, alleges that Future Group did not meet the criteria of its deal. The latter argues that in the peak of the government enforced nationwide lockdown, and its credit rating took a severe blow after it missed a bond payment, and was downgraded by Fitch Ratings two notches to C. In August, it announced its acquisition by Reliance. Kishore Biyani, the CEO Future Group, in a statement had said the deal allowed the company to achieve a holistic solution to the challenges that have been brought about by the pandemic and the macro-economic environment.

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Jeff Bezos’ Amazon pointed out that its 2019 deal with the Future Group included a non-compete clause, which listed 30 restricted parties with which Future Retail and Future Group could not do business, and Reliance was on that list. This clearly defines and highlights that the latter outrightly violated the contract. Amazon is just asking Future Retail for specific performance, implying that if something is written in the contract, both parties should follow it. Moreover, legal experts have pointed out that Reliance-Future Group deal needs the approval of the Competition Commission of India (CCI), which is currently investigating the offline and online aspects of the deal and its possible impact on competition in the sector. And notedly, this violation has set off bad business vibes between future dealings between international companies and Indian organizations. While the government is attracting foreign companies to invest in Indian businesses through foreign direct investment (FDI), side deals like Reliance-Future Group have set the ball rolling in the opposite direction.