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Public Policy and Arbitrability Challenges to Enforcement of Foreign Arbitral Awards in India

July 7, 2022
arbitration

By Nihit Nagpal and Devika Mehra

Arbitration is a tool to settle disputes expeditiously by subverting the dispute resolution mechanism from municipal courts to a seat of arbitration. Section 44 of the Arbitration and Conciliation Act, 1996 defines a ‘foreign award’ as an arbitral award arising out of disputes or differences between persons bound by legal relationships, whether contractual[1] or not, considered as commercial under the domestic law of India. Further, this award must have been issued by a state notified through the Official Gazette of the Central Government as a reciprocating country. Part II of the 1996 Act exclusively deals with the enforcement of a foreign arbitral award which is governed by the Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958 (‘New York Convention’) under Chapter 1; and Chapter II is based on the Geneva Convention, 1927. These conventions have become applicable by virtue of India being a signatory to them. There are currently 48 countries that have been recognised as convention countries or signatories to the New York Convention and the Geneva Convention.

The Article will further elaborate on enforcement of foreign awards in India and will talk about the Public Policy doctrine under Article V of the New York Convention which sets aside the execution of an arbitral award on the grounds of violation of public policy. This definition is not edified and constantly evolves as there is no definition of the term laid down by the New York Convention, its interpretation is usually construed broadly by states. Validity of awards is also dependant on the doctrine of arbitrability which emphasises the jurisdiction of the arbitrator on the matter. Article V(2)(a) of the New York Convention refuses enforcement when the subject matter of differences excludes the use of arbitration or when lex fori empowers local courts to adjudicate on the matter. These doctrines are related as they set aside jurisdiction of disputes relating to the public interest.

Forums for Enforcement of a Foreign Award

According to the territoriality principle laid down through UNCITRAL Model Law, awards made by foreign seats of arbitration even in cases where the contract and the arbitration agreement is governed by Indian laws will be treated as a foreign award.[2]

Arbitral tribunals can award decrees but local jurisdiction is essential to execute such awards. The national court is empowered by the New York Convention to refuse the enforcement under Article V as all rights and duties are derived from municipal law. A foreign award is binding and can be relied on in any legal proceedings in India (S. 46 of the 1996 Act). Further, a foreign award will be deemed as a decree of the court when conditions under Sections 44-48 of the Arbitration Act are met, this court will then move towards execution of the foreign award. Section 44-A of the Civil Procedure Code, 1908 states that decrees passed by courts of reciprocating states can be enforced.

Section 48(1)(e) when read with S. 48(3) of the 1996 Act empowers a competent authority under the law of which the award was passed to set aside its enforcement. The Apex Court of India held that Enforcement can be filed by a party to the jurisdiction of the country where assets of the loser are placed or where the decree is executable. The purpose of enforcement is to ensure compliance to the arbitral award by seizure of title to the assets or obtaining the proceeds of the sale.[3]  In India, enforcement proceedings must be filed in the states where the property or the assets of the losing party are located. Furthermore, the commercial division of a High Court will be empowered to execute decrees in cases of money awards and where assets of the opposite party lie. Courts cannot delve into the merits of the case while referring to a previously passed arbitral award.

Section 2(6), Code of Civil Procedure, defines a foreign judgment as a judgment of foreign court, that is a court established beyond the territoriality of India and is not bound by the Central Government. Decrees from reciprocating countries can be enforced by filing execution proceedings in India whereas decrees from non-reciprocating countries require the filing of a fresh suit. The Supreme Court In, Sundaram Finance Ltd. v. Abdul Samad[4] in cases where a foreign award is of a specific value, commercial courts with the appropriate pecuniary and territorial jurisdiction will take up the matter. Further in cases of execution of assets, the award can be executed by courts in the state under the territoriality of which such assets lie.

 

Public Policy exception

Ex dolo malo non oritur action means that no court of law will aid a man who bases his cause of action upon an immoral or illegal activity. This is the principle for public policy which renders an agreement void if the consideration of such contract is unlawful (Section 23 of the Indian Contract Act, 1972). The principle of public policy is broadly divided into two camps, broad and narrow. It is a very elusive concept and is contingent on the good of the public or their interests which are varied and diverse. The Supreme Court has adopted the narrow approach to facilitate a smooth and improved system of laissez-faire but this regime of laws underwent changes and witnessed the judiciary posing a hindrance to the expeditious nature of arbitration.   

In the matter of Renusagar Power Co. Ltd. v. General Electric Co.[5], the Supreme Court dealt with the interpretation of public policy in cases of foreign arbitrations. The apex court contemplated between the narrower concept of public policy as applied in the context of public international law and the broad ambit of public policy as implemented by domestic law. The court said that a contravention of any Indian law will not attract the bar of public policy as the broader ambit can be misused to delay and forego execution. In, Ssanyong Engineering & Construction Co. Ltd. v. National Highways Authority of India[6], it was held that the justification of justice or morality on the bar of enforcement can be taken up in extremely exceptional situations where the conscience of the court is shocked and is appalled by the infraction of the principle of justice. The court further moved away from the principle of judicial intervention as laid down in ONGC v. Western GECO[7].

Amendments to the Arbitration Act in 2015 brought about significant changes whereby the scope of the term ‘public policy’ was made identical for both Sections 34 and 48. Contravention of public policy was now inclusive of (i) violating the principles of justice and morality, (ii) undermining the fundamental policy of India and (iii) inducement by fraud or corruption.

One example of ebb and flows faced by the law on arbitration can be traced through the issue of patent illegality which stands inserted in Section 34 but not in Section 48. By virtue of the ruling passed in the case of Oil and Natural Gas Ltd. v. Saw Pipes Ltd.[8],  domestic arbitration was now subjected to a review process where even the merits of the case could be taken up while passing a decree on enforcement. This proved disastrous with the advent of Bhatia International v. Bulk Trading[9] where the court extended the application of remedies available under Part I to international parties as well.

The combination of these judgments challenged the cause for arbitration by removing the essence of arbitral awards. In, Venture Global Engineering v. Satyam Computer Services Pvt. Ltd.[10] the court allowed an application under Section 34 for international commercial arbitration. This resulted in the setting aside of a foreign award based on patent illegality, and thus blurred the demarcation of public policy as laid down in the Renusagar[11] judgment. Now arbitral awards were facing delay in execution due to judicial interference caused by alleged violations of Indian Law.

The position of the impediment was later amended through Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[12] where clarification was given in respect of Section 48 applications. The merits of the arbitral award was no more a matter for consideration in front of the courts. Further, the ground of patent illegality was also removed from international commercial arbitrations. The scope of public policy was limited later on for domestic arbitration awards.[13] This indicated that in a proceeding for enforcement, only the enforcement of the award will be viewed through the lens of public policy and the arbitral award itself will be left untampered with.

In, Shri Lal Mahal v. ProgettoGrano Spa[14] the SC held that an appellate court had no authority to adjudicate on the subject matter of the award and upheld the narrow interpretation of public policy as laid down in the Renusagar judgment[15]. The court unequivocally held that Section 48 of the 1996 Act did not permit a second look and that an error in a foreign award is not violative of public policy.

In, Vijay Karia v. Prysmian Cavi E Sistemi SRL[16] the court held that:

“Fundamental Policy’ refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. Judged from this point of view, it is clear that resistance to the enforcement of a foreign award cannot be made on this ground”

The Supreme Court held that violations of the Foreign Exchange Management Act are not in breach of the fundamental policy of Indian law. There was no failure by the arbitrators which lacked any determination of material causes to the claim and thus the exception under Section 48(1)(b) did not arise. The overlooking of a material fact which goes to the root of the matter, that results in a travesty of justice, or is violative of the most basic notion of fairness and justice, is the only case when an arbitral award can be stayed. This determination of the time honoured and hallowed principle is discretionary in nature, as it aims to avoid subversion of essential municipal laws. Laws of the nation which state that no contract based on a fraud can be enforced, or proving a loss caused due to non performance, are examples of the fundamental policy of India.

The Bombay High Court in Nobel Resource Ltd. v. Dharni Sampda Private Ltd. [17] characterised the fundamental policy of Indian law under Section 48 as that which ‘connotes the basic and sub stratal [sic] rationale, values and principles which form the bedrock of laws in India.’ [18] The court held that for an award to be refused execution mere improper admission of evidence is not sufficient. The arbitral award should be offensive to the national policy and virtues, principles reflective of Indian culture. The court further gave examples of trading in elephant tusks from India and the sale of peacock meat as being offensive of the public sentimentality.

Although recently the exception of public policy was exercised by courts in National Agriculture Co-operative Marketing Federation of India v. Alimenta S.A[19], wherein the apex court set aside the enforcement of an arbitral award based on Section 32 of the Indian Contracts Act, 1872. This section talks about contingent contracts and is a globally accepted common law principle. In this case, NAFED had promised to export 5000 MT of groundnuts to Alimenta in the year 1979-80. Due to crop failure the company could only send 1900 MT. This met with two addendums to carry forward the leftover quantity to the next year. NAFED failed to supply the remaining quantity as the government did not support the fulfilment of the contract on the grounds that the price for the commodity had increased in the next season. This decision of the apex court is of interest as it is a rare instance when the court delved into the merits of a matter despite the issue before it being simply to decide on the enforceability of a foreign award in India. Further, the court applied the provisions of the Indian Contract Act, 1872 (Section 32) to a contract that had been agreed by the contracting parties only to be subject to English law, and ruled that in view thereof, the underlying contract (leading to the arbitral award) was void thereby leading to the award itself becoming infructuous. The Supreme Court decided this matter as though it were in fact an appeal before it, when in fact it always needs to be kept in mind the difference between the requirement of an order to be based on merits, and when in fact the sole requirement of the court is merely to adjudicate upon the enforceability of a passed award, wherein the merits have already been considered and decided, one way or another, and it is repetitive to go into the same again when the decision is in fact not being appealed! In its exercise of upholding and safeguarding public policy over enforceability of a foreign award, the Court in fact contradicted its own stand as laid down in the Renusagar and Shree Lal Mahal cases.

Arbitrability

Arbitrability is a pre-requisite of validity of the arbitration agreement and is essential to establish the arbitrator’s jurisdiction. It is a kind of clause which is exclusive to the subject matter of the dispute. Arbitrability sees the control of state courts on significant issues, these courts clearly demarcate certain issues reserved exclusively for the jurisdiction of municipal courts. The question is not about conflict of jurisdiction it is about compatibility of law in question with that of the municipal laws, it is essentially a conflict of law. This issue lies at the core of comity of nations versus reserving matters of the public interest (human rights or criminal law), and the judiciary attempts to balance the public interest of safety and the commercial interest of speedy justice.

This principle is laid down in Article I of the Geneva Convention as subject matter of the award should be capable of settlement by arbitration under the municipal laws of the country where execution is sought. This is also reiterated in Article II(1) and Art. V(2)(a) and the principle of arbitrability varies among nations and is solely a matter of concern for local courts. Now, subjective arbitrability or ratione personae is understood as the contractual capacity of a state or individual to enter into a valid arbitration agreement. Whereas objective arbitrability are government specified restrictions on foreign courts to try matters which might be sensitive to the public. This is the range of conflicts which can be resolved by arbitration.

An example of pro-enforcement regime in USA over arbitrability can be seen through Anti-trust Laws. In American Safety Equipment Corp. v. JP McGuire & Co.,[20] the court held that the nature of claim arising in anti-trust laws and the subject matter is highly volatile and affects the public interest at large and thus the subject was made non-arbitrable. Further, the US Supreme Court, in Mitsubishi Motors Corp v. Soler Chrysler- Plymouth Inc. [21]  rejected the prevailing reasoning that anti-trust issues were sensitive and confidential. The court upheld the need for comity of nations and said that execution and enforcement should not be stopped even if such execution would be contrary to the domestic law.

In Booz Allen Hamilton Inc. v. SBI Home Finance Ltd.[22] the question of arbitrability pertained to whether or not the subject of the dispute could be resolved by a private forum, and whether the dispute is included within the arbitration clause or excluded. The Supreme Court of India further held that rights enforceable against a person are arbitrable. Further, the court even lay emphasis on the ground that whether the dispute in question arises out of a claim or a counter-claim, and whether it falls under the scope of submission to the arbitration or not, is an essential requirement to establish arbitrability.

The court over years has illustrated various examples of non-arbitrable disputes through various judgments. These examples are given below:

  1. Matters in relation to winding up of a company[23]
  2. Disputes among trustees and its beneficiaries[24]
  1. Oppression and mismanagement in a company[26]

The stand on arbitrability in the context of copyrights issues is not clear. The Bombay High Court, in the case of Eros International Media Ltd. v. Telemax Links India Pvt. Ltd.[27] gave the obiter that copyright disputes arise out of rights in personam or from an individual and hence are arbitrable. But the precedent faced by this case was 2012 judgment of Indian Performing Rights Limited v. Entertainment Network( India) Limited[28], where it had been pronounced that infringement of copyright cannot be made subject matter of arbitration and had further set aside the enforcement of award in relation to payment of royalty. Fraud, is however arbitrable, with respect to foreign seated awards. [29]

Conclusion

The jurisprudence on public policy and arbitrability is tightly knit, it faces many challenges and evolves but the approaches always have fixed results as the question is of enforcement. Arbitration becomes a toothless tiger when the domestic laws of the state fail to execute a foreign decree. India is a hub for arbitration and in order to be successful it needs to expeditiously execute even foreign awards and be pro-enforcement. Usually, the stand taken by courts has been seen to be in favour of the Central Government instead of the arbitral award but this trend is now witnessing a change. A plethora of judgments now exists to narrow the ambit and scope of the public policy exception, as widening the scope would result in fruitless litigation at foreign tribunals as there will be no actual remedy present.

Article V restrictions may vary and shall act for the benefit and good of the people, it should not be used as a tool for causing hindrance in the delivery of justice. The courts in India have accepted foreign arbitral awards as municipal decrees subject to a few conditions. Although the discretionary powers vested with the courts remind that these exceptions are fluid and take shape according to the question at hand. Circumstances may lead to a change in policy of dealing with enforcement, like the latest judgement of NAFED where the subject matter of the arbitral award was under review. The pro-enforcement regime will add value to arbitral proceedings but the necessary safeguards in place should not be overlooked.

[1] RM Investments Trading Co. Pvt. Ltd. v. Boeing Co. & Anr, 1994 (4) SCC 541.

[2] Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc, (2012) 9 SCC 552.

[3] Brace Transport Corp of Monrovia v Orient Middle East Lines Ltd. 1995 Supp (2) SCC 280.

[4] (2018) 3 SCC 662.

[5] AIR 1994 SC 860.

[6] 2011 (9) SCC 735.

[7] (2014) 9 SCC 263.

[8] (2003) 5 SCC 705.

[9] (2002) 4 SCC 105.

[10] Venture Global Engineering LLC v. Tech Mahindra Limited, (2018) 1 SCC 656.

[11] Supra at 5.

[12] (2012) 9 SCC 552.

[13] Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49.

[14]  (2014) 2 SCC 433.

[15] Supra at 5.

[16] Vijay Karia v. Prysmian Cavi. E Sistemi SRL & Ors. (2020) SCC OnLine 177, para. 84.

[17] (2019) SCC OnLine Bom 4415.

[18] Id.

[19] 2020 SCC OnLine SC 381.

[20] 391 F 2d 821 (2d Cir 1968).

[21] 105 SCR (1985).

[22] (2011) 5 SCC 532.

[23] Haryana Telecom Ltd. v. Sterile Industries(India) Ltd. AIR 1999 SC 2354.

[24] Vimal Kishor Shah v. Jayesh Dinesh Shah, AIR 2016 SC 3889.

[25] Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan, AIR 1999 SC 2102.

[26] Rakesh Malhotra v. Rajinder Kumar Malhotra CO, [2015] 192 Comp Cas 516(Bom).

[27] 2016 SCC OnLine Bom 2179.

[28] Arbitration Petition No 341 of 2012.

[29] World Sport Group(Mauritius) Ltd. v. MSM Satellite(Singapore), AIR 2014 SC 968

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