Enforceability of Foreign Arbitral Award in India: Developments

Background

The statute which is applicable for the enforcement of foreign arbitral award in India is the Arbitration and Conciliation Act, 1996 [“the Act”]. India being a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958[1] and the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927. The Supreme Court of India has dealt with two opposing positions on public policy, namely – the narrow view where the Courts do not create new heads of public policy and the broad view where a certain degree of judicial review is allowed. Indian position on the enforcement of foreign arbitral awards is in line with the international standards. In  Shri Lal Mahal Ltd. v. Progetto Grano Spa[2], a three-Judge Bench of the Supreme Court held that review of a foreign arbitral award on its merits is untenable as it is not permitted under the New York Convention. The judgment clearly exposes the difference in the scope of inquiry during the annulment of a domestic award and the enforcement of a foreign award. It stated that the expression ‘public policy of India’ under Section 48 of the Act should be construed narrowly; whereas the same could be given a wider meaning under Section 34 of the Act.

In its landmark decision in Renusagar Power Co. Ltd. v. General Electric Co.[3] the Supreme Court addressed this question under Section 7(1)(b)(ii) of the Foreign Awards (Recognition & Enforcement) Act, 1961[4] and concluded that the public policy in an enforcement setting shall include: (i) fundamental policy of Indian law, (ii) the interests of India; or (iii) justice and morality. This clearly was a narrow interpretation of international public policy reflecting on the pro-enforcement bias of the New York Convention.

However, the Supreme Court in two significant judgments, namely, Oil and Natural Gas Corporation v. Saw Pipes Ltd. [5] and Venture Global Engineering v. Satyam Computer Services Ltd.[6], deviated from this precedent by giving an undesired and expansive interpretation to the public policy exception. In Saw Pipes, while dealing with a domestic award, the Court held that the award could be set aside on the ground that the tribunal violated the Indian Law and eventually, added “patent illegality” as an additional ground to  Renusagar[7] formula. In Venture Global case[8], the Court relying on the this ratio and of Bhatia case[9] annulled a foreign arbitral award based on pure domestic notions of public policy, and thereby afforded India the image of an arbitration-hostile jurisdiction. Therefore, the underlying fact is that, although both the notions domestic and international comes under the purview of national public policy, the application of the domestic public policy must be limited to domestic award.

The limited scope of public policy defence available under Article V of the New York Convention does not permit the judicial review of the merits of a foreign arbitral award. The Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano Spa[10] overruled the wider view as held in Phulchand Exports Ltd.[11], vide para 30 of its judgment:

“It is true that in Phulchand Exports[12], a two-Judge Bench of this Court speaking through one of us (R.M. Lodha, J.) accepted the submission made on behalf of the appellant therein that the meaning given to the expression “public policy of India” in Section 34 in Saw Pipes must be applied to the same expression occurring in Section 48(2)(b) of the 1996 Act. However, in what we have discussed above it must be held that the statement in para 16 of the Report that the expression “public policy of India used in Section 48(2)(b) has to be given a wider meaning and the award could be set aside, if it is patently illegal” does not lay down correct law and is overruled.”

Recently, in Vijay Karia v. Prysmian Cavi E SistemiSrl [14] the Supreme Court held that while considering grounds for setting aside a foreign award, the Court must warrant minimal interference. While dismissing the petition under Article 136 of the Constitution elucidated the following:

1. Enforcement of a foreign award may only be refused under Section 48 of the Act if the party resisting enforcement furnished to the court proof that any of the stated grounds have been made to resist enforcement and the discretion to do so lies with the Court. In light of the above, the Court enforcing a foreign award may perform a “balancing act“.

2. Section 48(1)(b) was to be interpreted in the context and colour of the words preceding the phrase “was otherwise unable to present his case”.

3. A foreign award must only be set aside if it were to overtake the most basic notion of justice.

“The important point to be considered is that the foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counter-claims of the parties, enforcement must follow.”

4. The following will not fall under the parameters of any grounds mentioned in Section 48 of the Arbitration Act.

    1. Any ground which appears to be an after-thought and has not been taken before the learned arbitrator in light of the given circumstances.
    2. If it is apparent on the face of record that no adverse inference has been drawn by the arbitrator and there is no breach of natural justice.
    3. If critical evidence has not been taken into account or admissions have not been ignored, the perversity of the award cannot be challenged on the said ground.
    4. Valuation on the basis of merits is for the arbitrator to determine and falls outside the purview of any grounds laid down in Section 48.
    5. Interpretation of an agreement by an arbitrator being perverse is not a ground that can be made out under any of the grounds contained in Section 48(1)(b).
    6. Pleas going to the unfairness of the conclusions reached by the award are foray into the merits of the matter, and which is plainly proscribed by Section 48 of the Arbitration Act read with the New York Convention.

The Court also observed that its jurisdiction under Article 136 is limited in scope and if merits have already been dealt with exhaustively in the awards and the High Court, the Supreme Court’s interference is unwarranted.

GROUNDS FOR REFUSAL TO RECOGNITION

The grounds in the Indian Law for refusing recognition are similar to the grounds provided under Article V of the New York Convention[15]. Thus, the grounds for refusing recognition and enforcement of a foreign award under Section 48(1)[16] of the Act are:

  • The parties referred to in Section 44[17] of the Act are under some incapacity according to the law applicable to them, or the agreement is void according the law to which the parties have subjected to, or the award is deferred or set aside by the competent authority the country in which the award was made; or
  • The party against whom the award is invoked was not given proper notice of the appointment of the arbitral tribunal or wasn’t able to present his/her case during the proceedings; or
  • The award is rendered on issues that were not contemplated at the time of signing of the agreement; or
  • The arbitral tribunal was not composed in accordance with the agreement with the agreement of the parties, or not in accordance with the law of the country where the arbitration took place; or
  • The award has not yet become binding on parties, or has been set aside or suspended by the competent authority of the country in which the award was made. It may be reasonable to adjourn enforcement proceedings if a challenge has been made by an award debtor in the country where the award has been made.[18] However, courts may order for the deposition of security while the execution proceedings are deferred.

A reading of Section?48(1)(e) of the Act read with Section?48(3) of the Act implies that the ‘competent authority’ in Section?48(3) is the authority of the country where the award has been made, and not the executing court in India. Further, under Section 48(2) of the Act, enforcement of a foreign award may also be refused if the court finds that:

  • The subject-matter is not arbitrable under the law of India.
  • The enforcement would be contrary to the public policy of India.

The amendments to the Act[19] have clarified that an award would be considered to be in conflict with the public policy of India, only if:

  • The award was tainted by fraud or corruption or was in violation of Section 75 or Section 81 of the  Evidence Act, 1872;
  • It is in violation with the fundamental policy of Indian law; or
  • It is in conflict with the most rudimentary notions of morality or justice.

FOREIGN AWARD NOT ENFORCEABLE IF CONTRACT VIOLATES GOVERNMENT POLICY, RULES

In a recent case, the Supreme Court in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A[20] held that a foreign award is not enforceable, on the basis that the transaction contemplated would have violated the Indian laws and was contrary to the public policy of India.

FACTUAL MATRIX

National Agricultural Cooperative Marketing Federation of India (NAFED), the appellant entered into a contract on 12.01.1980 with Alimenta S.A. (respondent) for supply of 5000 metric tonnes (“mt”) of India HPS groundnut (“commodity”). NAFED was able to supply only 1900 mt of the commodity due to some unforeseen circumstances. The parties entered into a first and second addendum on 18.08.1980 and 8.10.1980 respectively due to occurrence of certain anomaly in the US. The remaining 3100 mt was supposed to be delivered at an inflated price. NAFED was a canalizing agency for the Government of India (“GOI”). Prior approval was needed by NAFED from the Government of India for exporting the commodity which is to be C/F to the next year from the previous year.

NAFED unaware of the fact that Government of India’s approval was needed, entered into a new contract for the year of 1980-81. Subsequently NAFED was denied the permission to export under the new quota of the GOI. Alimenta approached Federation of Oil, Seeds, and Fats Association Ltd. (“FOFSA”) and invoked the arbitration clause in the agreement.  FOFSA asked NAFED to appoint their arbitrator in 21 days as Alimenta had appointed their arbitrator. NAFED filed for a stay on the proceeding in the Delhi High Court, who granted the stay on arbitration proceeding. FOFSA with a telex informed the High Court that they had no jurisdiction to grant a stay. FOFSA then moved on with the proceeding and appointed an arbitrator for NAFED. Following the appointment NAFED moved to remove the arbitrator as they had been stripped of the opportunity to appoint an arbitrator in light of stay of the proceeding on 10.01.1989 in which they contended the appointment was manifestly arbitrary; meanwhile Alimenta filed their written submissions on 19.06.1989. On the basis of these submissions FOFSA passed an award of USD 4,681,000 with an interest of 10.5% per annum from 13.02.1981 to the date of the award. NAFED moved to the Board of Appeal which denied them the opportunity of their choice of counsel and passed an award increasing the interest rate to 11.25% instead of 10.5%. Alimenta filed a petition for enforcement of the said award at the High Court. The High Court after hearing both the sides held the award to be enforceable.

On 24.11.2010 NAFED filed an appeal before the Supreme Court for the case to be adjudicated on merits. 

ISSUES BEFORE THE SUPREME COURT

In the light of above contentions raised by respective parties, the Supreme Court was called upon to answer three questions:

  • Whether NAFED was unable to comply with the contractual obligation to export groundnut due to the Government’s refusal?
  • Whether NAFED could have been held liable for breach of contract to pay damages particularly in view of Clause 14 of the agreement?
  • Whether enforcement of award is against the public policy of India?

FINDINGS

1. First issue:

The Bench considered the judgments decided by this Court in Satyabrata Ghose v. Mugneeram Bangur & Co. [21] and Delhi Development Authority v. Kenneth Builders & Developers Pvt. Ltd.[22]  which discussed upon the doctrine of frustration being a positive doctrine which doesn’t fall under Section 56 of the Contract Act rather falls under Section 32 of the Contract Act which deals with enforcement of contract contingent on an event happening.

Relying on these judgments, the Court observed that Clause 14 (supra) of the agreement which clearly stipulates the criteria on the basis of which the enforcement of the contract will come to an end and will release both the parties from their obligations. In this instance it was the failure of NAFED to supply the commodity due to Government of India’s new quota, the validity of which was looked at length and on the basis of the evidence provided the Court held that NAFED was unable to fulfil its contractual ability due to unforeseen circumstances which as per Clause 14 released them of the obligation.

2. Second issue: 

Clause 14 of the contract which was termed as prohibition listed out the possibilities under which a party would have been considered discharged from their contractual obligations. The Supreme Court held in a judgment of Ram Kumar v. P.C Roy & Co (India) Ltd.[23] in which by the virtue of limitation placed by the Government of India there was a failure to supply of wagons as per the contract. The Court in the said case held that the contract became void and parties were relieved of their liabilities. In the current case, using Ram Kumar case as reference the Supreme Court held that NAFED was not liable to pay any damages under Clause 14 of the contract.

3. Third issue:

Relying on the judgment of Renusagar[24] in which the meaning of expression of ‘public policy’ under Section 7(1)(b)(ii)[25] of the Foreign Awards Act, 1961 came into question. A test was laid down for determining the enforcement of foreign award in relation to public policy of India as to under what circumstances will it be held in violation of public policy and will not be enforceable in the county. The award would be held contrary on the following grounds:

  1. Fundamental policy of Indian Law,
  2. The interest of India,
  3. Justice and morality.

Even referring to the judgment of Ssangyong Engineering & Construction Co. Ltd v. National Highways Authority of India[26] which also talked upon public policy which reiterated the test laid down in Renusagar[27]. This Court in the judgment held that the award could not be said to be enforceable on the basis of the test laid down in the aforementioned case as its enforcement would be against the fundamental policy of Indian law and the basic concept of justice. Hence, the award was held unenforceable. The High Court was said to have erred in law in holding the award to be enforceable. Hence, NAFED was held to be not liable to pay any damages under the foreign award.

CONCLUSION

The award was ex facie illegal as per the Supreme Court, and that no export could have been undertaken without the permission of the Government of India. The export would have violated the law and hence the enforcement of the award was against the public policy of India. On the happening of Clause 14 of the agreement, both the parties stood discharged of their obligations and keeping these findings in mind, the Court held that NAFED could not be held liable to pay damages under foreign award.


* Final year BA LLB student, Lloyd Law College, Greater Noida.

** Second year LLB student, Lloyd Law College, Greater Noida.

[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (hereinafter called the New York Convention). 

[2] (2014) 2 SCC 433 

[3] 1994 Supp (1) SCC 644

[4] Foreign Awards (Recognition & Enforcement) Act, 1961 

[5] (2003) 5 SCC 705

[6] (2010) 8 SCC 660 

[7] 1994 Supp (1) SCC 644

[8] Venture Global Engineering v. Satyam Computer Services Ltd., (2010) 8 SCC 660

[9] Bhatia International v. Bulk Trading S.A,  (2002) 4 SCC 105 

[10] (2014) 2 SCC 433

[11] Phulchand Exports Ltd. v. O.O.O Patriot,  (2011) 10 SCC 300 

[12] Ibid.

[13] Oil and Natural Gas Corporation v. Saw Pipes Ltd., (2003) 5 SCC 705

[14] 2020 SCC OnLine SC 177 

[15] Supra Note 1.

[16] 48 Conditions for enforcement of foreign awards. — (1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the Court proof that—

(a) the parties to the agreement referred to in Section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or

(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

[17] 44. Definition.—In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.

[18]Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd.  (2009) SCC OnLine Del 2961 

[19] The Arbitration and Conciliation (Amendment) Act, 2015.

    22. Amendment of Section 48.— In Section 48 of the principal Act, for the Explanation to sub-section (2), the following Explanations shall be substituted, namely—

Explanation 1.— For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.— For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”.

[20] 2020 SCC OnLine SC 381

[21] 1954 SCR 310

[22] (2016) 13 SCC 561

[23] 1949 SCC OnLine Cal 48

[24] 1994 Supp (1) SCC 644

[25] 7. Conditions for enforcement of foreign awards.—(1) A foreign award may not be enforced under this Act—

*              *            *

(b) if the Court dealing with the case is satisfied that—

(i) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or

(ii) the enforcement of the award will be contrary to the public policy.

[27] 1994 Supp (1) SCC 644

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