In its recent decision in Phulchand Exports Ltd v OOO Patriot(1) the Indian Supreme Court examined the scope of the expression 'public policy' under Section 48(2) of the Arbitration and Conciliation Act 1996, in relation to the setting aside of a foreign arbitral award. While importing the wider meaning given to this term in its previous decision in Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd,(2) where the issue was the setting aside of a domestic award under Section 34 of the act, the court held that a foreign award challenged under Section 48 of the act can be set aside "if it is patently illegal".
The appellant, an Indian company, challenged an award that had been passed by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation, Moscow in favour of the respondent, a Russian company.
The appellant and the respondent had entered into a contract through which the appellant had undertaken to supply a specific quantity of polished rice to the respondent at Novorossiysk, Russia on a cost, insurance and freight basis.
Although the respondent had paid the consideration for the goods in advance through a letter of credit, the goods ultimately did not reach the respondent.
Consequently, the respondent lodged a claim against the appellant for recovery of the contracted amount before the Russian arbitral tribunal. The arbitral tribunal found no merit in the defence given by the appellant and rejected its arguments. It ultimately held the respondent liable for payment of half of the amount in dispute in the arbitration.
The respondent then filed an arbitration petition before the Bombay High Court for enforcement of the award under Sections 47 and 48 of the act. This petition was challenged by the appellant on the grounds that the arbitral award was not enforceable, as it was against 'public policy' and therefore liable to be set aside under Section 48(2)(b) of the act. The single judge of the Bombay High Court rejected the appellant's contentions and held that the arbitral award could be enforced as a decree of the court. The appellant appealed the judgment before the Division Bench of the Bombay High Court. This appeal was also dismissed, in view of the Supreme Court's decision in Renusagar Power Co Ltd v General Electric Co.(3)
The appellant then brought its appeal before the Supreme Court. The appellant argued that the wider meaning attributed by the Supreme Court in Saw Pipes to the definition of 'public policy' (under Section 34 of the act) in the context of setting aside a domestic award should also be applied to the definition of the same expression under Section 48(2)(b) of the act.
While accepting the wider definition of 'public policy' in Saw Pipes over the narrow scope ascribed in Renusagar Power, the Supreme Court held that a foreign award can be set aside under Section 48(2)(b) of the act "if it is patently illegal". The court therefore decided to consider the arbitral award on the basis of patent illegality.
However, on the merits, the court did not find the impugned arbitral award to be patently illegal and consequently dismissed the appellant's civil appeal.
Section 48 of the act contains limited grounds on which enforcement of an arbitral award can be refused, one of which is that the arbitral award is against Indian public policy. The Supreme Court's decision in Phulchand Exports increases judicial intervention in the enforcement of foreign arbitral awards by expanding the contours of the definition of 'public policy'. In support of an expansive interpretation of this expression, the court relied on its previous decision in Saw Pipes, where a wider scope was assigned(4) in the context of setting aside a domestic award. It may not have been brought to the attention of the court that the decision in Saw Pipes had recognised that the scope of intervention for foreign awards should be much less than that for domestic awards, and hence wider meaning should be assigned to the definition of 'public policy' in Section 34 alone and not to that in Section 48. The Delhi High Court had also taken the view that 'public policy' carried a narrower meaning under Section 48 of the act than that under Section 34(ii)(b).(5)
In the past, the increasing judicial intervention shown by Indian courts in enforcing or recognising arbitral awards has been widely criticised. The introduction of 'patent illegality' as a new ground for challenging the enforcement of a foreign arbitral award in Phulchand Exports gives rise to a valid apprehension that this could lead to potentially limitless judicial review of foreign arbitral awards in India.
Further, a foreign award brought to India for enforcement may be based on a substantive law other than Indian law. Thus, under the amorphous concept of 'patent illegality', the Indian courts may be called on to rule on a foreign award by applying a foreign legal system, leading to inevitable complexities and delays in the process of enforcing a foreign award in India.
For further information on this topic please contact Dhruv Dewan or Mayank Pandey at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email ([email protected] or [email protected]).
(1) Civil Appeal 3343/2005, dated October 12 2011.
(4) In paragraph 74 of its judgment, the Supreme Court defined the scope of the term 'public policy' as follows:
"The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law;
(b) the interest of India;
(c) justice or morality; or
(d) if it is patently illegal."
(5) Penn Racquet Sports v Mayor International Ltd, (2011) 1 ARBLR 244 (Delhi).