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Execution of foreign arbitral awards - Position in India and analysis thereof

-By Divya Sharma, Sr. Associate, Delhi Office

Introduction

Arbitration in India is governed by the Arbitration and Conciliation Act, 1996 which prescribes the manner in which the proceedings are to be conducted and the awards are to be enforced. Part I of the Act deals with the domestic arbitration, while Part II of the Act deals particularly with the enforcement of certain foreign arbitral awards. India only recognizes foreign arbitral awards given by such of the countries that are specifically included in the notification by the Central Government who are also signatories to the New York Convention. Section 44 defines a ‘foreign award’ as follows:

“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 New York Convention applies.”

In “RM Investments Trading Co Pvt. Ltd v. Boeing Co & Anr”, the Supreme Court interpreted the term “commercial relationship” where it said that the term commercial must be construed in a manner to include matters arising from all relationships of commercial nature, whether contractual or not.

Enforcement of Arbitral Awards under Arbitration and Conciliation Act.

The conditions for the enforcement of arbitral awards is prescribed in Section 48 of the Act which says that the enforcement of the arbitral award may be refused by the court in any of the certain situations as follows:

  • If the party under the agreement is not a valid party due to some incapacity, under the law applicable to it or under the law of the country where award was made.
  • If the party was not given proper notice before the arbitration proceedings commenced.
  • If the award given deals with the matters beyond the scope of arbitration clause empowered by the agreement.
  • If the composition of the arbitral authority or the arbitration proceedings was not in consonance with the agreement or the laws of the country where the agreement was made.
  • If the award is not binding or has been set aside or suspended by any competent authority of the country in which the award was made.
  • If the subject matter of the dispute or difference is not capable of being settled by arbitration according to the laws of India.
  • If the execution or enforcement of the foreign award will be against the public policy of India.

 

Therefore, because of so many conditions as mentioned above the courts in India have become very liberal at interpreting whether these foreign awards be enforced due to broad terms such as “Public Policy” and “laws of the country where award was given” which concepts are nowhere defined in New York or the Geneva Convention and the Courts have, in many instances refused the enforcement or execution of an award.

While in “Renusagar Power Co. Ltd. v. General Electric Co.” it was held that a mere violation of Indian Laws would not be sufficient to be equivalent to the violation of “Public Policy”. But, in “ONGC v. Saw Pipes Ltd.”, the term public policy was interpreted, and it was stated that an arbitral award shall not be valid and is liable to be set aside if it is against the fundamental policy of Indian law, interest of India, Justice or Morality or if it is patently illegal. Further with the rulings in the cases of “Venture Global v. Satyam Computers” and “Bhatia International v. Bulk Trading S.A.”, in which it was said that the foreign arbitral awards can be subjected to Section 34 of the A & C Act which later became consolidated ratios for numerous petitions made by parties against whom arbitral awards were made. Thus, these rulings became lifesavers in the name of precedents to be used by parties to escape their liability by using broad perspective of patent illegality and public policy. After this by the virtue of the broad test of public policy given in the Saw Pipes case being applied in case of “Phulchand Exports Ltd. v. O.O.O Patriots”, any party could now use the standards laid down to challenge the arbitration and could reopen the case for the issues to be completely determined again by the court which meant that the award cannot be enforced in India until all the actions taken by the arbitration are reviewed.

The Lifesaver Rulings and Pro-Arbitration Approach

This actually made dispute resolution a very tiresome procedure and the arbitration was losing its significance. Then came a ruling of the Supreme Court in the case of “Shri Lal Mahal v. Progetto Grano S.P.A.”, where an award was passed in London under the local rules of Grain and Trade Feed Association of London and was objected to in India under Section 48 of the Indian Act of 1996 for being against the terms of the contract, being patently illegal leading it to be against public policy. The Supreme Court, overruling the decision given in Phulchand case, said that patent illegality is an issue to be dealt under Section 34 of the Act to set aside the award and shall not be covered under Public Policy in Section 48 and such element must be checked to challenge the validity of the award rather than at the time when the award gets final and is up for enforcement under section 48. By the case of “Bharat Aluminium Co.v. Kaiser Aluminium Technical Services” (the Balco case), the ruling in the Bhatia International v. Bulk Trading S.A was overruled and it was held that the applicability of part I of the A&C Act will now be limited to arbitrations having their place or seats in India and not to the foreign arbitral tribunals and that the Indian courts will not have the power to interfere with the awards by giving the interim relief when the seat of arbitration is outside India and will be subjected to the interference of the courts in India only under Part II of the A&C Act. However, it was held in various decisions like “Reliance Industries Limited and Anr. v. Union of India” of Supreme Court and “Yograj Infrastructure Ltd. vs. Ssangyong Engg. And Construction”, that the ratio laid down in Balco case will only apply prospectively to the cases where the contract was executed after the Balco case. In a recent ruling “Oil and Natural Gas Corporation Ltd. v. Western Geco International Ltd.” has explained the phrase “fundamental policy of Indian Law”, an element to prove that the award is against the public policy by giving three ingredients that must be satisfied failing which the award will be against the fundamental policy of India which are (a) judicial approach by the tribunal; (b) principles of natural justice (c) rationality and reasonableness.

Conclusion

After these judgments, the arbitration in India got revived, after being on the verge of extinction, through an Amendment of the law. It was in 2015 that this Indian law (Arbitration & Conciliation Act, 1996) was amended, which amendment has clarified that though the Indian Courts shall have jurisdiction to interfere with Foreign Awards in case of “International Commercial Arbitrations having seat of arbitration outside India”, the final award shall not be interfered by the Indian Courts, on merits, unless the Award under challenge:

  • Is such that the subject matter of the relevant dispute is not capable of being settled by arbitration;
  • Is such that it conflicts with the ‘Public Policy’.

The Amendment further clarifies that an Award shall conflict with ‘Public Policy’ only if the making of the Award is -  

  • induced or affected by fraud or corruption or was in violation of Sections 75 and 81 (violation of confidentiality & admissibility of evidence in conciliation proceedings);
  • in contravention with the fundamental policy of Indian law;
  • in conflict with the most basic notions of morality or justice.

 

The above amendment shall now ensure that there exists a uniform standard for setting aside the awards – in both domestic & international commercial arbitrations – in conformity with the Supreme Court decision in the Renusagar case and Shri Lal Mahal case. 

Therefore, the appropriate procedure of the examination of challenge of awards by the courts now include that they do not expand the grounds for refusal of enforcement; must review the award strictly as per the Act; do not involve themselves in the merits of the case and be expeditious in approach to ensure efficiency and effectiveness of arbitration and to uphold its basic essence. Though the amendment is welcoming in its approach, still it has failed to clarify various issues related to enforcement of arbitral awards in India such as the distinction between venue and seat of arbitration; enforcement of emergency arbitral awards; exclusion of public policy as a requirement for enforcement of arbitral awards if the arbitration seat is chosen outside India.

The above Amendments are in sync with and in fact, are an outcome of the Judicial Precedents

We are aware that the case of ONGC v Saw Pipes (2003) 5 SCC 705 considered the scope of the term ‘Public Policy of India’ in the context of challenging an Arbitral Award. The Supreme Court in this case held that an arbitral award which is ‘patently illegal’ violates the Public Policy of India. This empowered the courts to re-open the merits of the case while considering a challenge to the Award.

The above decision was applied all over again in the case of Phulchand Export Ltd v OOO Patriot and accordingly to some, a worrying precedent was set by Supreme Court of India by allowing parties to challenge enforcement of a foreign arbitral award on grounds of patent illegality. In applying the ONGC Case decision, the Supreme Court held in the Phulchand Case that a patently illegal award violates the public policy of India and therefore the Indian Courts were entitled to re-look at the merits of the case even in enforcement proceedings.

However, the above worrisome precedent was over-ruled by the Supreme Court, in its latter decision in Shri Lal Mahal Ltd v Progetto Grano Spa where it expressly overruled Phulchand decision and declined to consider the merits of a foreign arbitral award in an enforcement proceeding. The decision in Shri Lal Mahal represents another significant pro-arbitration step taken by the Indian Supreme Court in recent times.

A three-Judge Bench of the Supreme Court speaking through Justice RM Lodha (who was interestingly also the author of the decision in the Phulchand case), overruled Phulchand decision and accepted the contentions to the contrary. The court held that during setting aside proceedings, the arbitral award is not yet final and executable and this is in contradistinction to a challenge during enforcement where the award is final and binding. On this basis, the court refused to apply the definition of the term ‘Public Policy’ as applied in the context of setting aside proceedings and as laid down in ONGC v Saw Pipes (and re-confirmed in Phoolchand Case) in the context of a challenge during an enforcement action. Here the Court followed the decision in Renusagar case and held that enforcement can only be opposed on grounds of public policy where it is contrary to:

  • Fundamental policy of Indian law;
  • The interests of India; or
  • Justice and morality.

The Court expressly declined to allow a challenge to the Foreign Award on the grounds of ‘patent illegality’.