The law in India concerning arbitration has seen many phases and developments over the years. Its origins were contained in the 1899 Arbitration Act and the Code of Civil Procedure, 1908. Thereafter, the Arbitration Act, 1940 and the Foreign Awards Act, 1961 led the way. The 1940 Act covered only domestic arbitration and while it was perceived to be a good piece of legislation in its actual operation and implementation by all concerned – the parties, arbitrators, lawyers and the courts, it proved to be ineffective and was widely felt to have become outdated.
Then came the Arbitration & Conciliation Act, 1996 (“1996 Act”). The 1996 Act applies both to international and domestic arbitrations. It has been aligned with the UNCITRAL Model Laws from time to time to ensure that the international business community views India as a mature jurisdiction having the will and the laws capable of affording quick and smooth dispute resolution mechanisms. The 1996 Act requires the Arbitrators to give reasons for their awards unless otherwise agreed by the Parties. The purpose was to curtail the jurisdiction of the Courts in the interference of the arbitral awards.
Invoking arbitration and getting an arbitral award in one’s favour after a long and hard battle is at times only half the battle won. The main challenge is the enforcement of the arbitral award.Enforcing a judgment or an arbitral award against the counterparty can be a highly complex affair. Winning a case may represent just the first step in a long, difficult battle to recover the proceeds.
India became a signatory to the New York Convention (“Convention”) on the Enforcement of Foreign Arbitral Awards on 13 July 1961. The Convention provides for the recognition of all foreign arbitral awards provided they meet certain basic minimum standards (such as the award being in writing, and not contrary to public policy)
In theory, Indian courts may only refuse to enforce a foreign award in the limited circumstances set out in Article V of the Convention. In other words, an award rendered in one country can be taken, with relative ease, to another country and be enforced. Unlike most other Convention states, India has not officially recognised all the signatories to the Convention. Indian courts will therefore only enforce foreign awards under the Convention if they have been issued in a state that has been notified in the Official Gazette of India as a country to which the Convention applies. It is important to bear in mind, therefore, that the seat of arbitration specified in a contract should be a Convention country which has also been notified in the Official Gazette of India.
Under Section 48(1) & (2) of the 1996 Act, enforcement of a foreign award may be refused atthe request of the party against whom it is invoked, if that party furnishes proof that:
The parties to the agreement were 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
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
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
The award contains decisions on matters beyond the scope of the submission to arbitration; or
The subject matter of the dispute is not capable of settlement by arbitration under the law of India; or The enforcement of the award is contrary to the public policy of India.
Under the Arbitration and Conciliation (Amendment) Act 2015, it was clarified that an award will be in conflict with the public policy of India if:
the making of the award was induced or affected by fraud or corruption or was in made in breach of confidentiality (between the parties) or was based on evidence relating to a dispute that is subject to conciliation proceedings;
it is in contravention with the fundamental policy of India law (that is, not to be a review on the merits); or it is in conflict with the most basic notions of morality and justice.
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.
Even where international arbitration awards have been made in a notified country, enforcement in India to date has been difficult.
Court Intervention & the Public Policy Conundrum
In India, court intervention is facilitated under Part I of the 1996 Act, which applies to arbitration conducted in India and the awards thereunder. Part II provides for enforcement of foreign awards and has further been sub-divided into two distinct chapters. Chapter one deals with the Awards as regulated by the Convention; defined as per Section 44 of the 1996 Act. Chapter two deals with Awards as regulated by the Geneva Convention; Section 53 of the 1996 Act covers it. The arbitration conducted in India and the enforceability of such awards (whether domestic or international) fall in the category of Part I, whereas the enforceability of foreign awards in India, is based on the guidelines laid down in the New York Convention.
The Supreme Court of India in a number of decisions had made up its mind to follow the principle of “least interference” with foreign arbitral awards while determining enforceability of foreign arbitral awards under Section 48 of the 1996 Act.
Historic Position
The Supreme Court of India in the case of ONGC vs Saw Pipes ((2003) 5 SCC 705) greatly increased the scope of interference and continued to be followed by the courts in India.
In, Renusagar Power Plant Co. Ltd. v. General Electric Co. AIR 1994 SC 860, it was held that any interference on the merits of the decision of the arbitral tribunal would be outside the purview of Section 48 of the 1996 Act.It further held that,“the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.” Although the judgment was passed under the old arbitration regime and the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961 (“Foreign Awards Act”), it has stood the test of time including the amendments made in the year 2015 to the 1996 Act.
Recent decisions
In the case of Shri Lal Mahal Ltd. v. Progetto Grano Spa (2014) 2 SCC 433,a threeJudge 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 Convention. 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 Cruz City 1 Mauritius Holdings v. Unitech Limited (2017) 239 DLT 649 the Delhi High Court enforced a foreign award even though it may have been violative of FEMA. The Court held that the discretion to disallow enforcement is limited to the circumstances stated in Section 48, in which case a balancing act may be performed by the Court enforcing a foreign award.The Court observed that a violation of fundamental policy of Indian law must entail a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” was held to be the core values of India’s public policy as a nation, which may find expression not only in statutes but also time honoured, hallowed principles which are followed by Courts.”
In the case of NTT Docomo 2017 SCC OnLine Del 8078, the award holder sought to enforce a foreign award for damages in India. The Reserve Bank of India (“RBI”) filed an intervention application before the Delhi High Court to challenge the enforcement on the ground that the award facilitated the acquisition of shares by an Indian company from a foreign company, in a manner which would be in contravention of the provisions of FEMA. The Delhi High Court rejected the application and held that there is no provision in law which permits the RBI to intervene in a petition seeking enforcement of an arbitral award to which the RBI is not a party. The court aligned with the finding of the tribunal that the award was simply in the nature of damages, and therefore RBI permission was not a prerequisite to allow enforcement.
In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, AIR 2019 SC 5041, the Supreme Court laid down further principles on what constitutes the “fundamental policy of Indian law” and limited the scope for interference with foreign arbitral awards. It clarified the scope of the “public policy” ground for setting aside an award as amended by the Arbitration and Conciliation (Amendment) Act 2015 (“2015 Act”), and affirmed the prospective applicability of the 2015 Act.
Section 48 of the 1996 Act was further amended by the Arbitration & Conciliation (Amendment) Act, 2015 to delete the ground “contrary to the interest of India”. It was clarified that, in any case, refusal to enforce a foreign award is discretionary. Courts can choose to enforce foreign awards even if there exist some grounds of objection under Section 48.
The Amended Act 2015 now provides that while considering whether a foreign award should be enforced in India, the test to determine whether the award is in contravention with the fundamental policy of India shall not entail a review on the merits of the dispute. (Explanation to subsection (2) of Section 48 and to sub-section (1) of Section 57 of the Amended Act) This change reinforces the aim of non-interference with the enforceability of a foreign award. The Amended Act now clarifies the scope of review under Section 48 (2) (b), on the grounds of public policy. Explanation 1 to Section 48(2) (b) expressly mandates that an award will conflict with the public policy of India only if: the making of the award was induced or affected by fraud or corruption; or the award is in contravention with the fundamental policy of Indian law; or the award is in conflict with the basic notions of morality and justice. This amendment is clarificatory in nature, and reaffirms the judicial interpretation laid down by the courts, in recent times.
In the recent case of Vijay Karia v. Prysmian Cavi E Sistemi Srl 2020 SCC SC 177, decided on 13.02.2020 in relation to a foreign award,a 3-judge bench of the Supreme Court comprising of RF Nariman, Aniruddha Bose and V. Ramasubramanian, JJ held that the enforcement of a foreign award under Section 48 of the Arbitration and Conciliation Act, 1996 may be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The said grounds are watertight – no ground outside Section 48 can be looked at. The Supreme Court further held that ‘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.’.
More recently, the Bombay High Court in the case of Banyan Tree Growth Capital LLC v. Axiom Cordages Ltd Commercial Arbitration Petition bearing no. 476 of 2019, considered the objections to the enforcement of a foreign award on the ground of the award being in violation of the public policy of India, given it was allegedly contrary to provisions of Foreign Exchange Management Act, 1999 (“FEMA”) and the Securities Contracts (Regulation) Act, 1956 (“SCRA”).
This judgment has discussed in detail the law in relation to the legality of put options under the SCRA and the FEMA, issue of inadequate stamping and scope of fundamental policy of Indian law. Indian courts have time and again recognised the concept of put options, which is one of the most well-known exit mechanisms for foreign investors. The courts have granted interim reliefs in disputes involving exercise of put options and not interfered with the award granting reliefs based on put options.
Nafed Ruling: A complete U-turn by the Supreme Court
Most recently, the waters have now been muddied by the Nafed ruling, a mere two months later contrary to the decisions rendered by the Court in the recent past and more so in the light of the decision laid down by a coordinate Bench of the Court in Vijay Karia v. Prysmian SA.
The Supreme Court, in the case of National Agriculture Cooperative Marketing Federation of India v. Alimenta S.A. (“NAFED v. Alimenta S.A.”), refused to enforce a foreign arbitral award in a case dealing with groundnut export in the 1980’s. While doing so, the Court seems to have undertaken a review of the award on merits as an appellate court and arrived at its own conclusions on the parties’ liability under the contract. This is clearly not permitted under the provisions of Section 48 of the 1996 Act. As regards, the public policy argument, the Court considered a series of judgments and concluded as follows: “…
There was no permission to export commodity of the previous year in the next season, and then the Government declined permission to NAFED to supply. Thus, it would be against the fundamental public policy of India to enforce such an award, any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary.”
This conclusion has been arrived at on the presumption that grant of permission from the government to carry out supplies by NAFED is a fundamental public policy of India.
The Court also quoted Redfern and Hunter: “Even if blatant, a mistake of fact or law, if made by the arbitral tribunal, is not a ground for refusal of enforcement of the tribunal’s award.” However, the Hon’ble Court did not apply this principle despite it being approved in the recent case of Vijay Karia v. Prysmian.
In dealing with an old case when India was a closed economy, the Supreme Court has despite settled principles previously enunciated on enforcement of Foreign Arbitral Awards has taken a complete U turn!
The scope of refusing enforcement of a foreign arbitral award is extremely limited, according to the statute.
Other issues for consideration for enforcement of arbitral awards:
Jurisdiction
The Supreme Court of India has clarified that an award holder can initiate execution proceedings before any court in India where assets are located. In case, the subject-matter of the arbitration is of a specified value, commercial courts established under the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015 (“Commercial Courts Act”) would have jurisdiction.
By virtue of the Commercial Courts Act and the Amendment Act, the Commercial Division of a High Court where assets of the opposite party lie shall have jurisdiction for applications relating to enforcement of such awards if the subject matter is money. In case of any other subject matter, Commercial Division of a High Court which would have jurisdiction as if the subject matter of the award was a subject matter of a suit shall have jurisdiction, i.e., where the opposite party resides or carries on business or personally works for gain.
The Delhi High Court in the recent case of Glencore International AG vs Hindustan Zinc Limited (O.M.P. (EFA) (COMM.) 9/2019 & O.M.P. (EFA) (COMM.) 10/2019) held that a foreign award can be enforced anywhere as a deemed decree, depending on the location of the assets of the Judgement Debtor. The Court also observed that the various provisions of Order XXI of the CPC clearly held that the only relevant factor in execution of the Award was the location of the assets or the property of the JD and not the Judgment Debtor. The final Award on costs as well as the final Award on interest on costs was passed in favour of the Decree Holder.
Limitation
Courts have been of the view that the limitation period for enforcement of a foreign award would be the limitation period for execution of decrees, i.e., twelve years.
Asset Tracing
Asset Tracing is a critical aspect for the Parties to consider, even before signing the contract. Often this is not given much thought. From a commercial perspective, one does not take into calculations that a dispute may arise so what is the need to stoke fire on a wrong note, and hence this aspect is not considered very seriously.
However, when disputes do arise, the need for having conducted a due diligence of the properties is always felt in hindsight.
The Debtors may have their assets such as receivables from abroad or real estate and bank accounts, or assets like airplanes, fine art or expensive jewellry located in several jurisdictions. In such cases, the party in whose favour the award is passed needs to workclosely with their local counterparts in the jurisdiction (s) where the Debtor’s assets are located to find and freeze those assets. This puts pressure on the debtor to pay the judgment or award or, if the debtor continues to refuse or has absconded, it allows the Claimant an opportunity to foreclose against seized assets to satisfy the debt. Timing is often critical to prevent the Debtor from moving assets to yet another jurisdiction.
The ability to connect the dots and detect patterns of behaviour to help locate the Debtor’s hidden financial and physical assets is vital. One would also require to leverage legal discovery tools and proprietary asset tracing databases from reputed companies engaged in enforcement who would have developed an extensive global network of onthe-ground investigators to assist in finding assets.
There is no doubt that some judgements now and then have caused ripples, however, the Courts have by and large tried to ensure minimum intervention and the Legislature have addressed the issue of enforcement of foreign arbitral awards. The endeavour should be to preserve the spirit underlying the Act which is precisely the objective of the new amendment Act.
By Kirit S. Javali, (Advocate, Supreme Court, Partner Jafa & Javali, Advocates)
