Applying Promissory Estoppel on government policies to protect investor sentiments

[By Rahul Kumar and Aditya Singh]

The authors are Advocate at Sarvada Legal and student at Dr. Ram Manohar Lohiya National Law University, Lucknow.

 

Introduction

Promissory estoppel is a legal principle that states that a promise made by one party can be enforced by the other party if the promisee relies on the promise to their detriment. This principle is often applied in contract law to enforce promises made by one party to another.  The Hon’ble Supreme Court of India, in the case of Hero Motocorp v Union of India, held that this principle shall not be applicable to the legislative powers of the State.

One reason for this is that governments are not bound by the same rules and regulations as private parties. Governments have sovereign immunity, which means that they cannot be sued or held liable in the same way as private parties. While such a stance does make sense from a broader perspective, as policies are often a representation of the ideology of the party in power, and when parties change, so do the policies, it does little to take into consideration the interests of an investor who has made substantial investments into an activity based on such policies. The authors of this piece aim to elucidate why it is necessary not to have a blanket ban on the applicability of Promissory Estoppel on Governments and that there must be certain exceptions to the same, keeping in mind the volatile nature of investor sentiments and the impact of withdrawing incentives.

Domestic Scenario

The history of Promissory estoppel is very interesting in India. The landmark case on this subject matter is M. Ramanatha Pillai v The State of Kerala, wherein the Supreme Court held, “Therefore, as a general rule, the doctrine of estoppel will not be applied against the State in its governmental, public or sovereign capacity. An exception, however, arises in the application of estoppel to the State where it is necessary to prevent fraud or manifest injustice”. The court, in Sipahi Singh, reiterated this position by stating that “- it is well settled that there cannot be any estoppel against the Government in the exercise of its sovereign legislative and executive functions.

In the case of Motilal Padampat Sugar Mills Co. Ltd, P.N. Bhagwati took a contrasting view, holding that, if on the basis of a promise made by a government, an entity changes its legal position to its detriment, the State could not be permitted to resile from the said promise. This was an innovative deviation from the established standpoint of the Supreme Court established in Ramanatha Pillai and Gwalior Rayon Silk Manufacturing. This daring stance was then criticized in the case of Ram Shiv Kumar, and it was held that the findings of the two-judge bench in Motilal Padampat were not in consonance with the stance taken in Ramanatha Pillai and Gwalior Silk, which were decisions of larger benches. Interestingly, when this conflict was brought to the forefront in Godfrey Philips, Justice Bhagwati upheld his own findings in Motilal Padampat and endorsed the judgement.

Furthermore, in Union of India v Indo-Afghan agencies, the Supreme Court explicitly mentioned that “Under our jurisprudence, the Government is not exempt from liability to, carry out the representation made by it as to its future conduct, and it cannot on some undefined and undisclosed ground of necessity or expediency fail to carry out the promise, solemnly made by it, nor claim to be the judge of its own obligation to the citizen on an ex parte appraisement of the circumstances. in which the obligation has arisen.”

In the instant case of Hero Motocorp, Justice Gavai and Justice Nagarathna have, in clear terms, mentioned that there can be no promissory estoppel against the legislature in the exercise of its legislative functions. The court further noted that Section 174(2)(c) provided that any tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the said notification is rescinded.

International Scenario

To better understand the impact of changing tax regulations and other incentives offered to investors, one needs to look no further than the crisis that unfolded in Europe, resulting in several arbitration cases, mainly in Spain, the Czech Republic and Italy. The disputes stemmed from the changes brought to the incentive programmes doled out by the governments to attract investors from around the globe.

While there were various awards and lines of reasoning adopted by the various tribunals, it could be seen that the general notion was that if there was a specific commitment by a Host State, then that would give rise to a legitimate expectation that these commitments would not then be modified to the detriment of the investor. The case of PV Investors v Spain, is an important one as it highlights the duty of the Host nation to stay true to its words. It concerns a dispute between a group of investors and the Spanish government over the retroactive changes made to the country’s solar energy regulations

The case was heard by the International Centre for Settlement of Investment Disputes (ICSID), which is an international arbitration institution that resolves disputes between investors and states. In its decision, the ICSID tribunal found that the Spanish government had indeed breached the principle of fair and equitable treatment, as well as the principle of protection of legitimate expectations. The tribunal also found that the retroactive changes had caused a significant reduction in the value of the investors’ projects and that the investors had suffered a substantial loss as a result. The tribunal ordered the Spanish government to compensate the investors for the damages caused by the retroactive changes. There were many such cases in which the tribunals had a similar stance and looked to protect investor sentiments.

The need for application of Promissory Estoppel

There are several reasons why promissory estoppel should apply to governments, especially in the context of protecting investor sentiments. First, governments often make promises to attract businesses and investments. These promises may include incentives such as tax breaks, subsidies, or other benefits. When businesses and investors rely on these promises and make investments based on them, it is only fair that the government should be held liable for any detrimental consequences that result from breaking those promises.

Second, the principle of promissory estoppel can help to promote stability and predictability in the business environment. When governments make promises and then break them, it can create uncertainty and mistrust in the business community. This can make it difficult for businesses and investors to plan for the future and make informed decisions. By applying the principle of promissory estoppel, governments can be held accountable for their promises and businesses and investors can have greater confidence in the promises made by the government.

Third, India relies heavily on foreign investments in a lot of its projects. Even in the future, if the government decides to take up projects in an industry which is capital intensive, it will require huge amounts of foreign investments, for which it would be required to give tax breaks and other forms of incentives.

Finally, promissory estoppel is an important principle for protecting investor sentiments in the long run. As investors rely on the promises made by the government, they would have to make investments, which are based on the promises and the government’s reputation for keeping its promises. When the government breaks the promises, it may lead to a loss of trust from investors, leading to a lack of investment, and, ultimately, hampering economic development.

The Way Forward

Tax breaks and incentives offered cannot be completely protected from modifications and subsequent withdrawal from the government as this would encroach upon the power of the sovereign to make laws. However, a middle ground can be reached to protect the investor who has already made financial commitments in lieu of such incentives promised by the government. A provision could be added to such incentives by way of judicial pronouncement or, better yet, by way of legislative enactment, that there cannot be retrospective damage to rolling back such regulations. In simpler terms, a person or company which has made the investment considering the incentives offered by the government should be allowed to avail them even if it has been rolled back by the government. The withdrawal should only apply to new aspirants who should be made subject to the new regulations.

Alternatively, and in a rather unorthodox manner, a minimum compliance period can also be added to such incentives so as to give the investor complete clarity as to what time period he has to enjoy the benefits of the incentives offered. However, large capital investments, especially for infrastructure and green energy projects, require a long period to come good and would, therefore, normally require enjoyment for an extended duration, and if possible, in perpetuity.

Conclusion

While it is established and accepted by the authors that it is not at all feasible to bind a government by the principle of Promissory estoppel in perpetuity, it should apply to governments, especially in the context of protecting investor sentiments. Governments often make promises to attract businesses and investments, and when businesses and investors rely on these promises, it is only fair that the government should be held liable for any detrimental consequences that result from breaking those promises. Furthermore, the principle can help to promote stability and predictability in the business environment, ensure that governments act in good faith, and protect investor sentiments in the long run.

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