Section 34 of the Arbitration and Conciliation Act, 1996 (Hereinafter “Act”) lays down the basis for setting aside arbitral awards made in domestic and foreign arbitrations held in India. Though international awards cannot be contested in India, the compliance of such awards in India may be validly challenged by the award debtor on the grounds set out in Section 48 of the Act. The grounds set under both these sections are almost similar, one of the grounds being that the arbitral award is found contrary to the “public policy of India”.
The question of the constituent elements of “public policy” have been discussed in a number of cases, however, in a recent case of Vijay Karia & Ors. V. Prysmian Cavi E Sistemi Srl & Ors, the SC drew attention to this point viz-a-viz foreign award. It was alleged that the arbitral award was against the “public policy of India” on the ground that it violated the Indian exchange control laws. The said judgment is important in two aspects: (a) It sets forth the scope of “due process” objection taken by the parties that they could not present their case before the tribunal; and (b) the judgment of the Delhi High court of the Cruz City has been upheld by stating categorically that a foreign arbitral award may be enforced even if it varies with the provisions of Foreign Exchange Management Act, 1999.
Facts of the Case
Ravin Cables Limited’s (Hereinafter Ravin) non-corporate owners were the appellants in the present case. Prysmian Cavi (Respondent No. 1), an Italian firm, entered into a Joint Venture Agreement (JVA) with Appellants and Ravin. Respondent No. 1 became Ravin’s majority shareholder after paying the Appellants 5 million euros in a Separate Control Premium Agreement (SCPA). Respondent No. 1 cited the Arbitration provision in terms of clause 27 of the JVA, alleging “material violations” of the JVA, namely the removal of Respondent No. 1 from Ravin’s power. The appellants replied to the demand for invocation of arbitration on March 26, 2012, with multiple counterclaims. Following receipt of the Appellants’ determination notices from Respondent No. 1 in terms of the JVA to remedy the alleged breaches remained remediless.
The London Court of International Arbitration (LCIA) then appointed a single arbitrator, whose choice the Appellant appealed to. The Appellants, on the other hand, elected not to exercise their right under the LCIA rules to appeal the nomination of the Sole Arbitrator. Respondent No. 1 lodged a statement of argument on September 9, 2012. The Appellants filed a statement of defense and counterclaims on September 28, 2012. The Sole Arbitrator granted a partial final award on the matters of jurisdiction, material violations, and admission of counterclaims, after which a final award was issued on 11.04.2017.
The final award was in favour of Respondent No. 1 that claimed, among other items, that Respondent No. 1 must take a total of 1,02,52,275 shares at a price of INR 63.9 per share, totalling INR 65,52,00,000. Even if the Appellants were not remediless, no appeal to the award was raised under English Arbitration Law, and the challenge was only made when the award was requested to be recognised in India for compliance under section 48 of the 1996 Act. On many points, the Appellants lodged appeals before a single judge of the High Court, asking that the aforementioned award not be enforced.
The award must be accepted and executed, according to the High Court single judge, since the objections did not collapse into any of the Act’s “neat legal pigeonholes.” The Appellants sought Special Leave from the Supreme Court under Article 136 of the Constitution.
Observations by the Supreme Court
The Court explained the following when rejecting the petition under Article 136 of the Constitution:-
- The terms preceding the term “was otherwise unable to present his case” has to be understood in the sense and colour of the words preceding the phrase “was otherwise unable to present his case,” i.e. this has to be an element of natural justice that would be violated only if the parties were not granted a fair trial, and this has to happen only at the time of hearing and not when the award was made. Factors outside the party’s jurisdiction, extra or fresh facts taken that forms the foundation of the award and no chance for rebuttal comes under this ambit.
- Explanation 1 to Section 48(2), states the reasons for refusing to apply a foreign award under Section 48 can be divided into three categories (i) grounds that concern the arbitration proceedings’ jurisdiction; (ii) grounds that involve only party interests; and (iii) grounds that affect India’s public policy. Only where an international award threatens to trump the most fundamental notion of fairness should it be put aside. “The international award must be read as a whole, equally, and without nitpicking,” the Court said.
- Either of the following would not come under the parameters of any of the grounds mentioned in section 48 of the Act:
a. Where it is obvious on the face of the record that the arbitrator has drawn no adverse conclusion and there has been no violation of natural justice.
b. Any ground that seems to be a spur-of-the-moment consideration that has not been presented to the learned arbitrator in light of the circumstances.
c. The perversity of the award cannot be questioned if critical proof was not considered or confessions were not made.
d. Merit-based valuation is left to the arbitrator’s discretion and lies beyond the scope of the grounds under section 48.
e. Perverse application of an agreement by an arbitrator is not a ground that can be made out under the grounds of section 48.
f. Challenges based on the unfairness of the award’s findings are forays into the merits, which are explicitly forbidden by section 48 of the Act read with the New York Convention.
4. It’s important to recognise that the Supreme Court’s Power (under Article 136) cannot be used to override statutory policy. Therefore, Supreme Court should exercise caution when interfering in such decisions, and should only hear an appeal with the aim of resolving the law if a new or unique issue is raised that has not been resolved by the Supreme Court previously. Furthermore, regardless of how inelegantly written the judgement could be, the Supreme Court may only interfere with a ruling that accepts and enforces a foreign award in a very unusual case of flagrant violation of Section 48 of the Act.
5. The Act was amended to remove the ground of “contrary to India’s interest” from Section 48. It was also necessary to restate the situation in Renusagar Power Co. Ltd. v. General Electric Co that the standard for whether there is a violation of Indian law’s basic policy would not require an examination of the dispute’s merits. Both Sections 34 and 48 of the Act, now stand similar on the ground of “public policy in India”. The ground of “public policy of India” for challenging the international commercial arbitration will be similar to the ground of refusing enforcement of foreign award in India reasons relating to patent illegality appearing on the face of the award are beyond the domain of interfering with international commercial arbitration awards made in India and foreign awards whose compliance is resisted in India, which is why it is necessary to draw attention to this provision of the 2015 Amendment Act. Therefore, the decision in the case of Sui Southern Gas Co. Ltd. V. Habibullah Coastal Power Co. rightly held that the “public policy” exception shall be narrowly viewed and the arbitral award that shocks the conscience alone would be set aside”.
6. New York Convention’s “pro-enforcement bias,” was introduced in Section 48 of the Arbitration Act of 1996, wherein the burden of proof has shifted from parties pursuing enforcement to parties objecting to enforcement. International awards cannot be put aside in the guise of the country’s national policy by second-guessing the arbitrator’s view. When an international award’s compliance is contested, the primary jurisdiction’s process allows the courts greater leeway to intervene with it than the New York Convention’s narrow restrictive grounds.
The Apex Court thus dismissed the petition and imposed a cost of Rs. 50 lakhs on the Appellants.
Conclusion
The Vijay Karia judgment clearly highlights the fact of the development of Indian Law on the subject of the enforcement of the foreign arbitral awards under the Act after the initial setbacks of the earlier cases. The judgment’s coup de grace lies in the imposition of heavy costs on the Appellants to sanction an attempt to challenge the enforcement of a foreign award on merits, when such an award was not even challenged in the seat of arbitration. The Supreme Court’s decision in Vijay Karia provides much-needed clarification and closure. It’s a major step forward in terms of maintaining arbitral awards’ dignity and shielding them from small technical difficulties. It prevents international parties from being stuck even though they have earned a favorable award. It is likely to provide a much-needed boost to foreign parties’ confidence in India as a seat.
This Article is written by Pragati Mishra, 4th year Law Student at Institute of Law Nirma University. She is interested in International Taxation, Arbitration, Conciliation and Mediation.
Libertatem.in is now on Telegram. Follow us for regular legal updates and judgments from the court. Follow us on Google News, Instagram, LinkedIn, Facebook & Twitter. You can also subscribe to our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.
