In 2013 a three-judge bench of the Supreme Court issued its decision in Shri Lal Mahal Ltd v Progetto Grano Spa,(1) holding that the enforcement of a foreign arbitral award can be refused only if it is contrary to:
- the fundamental policy of Indian law;
- the interests of India; or
- justice or morality.
The Arbitration and Conciliation Act 1996 was subsequently amended by the Arbitration and Conciliation (Amendment) Act 2015, with retrospective effect from 23 October 2015. The amendment act introduced Section 48(2)(b), which clarified the contours of a public policy challenge regarding a foreign award as follows:
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
- the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or
- it is in contravention with the fundamental policy of Indian law; or
- it is in conflict with the most basic notions of morality or justice.
This article focuses on the Indian courts' interpretation of the term 'fundamental policy of Indian law' when dealing with enforcement challenges to foreign arbitral awards. It also looks at the commonly arising question of whether a foreign arbitral award which is in mere violation of an Indian legal provision qualifies as a contravention of the fundamental policy of Indian law.
In the 2011 Delhi High Court decision in Penn Racquet Sports v Mayor International Ltd, Judge Sanghi observed that:
the recognition and enforcement of a foreign award cannot be denied merely because the award is in contravention of the law of India. The award should be contrary to the fundamental policy of Indian law, for the Courts in India to deny recognition and enforcement of a foreign award.(2)
In Cruz City 1 Mauritius Holdings v Unitech Limited, a single-judge bench of the Delhi High Court had to consider whether a violation of a provision of the Foreign Exchange Management Act would ipso jure contravene Indian public policy.(3)
The Delhi High Court referred to the Supreme Court's observation in Renusagar Power Co Ltd v General Electric Co that "public policy is somewhat open-textured and flexible".(4) Similarly, in Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly, the Supreme Court had held that public policy constitutes "some matters which concern public good and public interest".(5)
The Delhi High Court thereafter relied on the Supreme Court decision in Shri Lal Mahal, wherein a narrow interpretation was accorded to the phrase "public policy" in the context of a foreign arbitral award in line with Renusagar Power Co Limited and in sharp contrast to the Supreme Court decision in Oil and Natural Gas Corporation v Saw Pipes in the context of a challenge to an arbitral award under Section 34 of the Arbitration and Conciliation Act.(6)
The Delhi High Court subsequently referred to numerous US decisions in the context of enforcement challenges under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) to understand how they were interpreted in the context of a public policy challenge. For example, in Parsons and Whittemore Overseas Co Inc v Societe Generale De L' Industrie Du Papier, the Court of Appeals for the Second Circuit clearly stated as follows:
the Convention's public policy defense should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state's most basic notions of morality and justice.(7)
In Cruz City, Judge Bakhru of the Delhi High Court set out the contours of the phrase "public policy" in the context of Section 48(2)(b) of the Arbitration and Conciliation Act – particularly, whether a mere violation of an Indian legal provision would amount to a contravention of the fundamental policy of Indian law – as follows:
a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the principles and the legislative policy on which Indian Statutes and laws are founded. The expression "fundamental policy" connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country.
The Delhi High Court's rationale for the above observation was as follows:
It is necessary to bear in mind that a foreign award may be based on foreign law, which may be at variance with a corresponding Indian statute. And, if the expression "fundamental policy of Indian law" is considered as a reference to a provision of the Indian statue, as is sought to be contended on behalf of Unitech, the basic purpose of the New York Convention to enforce foreign awards would stand frustrated. One of the principal objectives of the New York Convention is to ensure enforcement of awards notwithstanding that the awards are not rendered in conformity to the national laws. Thus, the objections to enforcement on the ground of public policy must be such that offend the core values of a member State's national policy and which it cannot be expected to compromise. The expression "fundamental policy of law" must be interpreted in that perspective and must mean only the fundamental and substratal legislative policy and not a provision of any enactment.
Therefore, in Cruz City the Delhi High Court clearly held that the mere violation of an Indian legal provision by a foreign award does not amount to a breach of the fundamental policy of Indian law. It set out that the 'fundamental policy of Indian law' constitutes fundamental and substratal legislative policies, principles and values which form the bedrock of Indian law (and not a mere legal provision).
In Daiichi Sankyo Company Limited v Malvinder Mohan Singh, the Delhi High Court – while dealing with a challenge to the enforcement of a foreign arbitral award – followed the principles promulgated in Cruz City to limit the fundamental policy of Indian law to substratal principles only.(9) Judge Jayant Nath observed that the "fundamental Policy of Indian Law does not mean provisions of the statute but substratal principles on which Indian Law is founded".
Notably, under Section 34(2A) of the Arbitration and Conciliation Act, an award governed by Part I of the act can be set aside due to patent illegality:
An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality on the face of the award.
However, in the context of foreign awards, the abovementioned Delhi High Court and Supreme Court decisions should help to restore investor confidence in India's position as an enforcement-friendly jurisdiction. They should also encourage parties to opt for foreign-seated arbitration to ensure that they can attain finality because – unlike for awards governed by Part I of the act – the enforcement of a foreign award cannot be refused on account of a mere violation of an Indian legal provision or patent illegality, as the grounds of challenge are significantly narrower.
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