The Supreme Court of India in its judgement cleared the uncertainty regarding domestic enforcement of foreign arbitral awards in India. The judgement was regarding four arbitral awards passed by the London Court of International Arbitration (“LCIA“). The enforceability of the awards was stalled by the Appellant who approached the Bombay High Court and subsequently, the Supreme Court under Article 136 of the Constitution of India. The challenge was based on inter alia, grounds including substantive grounds as well as on the merits of the award. The aspects of appealing the rejection of an award’s unenforceability and the violation of domestic laws by enforcement of such awards, deserve special discussion.
Relevant Legal Provisions
The Hon’ble Court reasoned strongly against the practice of exhausting all possible recourse against enforcement of foreign awards. There is a provision under Section 48
of the Arbitration and Conciliation Act, 1996 (“Act
“) for challenging the enforcement of foreign arbitral awards and in this case, the Bombay High Court rejected the challenge under the said Section. Despite not having a remedy under Section 50
of the Act, the case was appealed under Article 136. The Court is granted limited jurisdiction under Article 136. The grounds of challenge were on substantive issues such as impartiality of arbitrator and lack of opportunity of being heard. The Court reasoned that such issues ought to have been dealt with at the stage of the arbitral proceedings itself. The Appellant had not brought up such issues before the LCIA but only at the stage of enforcement.
The “pro-enforcement bias” of domestic courts was highlighted under the New York Convention on Enforcement of Foreign Arbitral Awards, 1958
which clearly sits on the philosophy that the parties had a better chance at challenging the award at the lex situs arbitri compared to having a right to challenge it at the enforcement stage. The Court reasoned that issues of denial of a fair hearing would amount to a violation of natural justice principle. A lack of jurisdiction claim would nullify the award and it was opined that ought not to be discussed at the stage of enforcement at the domestic level, but at the seat of arbitration.
One of the awards directed the Appellant to sell its shareholding at a discounted price to the Respondent for material breaches of Joint Venture Agreement between them. The Act allows for a stay on enforcement of foreign arbitral awards in India for reasons inter alia, being violative of the “fundamental policy of Indian law”. The Appellant contended that such a sale at a discounted price to a foreign entity was violative of Foreign Exchange Management Rules (Non-Debt Instruments), 2019 (“FEMA
“) and thereby violative of the fundamental policy of Indian law. The Court rejected this argument citing a previous case of the Delhi High Court
which held that “fundamental policy of Indian law
” referred to as the backbone of Indian laws and not a mere violation of any individual enactment. This is pertinent to note because foreign arbitral awards are usually based on the agreed law between the parties which in several cases would be foreign law. More often than not it would be inconsistent with domestic laws.
It reasoned that if such objections were allowed then enforcement of most international awards would be impossible. This would defeat the pro-enforcement bias which is to be followed as well as the nation’s obligations under international law.
However, this does not mean that foreign awards give parties a free pass at escaping domestic laws. While the enforcement of the award is allowed, the relevant regulatory authority would step in, in this case, the Reserve Bank of India (RBI), and proceed accordingly.
The development of domestic jurisprudence in light of international law is a welcome step at harmonizing domestic laws across the world or an attempt at it by harmonizing enforceability of cross-border settlement awards. It is also a way ahead for parties trying to exhaust every available method to avoid enforcement of awards with the Court imposing hefty costs amounting to Rs. 50 Lakhs (6,60,000 USD). It acts as a deterrent for arguing such matters as a “first appeal” under Article 136 of the Constitution of India, having such a limited scope.
International commercial law is marred with issues such as these at the domestic level. On one hand, the parties spend time and considerable money to settle disputes through arbitration for speedy disposal of issues. On the other, the stage of enforcement presents new challenges which deter the timely settlement of disputes. Settlement of disputes form an integral part of ease of doing business and this development surely clears the murky waters around the same.