July 26, 2021

Volume XI, Number 207

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July 26, 2021

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Demystifying Public Policy To Enable Enforcement Of Foreign Awards – Indian Perspective PART II

KEY DEDUCTIONS ON PUBLIC POLICY UNDER INDIAN LAW

India is one of the few jurisdictions to statutorily define public policy through the Arbitration and Conciliation (Amendment) Act, 2015. While some countries consider public policy to mean international public policy, Indian courts have held that there is no workable definition of international public policy, thus, it should be construed to be the doctrine of public policy as applied by courts in India.1  Within the definition of public policy, India has statutorily included the grounds of fraud, corruption, fundamental policy of Indian law and basic notions of justice and morality. 

While public policy has no definition and its elements have been identified statutorily in Section 48(2)(b)(ii), additional elements have been sufficiently postulated by judicial interpretation. In light of the above analysis, the following practical deductions can be made about public policy. These will be helpful while assessing an application resisting enforcement of a foreign award.

A. COURT’S DISCRETION IN REFUSING ENFORCEMENT

S.48(2) provides that the Court “may” refuse enforcement of a foreign award. This provides discretion to the Court to, in certain circumstances, allow enforcement of a foreign award even if grounds of refusal are made out.

In the case of Cruz City 1 Mauritius Holdings v. Unitech Limited, (“Cruz City”) the Delhi High Court proposed a balancing test to determine when a foreign arbitral award may be refused enforcement on the ground of public policy. The Court in Cruz City considered whether refusing to enforce a foreign award which is contrary to public policy may be further opposed to ‘public policy’. However, the Court further held that while the width of discretion to refuse the enforcement of an arbitral award is narrow and limited, if sufficient grounds are established, courts can accept the contentions to refuse the enforcement of an arbitral award.2  

Additionally, in the case of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL (“Vijay Karia”), the Supreme Court held that while discretion of courts may be employed in some of the grounds for refusing the enforcement of a foreign award, courts do not have any discretion regarding the grounds of fraud, corruption, fundamental policy of Indian law, basic notions of justice and morality.3  

In the United Kingdom, in the case of Minmetals Germany Gmbh v. Ferco Steel Ltd., it has been held that “considerations of public policy involve investigation not only of the core procedural defect relied upon by way of objection to enforcement but of all surrounding circumstances which are material to the English Court’s decision whether, as a matter of policy, enforcement should be refused. Such circumstances may give rise to policy considerations which so strongly favour enforcement as to outweigh policy considerations to the contrary.4  

In Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan, the Supreme Court of the U.K., held that while there may be a discretion to enforce an arbitral award even if grounds for refusal of enforcement are made out in some circumstances, the absence of a valid arbitration agreement is not a ground wherein the court can exercise such discretion.5   

In Yukos Oil Co v. Dardana Ltd., the Court of Appeal in has held that the word ‘may’ in Article V of the New York Convention suggests that even if one or more grounds are made out, “the right to rely on them had been lost, by for example another agreement or estoppel.” The High Court of Hong Kong, in the case of Hebei Import,6  held that courts to not have the discretion to enforce an arbitral award if the award is against public policy and the basic notions of morality and justice.7  

B. BEYOND MERE STATUTORY VIOLATION

The expression ‘fundamental policy of Indian law’ calls for a violation that is beyond mere statutory violation. In Renusagar, the Court held that Article V(2)(b) of the New York Convention had omitted the reference to “principles of law of the country in which it is sought to be relied upon” while replacing the Geneva Convention of 1927. Since the expression "public policy" covers the field not covered by the words "and the law of India" which follow the said expression, it was held that contravention of law alone will not attract the bar of public policy and something more than contravention of law is required.8  

It is important to assess the nature, object and scheme of a statute to determine if the violation of such statute would constitute a violation of the fundamental policy of Indian law. In Vijay Karia, the Supreme Court held that any rectifiable breach under the FEMA cannot be said to be a violation of the fundamental policy of Indian law. It held that the Reserve Bank of India could step in and direct the parties to comply with the provisions of the FEMA or even condone the breach. However, the arbitral award would not be non-enforceable as the award would not become void on this count.9  Citing its judgment in Renusagar, the Supreme Court held that the fundamental policy of Indian law must pertain to “a breach of some legal principles or legislation which is so basic to Indian law that it is not susceptible of being compromised. “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.10 

C. BASIC NOTIONS OF JUSTICE & MORALITY

A recent instance wherein a majority arbitral award was set aside as being opposed to ‘justice’ is that of the case of Ssangyong Engineering, wherein it was held that the award unilaterally altered the contract which is opposed to the fundamental principles of justice and shocks the conscience of the court. Thus, when it comes to the public policy of India argument based upon most basic notions of justice, it is clear that this ground can be attracted only in very exceptional circumstances when an award shocks the conscience of the Court.11  

D. MISTAKE OF FACT OR LAW

The Supreme Court has repeatedly held that the scope of enquiry under Section 48 does not permit review of a foreign arbitral award on its merits. Courts do not have the ability to take a ‘second look’ at the foreign arbitral award at the enforcement stage.12  This is now incorporated as a statutory rule under Section 48(2)(b), Explanation 2. Further, the Delhi High Court, in the case of Cairn India & Ors. v. Government of India recently held that once an arbitral tribunal has been vested with jurisdiction by parties, it has the right to make both right and wrong decisions as these are errors which fall within their jurisdiction.13  

In Vijay Karia, the Supreme Court, while citing Albert Jan van den Berg in his treatise The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation, has noted that, “it is a generally accepted that the court before which the enforcement of the foreign award is sought may not review the merits of the award. The main reason is that the exhaustive list of grounds for refusal of enforcement enumerated in Article V does not include a mistake in fact or law by the arbitrator. Furthermore, under the New York Convention, the task of the enforcement judge is a limited one. The control exercised by him is limited to verifying whether an objection of a respondent on the basis of the grounds for refusal of Article V is justified and whether the enforcement of the award would violate the public policy of the law of his country. This limitation must be seen in the light of the principle of international commercial arbitration that a national court should not interfere with the substance of the arbitration”.14 

NATURAL JUSTICE

Section 48(1)(b) permits a party to resist enforcement on grounds relating to violation of natural justice if a party is unable to present its case during the arbitration proceedings. However, a party may also resist the enforcement of an arbitral award on the ground of natural justice as being against public policy under Section 48(2)(b)(ii) (as natural justice forms a part of the fundamental policy of Indian law). A foreign award can possibly be challenged if the arbitral tribunal had ignored the submissions of the party in totality and the resulting award was contrary to the principles of natural justice, thereby violating public policy. This was the finding of the Delhi High Court in the case of Campos Brothers Farms v. Matru Bhumi Supply Claim Pvt. Ltd.15  An appeal against the Single Judge’s order in this case is currently pending before the Division Bench of the Delhi High Court.16 

F. CONSTRUCTION OF CONTRACT

Under Section 48(2), a court is not permitted to delve into merits of the award and evaluate the manner in which the arbitral tribunal has construed the terms of the underlying contract. However, recently, in a rare decision, the Supreme Court has declined the enforcement of a foreign arbitral award in the case of National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A.17 (“National Agricultural”) under the Foreign Awards Act as the enforcement application in the present case was filed in 1993. 

In this case, the Appellant was allegedly unable to comply with the contractual terms wherein the Appellant was to export groundnuts. The Supreme Court noted that the export required government approval, however, the government did not grant the Appellant the necessary approvals to carry out its contractual obligations. Further, the agreement itself contained a clause wherein it was provided that the contract between the parties would be cancelled if the shipment was prohibited by an executive or legislative act by the government which would make the shipment impossible (“Contingency Clause”). In its award, the arbitral tribunal awarded damages upon the Appellant for a breach of contract.

The Supreme Court held that the export could not have taken place without the approval of the Government. Export without the government’s permission would have violated the law, thus, enforcement of the award would be violative of the public policy of India. Considering that the Contingency Clause would have become applicable, the contract itself would have been cancelled. The contract was thereby rendered void under Section 32 of the Indian Contract Act, 1872.18  Thus, enforcing an award which seeks the payment of damages for breach of a contract (which was rendered void) is contrary to the fundamental policy of Indian law. The Supreme Court, relying upon several judgments, including that of Associate Builders and Ssangyong Engineering, held the foreign arbitral award to be unenforceable as being opposed to the fundamental policy of Indian law and the basic notions of justice, and thereby public policy. This judgment could be problematic for many reasons, foremost being appreciation of the merits of the dispute and re-assessment of the tribunal’s construction of the contract. 

G. FRAUD OR CORRUPTION

While Indian courts have had an opportunity on expand upon what may constitute the fundamental policy of Indian law and basic notions of justice and morality, there is minimal jurisprudence on what constitutes fraud or corruption in the context of refusing the enforcement of a foreign arbitral award.

H. OTHER POTENTIAL GROUNDS

Further, courts in other jurisdictions have held that award without reasons is contrary to public policy,19  however, such objections may now be classified into the bucket of “patent illegality” in India and be unavailable as an objection to the enforcement of foreign arbitral awards. There are certain other grounds that courts have held to be contrary to public policy such as acting in bad faith, duress, impartial hearing, surprise decisions, etc.20  However, Indian courts have not had the opportunity to evaluate such grounds yet – and it is likely that many of these grounds would be considered ‘patent illegality’ and not be available as a ground to resist the enforcement of a foreign award. 

I. APPLICABILITY OF PUBLIC POLICY UNDER A&C ACT

The ground of public policy is available in India both for challenge to an India-seated award and to resist enforcement of a foreign award. However, in an international commercial arbitration conducted in India, the ground of challenge relating to public policy of India would be the same as the ground of resisting enforcement of a foreign award in India. This is because Section 34 of the A&C Act, which deals with challenge to awards made by India-seated arbitral tribunals, differentiates between international commercial arbitrations held in India and other arbitrations held in India. Thus, after the Arbitration and Conciliation (Amendment) Act, 2015, grounds relating to patent illegality appearing on the face of the award do not apply to (i) international commercial arbitration awards made in India; and (ii) foreign awards being resisted in India.

CONCLUSION

Resistance to enforcement of foreign awards in a country must be approached with circumspection. The question whether enforcement of a foreign award violates the public policy of India must be considered in the context that India is a signatory to the New York Convention.21  It is the sovereign commitment of India to honour foreign awards, except on the exhaustive grounds provided under Article V of the New York Convention.

While it may be tough to construe public policy without a workable definition, judicial interpretation offers sufficient guidance, whilst maintaining that judicial interference remain minimal. It is essential to recognize the need for restraint in examining the correctness of a foreign award or a domestic award tendered in an international commercial arbitration, as opposed to a domestic award. As stated in Fritz v. Scherk, we cannot have trade and commerce in world markets and international seas exclusively on our terms, governed by our laws and resolved in our courts.22  Concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties' agreement, even assuming that a contrary result would be forthcoming in a domestic context.23  

As the Court in Cruz City has aptly stated, a policy to enforce foreign awards itself forms a part of the public policy of India – and courts should strive to find the right balance between the policy of enforcing foreign awards and considering the grounds for resisting the enforcement of foreign awards.24  In light of judicial guidance and international circumspection over public policy as a ground for refusal of enforcement of foreign awards – hopefully, public policy will not be argued readily only when all other points fail! 


Disclaimer: The article has been previously published in the Indian Review of International Arbitration and is being republished with their due permission. IRIArb is an international journal published online by the Centre for Arbitration and Research, Maharashtra National Law University, Mumbai

1  Renusagar Power Co. Ltd v. General Electric Co 1994 Supp (1) SCC 644.

2 Cruz City 1 Mauritius Holdings v. Unitech Limited, (2017) 239 DLT 649.
3 Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine SC 177. 
4  Minmetals Germany Gmbh v. Ferco Steel Ltd., [1999] 1 All ER (Comm) 315.

5 Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46. 

6 Hebei Import & Export Corporation v. Polytek Engineering Company Ltd., [1999] 2 HKC 205.

7 Yukos Oil Co v. Dardana Ltd., [2002] EWCA Civ 543.

8 Renusagar Power Co. Ltd v. General Electric Co 1994 Supp (1) SCC 644.

9 Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine SC 177.

10 Id.

11 Ssangyong Engineering and Construction Company Ltd. v. NHAI, 2019 (15) SCC 131.

12 Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433.

13 Cairn India & Ors. v. Government of India, O.M.P.(EFA)(COMM.) 15/2016 & I.A. Nos. 20459/2014 & 3558/2015, Judgment Dated February 19, 2020.

14 Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine SC 177. 

15 Campos Brothers Farms v. Matru Bhumi Supply Claim Pvt. Ltd., (2019) 261 DLT 201.

16 Campos Brothers Farms v. Matru Bhumi Supply Claim Pvt. Ltd., EFA(OS) (COMM) 10/2019.

17 National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A, Civil Appeal No. 667 of 2012.

18 §32, Indian Contract Act, 1872 provides that, “Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”

19 Smart Systems Technologies Inc. v. Domotique Secant Inc., 2008 QCCA 444.

20 Dirk Otto & Omaia Elwan, Article V(2), in Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention (Kronke, Nacimiento, Otto, et al. (eds); Jan 2010).

21 Cruz City 1 Mauritius Holdings v. Unitech Limited, (2017) 239 DLT 649.

22 Fritz Scherk v. Alberto Cuvler, 417 US 506 (1974).

23 Mitsubishi Motors Corpn. v. Soler Chrysler-Plymouth Inc., 87 L Ed 2d 444.

24 Cruz City 1 Mauritius Holdings v. Unitech Limited, (2017) 239 DLT 649.

Nishith Desai Associates 2021. All rights reserved.National Law Review, Volume XI, Number 124
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Bhavana Sunder Lawyer Nishith Desai Assoc. India-centric Global Law Firm

Bhavana is a member of the International Dispute Resolution & Investigations Practice at Nishith Desai Associates, Mumbai. She focuses on commercial litigation, international arbitration and white-collar crimes. She is a member of Indian Arbitration Forum. Bhavana has a wide array of experience in advising on commercial litigation, international commercial arbitration and investigations. She augments her practice with thought leadership and policy writing on issues pertaining to arbitration and white-collar crime. She has authored several articles which have been...

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Kshama Loya International Dispute Attorney Nishith Desai Law Firm
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Kshama A. Loya is a Leader in the International Dispute Resolution practice at Nishith Desai Associates. She focusses on International Commercial and Investor-State Arbitration. Kshama advises and represents clients in complex cross-border commercial disputes, public and private international law disputes, civil and criminal litigation, commercial litigation and litigation arising out of international and domestic arbitration in Indian courts. She has advised on issues arising in a range of industries including Energy, Mining, Infrastructure, Construction, Production, Engineering,...

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