India: Enforcement Of Foreign Arbitral Awards: Supreme Court Promotes A "Minimal Interference" Approach

The current judicial climate in India fosters a "minimal interference" model for courts, when it comes to matters of arbitration. Be it domestic or international arbitrations, the Supreme Court is making every effort to ensure that courts do not interfere with the arbitral process, without good reason. India is therefore bringing its arbitration regime in line with international practice, which over the years has radically shifted in favour of respecting and preserving the autonomy of the arbitral process.

In one of its recent judgments, in the case of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.,¹ (Prysmian) the Supreme Court has cautioned Courts against enthusiastically interfering with enforcement of foreign arbitral awards. In doing so, the bench of Justice R.F. Nariman, Justice Aniruddha Bose and Justice V. Ramasubramanian has discussed the scope of Section 48 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) and jurisdiction of the Supreme Court under Article 136 of the Constitution of India (Constitution) in great detail.

Relevant Facts

Respondents in the matter had initiated arbitration under the London Court of International Arbitration Rules (2014) against the Appellants, alleging material breach of certain contractual obligations. The Appellants in turn, had raised several counter-claims against the Respondents. On the issues of jurisdiction, material breaches and counter-claims raised by the Appellant, the arbitrator had pronounced three partial final awards. Subsequently, the final award was passed in April 2017.

Interestingly, the four awards in question were not challenged before the courts of England, although the provision for such challenge was available to the Appellants. These awards were challenged for the first time when they were sought to be enforced before the High Court of Bombay. However, the challenge was declined by the High Court of Bombay, stating that none of the grounds raised to resist enforcement of the awards fell within the scope of the narrow exceptions provided in Section 48 of the Arbitration Act. Thereafter, the Appellants preferred a special leave petition before the Supreme Court, under Article 136 of the Constitution.

Findings of the court

Powers under Article 136

The Supreme Court noted that in the scheme of the Arbitration Act, provision for an appeal is provided against a judgment refusing to recognise and enforce a foreign award, but not the other way around. There is no provision to bring forth an appeal against an order recognising and enforcing a foreign award. It is therefore important to remember that the Supreme Court's jurisdiction under Article 136 should not be used to circumvent the legislative policy set out in the Arbitration Act.

Bearing in mind the restricted parameters of Article 136, the Supreme Court observed that it must be very slow in interfering with cases such as the one at hand, where no provision for appeal is available against a judgment recognising and enforcing a foreign award. Interference may only be warranted in the interest of settling the law, if some new or unique point is raised, which has not been answered by the Supreme Court on any previous instance; and a judgement arising out of such intervention may be used as a trailblazer to guide the future course of litigation in that regard.

Framework concerning enforcement and recognition of foreign awards

India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention). One of the primary objectives of the New York Convention is to ensure that a party which belongs to a signatory country, and which has gotten past a challenge procedure to an arbitral award in the country of its origin, must then be able to get such award recognised and enforced in other signatory countries as soon as possible.

The New York Convention therefore provides a carefully structured framework for the review and enforcement of international arbitral awards. It envisages significantly different regimes for the review of arbitral awards in (1) the countries in which, or under the law of which, the award was made; and (2) in other countries where recognition and enforcement of the award is sought.²

Under the New York Convention, the country in which, or under the arbitration law of which, an award is made is said to have primary jurisdiction over the arbitral award. All other signatory states are said to have secondary jurisdiction. Only a court in a country with primary jurisdiction over an arbitral award may annul that award. Courts in countries having secondary jurisdiction are required to limit themselves to deciding whether the award may be enforced in that country.

Even American Courts have held that defences to enforcement under the New York Convention are to be construed narrowly in order to encourage the recognition and enforcement of commercial arbitration agreements in international contracts,³ and the arbitral awards rendered thereunder.

In view of the same, the Supreme Court revisited the position set out in Renusagar Power Plant Co. Ltd. v. General Electric Co.⁴ (Renusagar), which construed provisions of the Foreign Awards Act, 1961 that are pari materia to Section 48 of the Arbitration Act. From a plain reading of the findings in Renusagar,⁵ it becomes increasingly clear that none of the grounds set out in Section 48 postulates a challenge to any foreign award on merits, and even the defence of public policy contravention must be construed narrowly.

Additionally, an analysis of American jurisprudence in this regard shows that given the "pro-enforcement bias" of the New York Convention (which has been adopted in Section 48 of the Arbitration Act), the burden of proof which was earlier on parties seeking enforcement has now been shifted to parties objecting to enforcement. Under the guise of contravention of public policy of the country involved, foreign awards cannot be set aside by second guessing the arbitrator's interpretation of the agreement between the parties. It is well established that the challenge procedure in the primary jurisdiction gives far more leeway to Courts to interfere with an award, as compared to the narrow restrictive grounds contained in the New York Convention when a foreign award's enforcement is resisted.

Discretion of the court to enforce foreign awards

Use of the word "may" in Section 48 indicates that a residual discretion remains with the Court to enforce a foreign award, despite grounds for its resistance having been made out. While discussing the ambit of this discretionary power, the Supreme has classified grounds for resisting enforcement of a foreign award under Section 48 into three groups:

i) grounds which affect the jurisdiction of the arbitration proceedings;

ii) grounds which affect party interest alone; and

iii) grounds which go to the public policy of India, as set out in Explanation 1 to Section 48(2).

There can be no question of discretion in matters where the ground to resist enforcement is one which questions the very jurisdiction of the tribunal, such as the validity of the arbitration agreement under the governing law of the contract; or where the subject matter of dispute is not capable of settlement by arbitration under the law of India. Specifically, when it comes to the "public policy of India" ground, there would be no discretion in enforcing an award which is induced by fraud or corruption, or which violates the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice.

However, where the grounds taken to resist enforcement can be said to be (1) linked to party interest alone; (2) capable of waiver or abandonment; or (3) such that no prejudice has been caused to the party on such ground being made out, a Court may well proceed to enforce a foreign award, even if such ground is made out. The width of this discretion is however restricted to the circumstances pointed out hereinabove, in which case a balancing act may be performed by the court enforcing a foreign award.

The "natural justice" ground

The Supreme Court referred to a judgment of the Delhi High Court in Glencore International AG v. Dalmia Cement (Bharat) Limited⁶ wherein it was clarified that in order to qualify as a ground to resist enforcement, the inability to present a case as contemplated under section 48(1)(b) of the Arbitration Act must be such that it renders the proceedings violative of the due process and principles of natural justice. However, a clear distinction was carved out between cases where a party is unable to present its case, thereby rendering the arbitral award susceptible to challenge on grounds of natural justice and cases where the arbitral tribunal does not accept the case sought to be set up by a party. The latter case does not give rise to a ground as mentioned in Section 48(1)(b) of the Arbitration Act, even if the decision of the arbitral tribunal is erroneous.⁷

In English jurisprudence, a commonly applied test is checking if the party was prevented from presenting its case by matters outside its control.⁸ This will normally cover the cases wherein the procedure adopted has been operated in a manner contrary to the rules of natural justice, thereby depriving a party of a fair hearing opportunity. However, a party which has, due to matters within its control, not taken advantage of an opportunity to present its case, cannot subsequently bring itself within the exception to enforcement citing the ground of natural justice.⁹

Considering that the object of Section 48 is to enforce foreign awards, subject to certain well-defined narrow exceptions, the Supreme Court has held that the expression "was otherwise unable to present his case" occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in the context and colour of the words preceding it. Therefore, this expression connotes that breach herein can only be established if it may be shown that a fair hearing was not given by the arbitrator to the parties.

The "public policy" ground

If a foreign award fails to determine a material issue which goes to the root of the matter, or fails to deal with a claim or counter-claim in its entirety, the award may shock the conscience of the court and may be set aside on the ground of violation of the public policy of India, in that it would then offend a most "basic notion of justice" in this country.¹⁰ However, it must simultaneously also be shown that the material issue in question has not been dealt with in the foreign award, despite it being raised before the arbitral tribunal. If the material issue is brought forth for the first time before a court of enforcement as an afterthought which has no foundation in the submissions made before the arbitral tribunal, it would not fall within the scope of any of the grounds set out under Section 48.

It was also clarified that contravention of a provision of law in itself is an insufficient basis to invoke the defence of public policy, when it comes to enforcement of a foreign award. Contravention of any provision of any enactment has been held as not being 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 i.e., the basic and underlying rationale, values and principles which form the bedrock of Indian laws.¹¹

A violation of the "fundamental policy" of Indian law, as previously held in Renusagar, must mean a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible to being compromised. The Supreme Court has further stated that "fundamental policy" may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the courts in a country. A rectifiable breach under the Foreign Exchange Management Act, 1999 (FEMA), as in the case of Prysmian, was held to be an inadequate ground to qualify as a violation of the "fundamental policy" of Indian law.

Observations

The Supreme Court was of the opinion that most of the grounds raised by the Appellants in the present matter pointed towards alleged perversity of the award, which is outside the ken of Section 48. The court went so far as to deprecate the conduct of the Appellants and state that the Appellants had indulged in a speculative litigation with the hope that by flinging mud on a foreign arbitral award, some of the mud so flung would stick. Having observed as such, the court imposed hefty costs on the Appellants, possibly with a view to deter future litigants from adopting a similar approach while resisting enforcement of foreign awards. The difference between questioning the inherent unenforceability of a foreign arbitral award and questioning the contents of the award on merits has now been clearly demarcated by the Supreme Court. Litigants must exercise due caution while resisting enforcement of foreign awards before Indian courts, now that the pro-enforcement bias has been well established.

Footnotes