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08 Dec 2011

India: a widening scope to avoid enforcement of foreign awards

by Robert Cutler, Timothy Webb

The move towards widening the possibilities for rejecting claims for enforcement of foreign arbitral awards means that there is less certainty for those who contract with Indian companies.

In the past, Indian courts have been widely criticised for failing to enforce or recognise arbitral awards. The recent introduction of "patent illegality" as a basis for the non-enforcement of foreign arbitral awards, gives rise to a concern that this could lead to expanded judicial review of foreign arbitral awards in India.

The Indian Supreme Court recently examined "public policy" and the scope and meaning of that phrase in section 48(2) of the Arbitration and Conciliation Act 1996 in relation to setting aside a foreign arbitral award. The court decided that a foreign award can be set aside if it is found to be patently illegal (Phulchand Exports Ltd v OOO Patriot Civil Appeal 3343/2005 - 12 October 2011).

Background

The case involved a dispute between the appellant, an Indian company, and a Russian company. Under a contract made privately between them, the appellant had agreed to supply the respondent with a certain quantity of polished rice on a cost, insurance and cargo basis. The respondent paid the appellant for the rice but never received it.

As a result, the respondent lodged a claim against the appellant before a Russian arbitral tribunal and asked for recovery of the amount set out by the contract. The appellant raised a defence, but ultimately the tribunal was not convinced by its arguments.

The respondent then filed an arbitration petition before the Bombay High Court. It asked for enforcement of the award under the Act.

Under section48(2) of the Act, "[e]nforcement of an arbitral award may be refused if the Court finds that – (a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or (b) the enforcement of the award would be contrary to the public policy of India".

The appellant challenged the petition, claiming enforcement of the award was against public policy and therefore that the award should be set aside. The Bombay High Court rejected this and resolved that the award could be enforced as a decree of the Court.

The appellant then appealed to the division bench of the Bombay High Court but again the appeal was dismissed.

The appellant then appealed to the Indian Supreme Court. It argued that the meaning of "public policy" credited by the Supreme Court in the Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705, in the context of setting aside a domestic award, should also be applied to the definition of the same expression.

Decision

The Supreme Court accepted the wider meaning of "public policy" that was set out in the Saw Pipes Case over the constricted range of meaning set out in Renusagar Power Co Ltd v General Electric Co AIR 1994 SC 860. The Supreme Court decided that a foreign award can be set aside under section 48(2) of the Act if it is considered to be patently illegal. Specifically, Justice R M Lodha approved the following statement of the Supreme Court in the Saw Pipes Case:

"In our view, the phrase "public policy of India"...is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term "public policy" in Renusagar case it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void."

The court then examined the arbitral award in this case on the basis of patent illegality, but did not find it to be patently illegal. Accordingly, the court dismissed the appellant's appeal.

Conclusion

Although in this case the award in question was not found to be patently illegal, the decision is still concerning.

The Supreme Court defined the scope of the term "public policy" such that an award could be set aside if it is against the public policy of India, that is to say, if it is contrary to the fundamental policy of Indian law, the interest of India, justice or mortality or if it is patently illegal. The move towards widening the possibilities for rejecting claims for enforcement of foreign arbitral awards means that there is less certainty for those who contract with India companies.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.