Enforcement of Foreign Arbitral Awards and Challenges

Abstract:

The enforcement of foreign arbitral awards in India, under the New York Convention, represents a significant stride in international commercial arbitration. India, an early signatory to the Convention, integrated its principles through the Arbitration and Conciliation Act, of 1996, specifically Sections 44 to 52. Challenges to enforcement primarily arise from procedural issues and the invocation of public policy norms. Indian courts, maintaining a generally pro-enforcement stance, have limited interference, particularly after the 2015 Amendment to the Act, which narrowed the grounds for resisting enforcement. The amendment clarified that public policy challenges are valid only if the award was influenced by fraud, corruption, violated specific sections of the Act, contravened fundamental Indian legal policy, or conflicted with basic notions of morality or justice. This article attempts to understand the legal framework and judicial stance in India for refusing enforcement, promoting a favorable arbitration environment, and aligning with global standards.

Key Words:

Arbitration, Arbitral Award, New York Convention, enforceability, International Awards

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, commonly known as the New York Convention, marked a significant advancement in international commercial arbitration.[1] By signing the New York Convention, states committed to recognizing and enforcing arbitral awards issued in other member countries. India was an early proponent, signing the New York Convention in 1958 and ratifying it in 1960. India enacted the Foreign Awards (Recognition and Enforcement) Act, of 1961, which was later superseded by the consolidated Arbitration and Conciliation Act, of 1996. Sections 44 to 52 of this act address the enforcement of foreign awards under the New York Convention.

The primary challenges faced by India are procedural challenges which delve into the question of the arbitral tribunal’s decision-making process and challenges based on enforcing the country’s public policy norms which are the guiding principles for any reform or socio-economic development. In India parties often invoke public policy as grounds to resist enforcement of foreign awards.

Challenges to Foreign Awards in India

Indian courts have generally maintained an excellent track record in enforcing awards under the New York Convention, typically adopting a hands-off approach despite occasional issues. The legislature also played a role by amending the Arbitration and Conciliation Act in 2015 to further limit the grounds for challenging foreign arbitral awards.

Grounds for Challenge/Enforcement of Arbitral Awards

Article V of the New York Convention sets out limited grounds under which the enforcement of a foreign award can be challenged.[2] Section 48 of the Arbitration and Conciliation Act, 1996 replicates these grounds, permitting refusal of enforcement if it violates India’s public policy or concerns non-arbitrable subject matter.[3]

Section 48(2)(b) permits refusal of enforcement if it violates India’s public policy. The 2015 Amendment added explanations to restrict this scope, stating public policy challenges are valid only if the award was influenced by fraud or corruption, violated specific sections of the Act, contravened fundamental Indian legal policy, or conflicted with basic notions of morality or justice. The amendment aims to limit the grounds on which enforcement of foreign awards can be resisted.[4]

Judicial Interpretation of “Fundamental Policy of Indian Law”

Indian Courts have clarified that the expression “fundamental policy of Indian law” does not encompass all provisions of Indian statutes but refers to the principles on which Indian laws are founded. The scope for challenging foreign arbitral awards is very narrow, as illustrated by the arbitration proceedings in the case of White Industries Australia Limited v. Republic of India (2011).[5]

An Australian firm called White Industries Limited and an Indian corporation called Coal India arbitrated this case. After receiving a positive ruling, White Industries attempted to have the award upheld in India. Unfortunately, the lawsuit was beset by delays, a well-known problem in Indian court cases, which caused the procedures to drag on for ten or eleven years. Australia filed a complaint with an ad hoc tribunal under the UNCITRAL Arbitration Rules, 1976, against India due to the delays.[6]

In this case, delays in enforcing an arbitral award led to a breach of the “fair and equitable treatment” standard, resulting in a penalty against India. This incident prompted the 2015 Amendment to the Arbitration and Conciliation Act, of 1996, significantly narrowing the grounds for refusing enforcement to just five conditions under Article 48(1).

The Supreme Court interpreted the term “fundamental policy of Indian law” broadly in ONGC v. Western Geco International Limited[7], incorporating the Wednesbury doctrine of reasonableness[8] before the legislature could take up the Law Commission of India’s recommendations. Three legal principles that, in the Supreme Court’s opinion, would inevitably be interpreted as integral components of the fundamental policy of Indian law were mentioned in Western Geco, without fully listing the meaning of the phrase “fundamental policy of Indian law.” These three well-known legal precepts were: (i) taking a judicial approach; (ii) upholding natural justice; and (iii) demonstrating the absence of perversity or irrationality by testing using the reasonableness standard established by Wednesbury.

The Supreme Court further strengthened the idea of the fundamental policy of Indian law in the case of Associate Builders v. Delhi Development Authority[9], which followed Western Geco. This included the three juristic principles—judicial approach, natural justice, and absence of perversity or irrationality—as well as the violation of FERA and disregard for superior courts. It goes without saying that the aforementioned ideas and examples were not all-inclusive and might be expanded upon.  In the end, the Law Commission of India’s recommendations from the Supplementary Report were accepted, and on October 23, 2015, the Act was changed.[10]

The highest court in the land was required to adopt, interpret, clarify, and elucidate (where necessary) the scope of public policy grounds for annulling arbitral awards following amendments made by the 2015 Amendment since the law governing arbitrations in India underwent significant changes.

The Judicial Backdrop of Enforceability of International Awards

Booz-Allen & Hamilton Inc. v. SBI Home Finance Limited (2011)[11] and A. Ayyasamy v. A. Paramasivam (2016)[12] in interpreting Section 48(2)(a) identified several non-arbitrable subjects under Indian law, such as disputes involving criminal offenses, matrimonial disputes, insolvency matters, and others. This list is not exhaustive but provides a broad overview of subjects excluded from arbitration under Indian law.

Renusagar Power Co. Ltd v. General Electric Co. (1993)[13] remains a landmark case, outlining three conditions for non-enforcement on public policy grounds: if the award is contrary to the fundamental policy of Indian law, violates the interests of India, or goes against basic notions of justice and morality. The Supreme Court ruled, in this case, that an award that contravenes the Foreign Exchange Regulation Act, 1973 (“FERA”), a regulation designed to protect the country’s economic interests, would be against both Indian public policy and the core principles of Indian law. The Supreme Court noted in the same ruling that disobeying instructions from higher courts would have a negative impact on the administration of justice. As a result, an award made in this manner would likewise be in breach of the fundamental principles of Indian law. [14] Crucially, the Supreme Court also ruled that something more than just breaking the law was necessary in order to attract the attention of public policy.[15] But instead of delving into the subject of what methodology the courts should use to determine whether the award violated any fundamental policies of Indian law, the Supreme Court just provided a few examples based on the case’s facts. The Law Commission of India also suggested limiting the concept of “public policy” in order to align it with the interpretation that the Supreme Court had provided after this ruling.

A decade later, the Supreme Court held in ONGC Limited v. Saw Pipes Limited[16] that an award could be set aside if it was obviously illegal in addition to the more restrictive definition of “public policy” in Renusagar. The Court examined the grounds on which an award can be set aside under Section 34 of the Act.[17] Given the then-statutory language of the Act, the Supreme Court in Saw Pipes, unfortunately, extended its interpretation of “public policy” to apply equally to awards arising out of international commercial arbitrations as well as foreign awards, despite its goal of broadening the scope of inquiry to set aside an award in purely domestic arbitrations.

The Law Commission of India recommended in 2014 that Section 34 (2A) be added to the Act to deal with purely domestic awards. This would eliminate the unintended consequences of Saw Pipes and allow for the award to be set aside if the Court determines that the award is vitiated by “patent illegality appearing on the face of the award.”[18] The Law Commission of India also suggested limiting the concept of “public policy” in order to align it with the meaning put forward by the Supreme Court in the Renusagar case.[19]

The interpretation of “public policy” was further clarified in Shri Lal Mahal Ltd v. Progetto Grano Spa (2013).

Regarding the enforcement of a foreign award, the Delhi High Court ruled in Cruz City 1 Mauritius Holdings v. Unitech Limited[20] that violating any provision of an enactment does not equate to violating the fundamental policy of Indian law, and that the aforementioned expression refers to the guiding principles and legislative policy that form the basis of Indian statutes and laws. The Delhi High Court continued by saying that the term “fundamental policy” refers to the underlying ideas, beliefs, and principles that serve as the cornerstone of our nation’s legal system.[21] As a result, the Delhi High Court aimed to offer a far more precise description of what would qualify as a breach of an essential principle of Indian law. It was made clear that simply breaking an enactment or legislation would not violate the fundamental policy of Indian law; rather, the violation would need to demonstrate that it violates one of the fundamental principles of Indian legislative policy, which the nation cannot be expected to compromise.

Remarkably, the Delhi High Court decided in Cruz City that, in contrast to a breach of a FERA provision, a simpliciter infringement of any provision of the Foreign Exchange Management Act, 1999 (“FEMA”), the successor to FERA, shall not be deemed equivalent to violating the fundamental policy of Indian law.[22]

As a result, the extent of the Cruz City infringement of a FEMA provision that runs counter to fundamental Indian legal policy was significantly reduced in comparison to the Renusagar violation of the FERA.[23]

In the recent case of Vijay Karia and Ors. v. Prysmian Cavi E Sistemi SRL and Ors.[24], the Supreme Court upheld the Cruz City ruling from the Delhi Court. It reaffirmed the limited grounds for refusing enforcement under the New York Convention, emphasizing that statutory contraventions do not equate to violations of fundamental policy.

Regarding the scope of challenges to awards based on violations of India’s fundamental policies[25], the Supreme Court noted the following:

“The fundamental policy of Indian law, as has been held in Renusagar (supra), must amount to 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” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honored, hallowed principles which are followed by the Courts.” [26]

In the case of Home Care Retail Marts Pvt. Ltd. v. Haresh N. Sanghavi[27], the Bombay High Court overturned the forfeiture of security deposit award where the party seeking damages could not provide evidence of loss or harm, citing the violation of fundamental policy of Indian law as the reason. The Bombay High Court overturned a liquidated damages decision in Sandhya Nayak v. Larsen and Toubro Infotech Ltd.[28] because the employer had failed to provide proof of actual loss or damage in the event that an employee was fired for violating an employment contract.

As a result, awards that were granted without proof of loss or harm have been overturned by the courts on the grounds of fundamental policy of Indian law.[29] The requirement of proving damages has been seen by the courts as a long-standing legal norm that is inviolable under Indian law.[30] However, it is evident that in each of the aforementioned cases, the party seeking damages did not present any evidence of loss or harm, nor did they make any argument that the case’s facts made it difficult to determine the actual amount of loss.[31] As a result, the Bombay High Court found that an Indian legal fundamental policy had been broken.

Conclusion

The scope for judicial interference in foreign arbitral awards in India is distinctly limited, a stance solidified by the 2015 Amendment to the Arbitration and Conciliation Act, of 1996. This amendment has streamlined and clarified the grounds for refusing enforcement, particularly in relation to public policy and subject matter arbitrability, thereby reinforcing India’s position as a favorable jurisdiction for arbitration. The amendment aligns with international arbitration norms, thereby promoting foreign investment by ensuring predictability and stability in the enforcement of arbitral awards.

The term “fundamental policy of Indian law” encapsulates a broad set of principles that have been meticulously developed by the Supreme Court of India, starting from Renusagar Power Co. Ltd v. General Electric Co. to the more recent Vijay Karia & Ors v. Prysmian Cavi E Sistemi SRL & Ors. In the Vijay Karia case, the Supreme Court emphasized that the term refers to legal principles or enactments that are so intrinsic to Indian law that they cannot be compromised. This interpretation now serves as the standard for judging awards alleged to violate the fundamental policy of Indian law, ensuring that courts are conscious of their limited role under the scheme of the Act.

However, the recent interpretation by the Bombay High Court has broadened the scope of the fundamental policy of Indian law, particularly in the context of proving loss or damage in a claim for damages. The court has effectively elevated the general principles governing Sections 73 and 74 of the Indian Contract Act, of 1872, to the status of fundamental policy. This interpretation implies that the absence of proof of loss or damage, instead of being merely a breach of the Contract Act, could now be treated as a breach of the fundamental policy of Indian law. This broad interpretation could potentially revert the legal landscape to the pre-2015 Amendment era, where the grounds for challenging arbitral awards were more expansive.

By treating the principle of proving loss or damage as a fundamental policy, the Bombay High Court may have inadvertently opened the floodgates for future challenges on this abstract ground. If courts routinely analyze whether the party claiming damages has actually proved loss or damage, it would necessitate a review of the merits of the dispute. This is contrary to the legislative intent of ensuring minimal judicial interference in arbitral awards.

The judiciary in India must adopt a narrow approach while setting aside awards on the grounds of breach of the fundamental policy of Indian law. This narrow interpretation is crucial to uphold the legislature’s intention of minimal interference by courts. The broader interpretation risks undermining the predictability and efficiency of the arbitration process, potentially deterring foreign investment and international commercial parties from choosing India as a seat for arbitration.

The legislative amendments and judicial interpretations collectively aim to foster a pro-arbitration environment in India. The judiciary’s role is to ensure that while fundamental principles of Indian law are protected, this does not extend to a general review of the merits of the arbitral award. By maintaining this balance, India can enhance its reputation as an arbitration-friendly jurisdiction, promoting the efficient and fair resolution of international commercial disputes.

Thus, it is imperative for Indian courts to adhere to a narrow interpretation of the fundamental policy of Indian law. This approach aligns with international standards and reinforces the legislative intent of minimizing judicial interference. By doing so, India can continue to attract international commercial arbitration, thereby bolstering its economic and legal standing on the global stage.

References:

1. Secretariat, U. N. C. I. T. R. A. L. Guide on the convention on the recognition and enforcement of foreign arbitral awards: New York, 1958. Brill, 2017.
2. Kronke, Herbert, Patricia Nacimiento, and Dirk Otto. Recognition and enforcement of foreign arbitral awards: a global commentary on the New York Convention. Kluwer Law International BV, 2010.
3. Martinez, Ramona. “Recognition and Enforcement of International Arbitral Awards Under the United Nations Convention of 1958: The” Refusal” Provisions.” The International Lawyer(1990): 487-518.
4. Gandhi, Vikas H. “Recent Developments in Indian Arbitration.” Asian Journal of Research in Social Sciences and Humanities2 (2018): 135-145.
5. White Industries Australia Ltd v India IIC 529 (2011)
6. Nacimiento, Patricia, and Sven Lange. “White Industries Australia Limited v The Republic of India.” ICSID review2 (2012): 274-280.
7. ONGC v. Western Geco International Limited (2014) 9 SCC 263.
8. Associated Provincial Picture Houses Ltd. v Wednesbury Corporation [1948] 1 KB 223
9. (2015) 3 SCC 49
10. Report No. 246, Amendments to the Arbitration and Conciliation Act, 1996, Law Commission of India, Government of India, August, 2014 ¶ 18.
11. AIR 2011 SCC 2507
12. ((2016) 10 SCC 386)
13. 1994 Supp (1) SCC 644
14. Ibid, ¶ 76 & 85
15. Ibid, ¶ 65
16. (2003) 5 SCC 705
17. Ibid, ¶ 31
18. Ibid
19. (2017) 239 DLT 649
20. Ibid, ¶ 97
21. Ibid, ¶ 97
22. Ibid, ¶ 108
23. 2020 SCC OnLine SC 177
24. Ram Chander v. Union of India, O.M.P. (COMM) 5/2015 and IA No. 20103/2015, decided on August 28, 2017 (Delhi HC
25. 2020 SCC OnLine SC 177
26. 2019 SCC OnLine Bom 392
27. 2019 SCC OnLine Bom 6665
28. Anila Gautam Jain v. Hindustan Petroleum Corporation Limited, 2018 SCC OnLine Bom 917
29. Creative Engineers v. Union of India, Arbitration Petition No. 610 of 2016, decided on November 29, 2018 (Bombay HC)
30. Union of India v. Recon, Arbitration Petition (L) No. 1293 of 2019, decided on February 13, 2020 (Bom HC) 

 

[1] Secretariat, U. N. C. I. T. R. A. L. Guide on the convention on the recognition and enforcement of foreign arbitral awards: New York, 1958. Brill, 2017.

[2] Kronke, Herbert, Patricia Nacimiento, and Dirk Otto. Recognition and enforcement of foreign arbitral awards: a global commentary on the New York Convention. Kluwer Law International BV, 2010.

[3] Martinez, Ramona. “Recognition and Enforcement of International Arbitral Awards Under the United Nations Convention of 1958: The” Refusal” Provisions.” The International Lawyer (1990): 487-518.

[4] Gandhi, Vikas H. “Recent Developments in Indian Arbitration.” Asian Journal of Research in Social Sciences and Humanities 8.2 (2018): 135-145.

[5] White Industries Australia Ltd v India  IIC 529 (2011)

[6] Nacimiento, Patricia, and Sven Lange. “White Industries Australia Limited v The Republic of India.” ICSID review 27.2 (2012): 274-280.

[7] ONGC v. Western Geco International Limited (2014) 9 SCC 263.

[8] Associated Provincial Picture Houses Ltd. v Wednesbury Corporation [1948] 1 KB 223

[9]  (2015) 3 SCC 49

[10] Report No. 246, Amendments to the Arbitration and Conciliation Act, 1996, Law Commission of India, Government of India, August 2014 ¶ 18.

[11] AIR 2011 SCC 2507

[12] ((2016) 10 SCC 386)

[13] 1994 Supp (1) SCC 644

[14] Ibid, ¶ 76 & 85

[15]  Ibid, ¶ 65

[16]  (2003) 5 SCC 705

[17] Ibid, ¶ 31

[18] Supra note 10, ¶ 35

[19] Ibid

[20] (2017) 239 DLT 649

[21] Ibid, ¶ 97

[22] Ibid, ¶ 97

[23] Ibid, ¶ 108

[24] 2020 SCC OnLine SC 177

[25] Ram Chander v. Union of India, O.M.P. (COMM) 5/2015 and IA No. 20103/2015, decided on August 28, 2017 (Delhi HC

[26] 2020 SCC OnLine SC 177

[27] 2019 SCC OnLine Bom 392

[28] 2019 SCC OnLine Bom 6665

[29] Anila Gautam Jain v. Hindustan Petroleum Corporation Limited, 2018 SCC OnLine Bom 917

[30] Creative Engineers v. Union of India, Arbitration Petition No. 610 of 2016, decided on November 29, 2018 (Bombay HC)

[31] Union of India v. Recon, Arbitration Petition (L) No. 1293 of 2019, decided on February 13, 2020 (Bom HC)