Author: Rishav Ray*
As trade becomes increasingly globalized, disputes have evolved into cross-border issues that transcend national boundaries. To steer clear of getting trapped between the conflict of laws and to avoid the dilemma of having to choose between the application of Lex Fori, Lex Domicilli, Lex loci contractus, etc. Arbitration has gradually been elevated from an “alternate means” of dispute resolution to the “preferred means.” Arbitration offers several benefits over traditional litigation, particularly in cases involving cross-border or international disputes. In India, arbitration is primarily governed by the Arbitration and Conciliation Act of 1996 (hereinafter “the Act”). Section 44 of the Act defines a “foreign award” as an arbitral award resulting from a dispute involving parties to contractual or any other kind of dispute considered commercial in India. The Act further states that the country granting the award must also be on India’s reciprocating nations list published in the Central Government’s Official Gazette.
This post examines foreign award enforcement in India in light of the Public Policy exception under Article V of the New York Convention. It also seeks to advance a comparative discourse concerning international developments to determine which end of the spectrum India currently lies on.
THE PUBLIC POLICY EXCEPTION
Under Article V of the New York Convention, the term public policy refers to the public policy of the State where the said award is to be enforced. Awards that violate or breach public policy would be rendered unenforceable. A lacuna that remains unaddressed here is the limits and the exact meaning of the term “public policy” that the drafters had in mind while penning down the provision. This has led states to exercise extensive discretion in applying the New York Convention’s rule. The House of Lords has interpreted the term as preventing a subject from lawfully doing something that would hinder public good or injure public interest.
The principle Ex dolo malo non oritur action roughly translates to“ “no court will aid a man whose reason of action is immoral or illegal.” It has become a grundnorm across common law countries, and India is no exception. It is based on such presumption that awards violating public policy cannot be enforced. The“ “public policy exception” has been widely interpreted by judiciaries across the globe, including India. However, there has been a shift in the approach of the Indian Supreme Court in the past couple of decades to promote a seamless and increased laissez-faire system.
In Renusagar Power Co. Ltd. v. General Electric Co., the Supreme Court considered public policy in international arbitration. The Supreme Court considered the difference between public policy in public international law and domestic law. The Court observed that the term public policy is too broad and cannot be used to justify barring the execution of a foreign award for breaching Indian domestic law. In Ssangyong Engineering & Construction Co. Ltd. v. NHAI, the Court held that only when the violation is such that Court’s conscience may be shocked and appalled by the violation of justice will it amount to a violation of public policy and make the award unenforceable.
The detrimental effect that such a broad and ambiguous term was having on the country’s overall economic growth was gradually realized by the Legislature, which paved the way for amendments. As a result of amendments made in 2015, the meaning of the term “public policy” may now be construed in the same manner under Sections 34 and 48 of the Act, and the scope of the definition of “contravention of public policy” has now been limited to:
- violating the fundamental principles of justice and morality,
- contravening the fundamental policy of India, and
- induced by fraud or corruption.
In Vijay Karia v. Prysmian Cavi E Sistemi SRL, the Court noted that “Fundamental Policy refers to the essential ideals of India’s public policy as a country, which may find expression not only in legislation but in time-honored, hallowed principles which are observed by the Courts.” Further, it was held that this could not be grounds for refusing to enforce an award.
In the case of Nobel Resource Ltd. v. Dharni Sampda Private Ltd., the Bombay High Court provided its definition of the fundamental policy of Indian law as that which “connotes the basic and substratal reasoning, values, and principles which constitute the foundations of legislation in India.” The Court concluded in its decision that the mere presence of inadmissible evidence was insufficient grounds to delay the execution of an award.
However, the judiciary has not been so liberal in every case. In National Agricultural Co-operative Marketing Federation of India v. Alimenta S.A., the Apex Court of India used the public interest exemption to exclude the execution of an arbitral award in accordance with Section 32 of the Indian Contracts Act, 1872. The Court ruled that the contract was null and void. Because of this, the award in question was declared invalid. In direct opposition to its own stance as expressed in decisions like Renusagar, the Court prioritized the maintenance and protection of public policy above the enforceability of a foreign judgment.
COMPARATIVE ANALYSIS IN LIGHT OF INTERNATIONAL DEVELOPMENTS
To better understand the legal position of“ “public policy exception” in India, it is prudent to analyze it in comparison with the developments in other regimes. The United States, for example, considered a violation of “the most basic notions of morality and justice” to be the only ground for denying the enforcement of a foreign award. In the Northrop Corp. case, the US Court of Appeals for the Ninth Circuit refused to entertain a plea for refusal of enforcement and clarified that public policy compliance is with regard to the country of enforcement and not the country of performance. As a signatory to the New York Convention, the UK’s judicial system must acknowledge and comply with the decisions and arbitration awards rendered by the tribunals of other nations. The courts in the United Kingdom have a history of being reluctant to deny implementing an award because it violates public policy. In the case of Soinco SACI and ors. v. Novokuznetsk Aluminium Plant and ors., the Court rejected a request to overturn an arbitration award because carrying out the terms of the award would violate the laws of the jurisdiction in which the respondent company was incorporated. Several other judgments rendered by the courts in the US and UK indicate the trend of moving towards a narrow and restrictive application of this exception.
However, similar to the situation in India, there have been instances in which courts have decided not to enforce arbitral awards because doing so would be against or is in contravention of the country’s public policy. The English Courts, in certain instances similar to the case of Alimenta S.A., have held that enforcing illegal contracts violates public policy.
The French Courts have stated that violation of public policy must be “flagrant, effective and concrete.” The Malaysian judiciary has narrowed the scope of the exception much more by holding that refusing to enforce an award on that ground should only be done in exceptional circumstances. The Courts of Hong Kong have held that, to justify a bar on an award’s enforcement, the injustice must be of such gravity that it shocks the conscience of the Court. This jurisprudence has seen a reflection in the Indian Supreme Court’s decision in the Ssangyong case, as discussed above.
The open-endedness of the restriction provided under Article V has turned into a weapon in the hands of the domestic courts, allowing them to interfere with the arbitral process. International Arbitration will be rendered toothless if there is no effective enforcement of foreign awards due to judicial interference. Foreign entities would not be willing to engage in trade with states where they are unsure of award enforcement in case a dispute arises. India has moved from a position of expansive interpretation of the public policy exception to having a much more liberal stance regarding the enforcement of foreign awards. It is evident from the judgments discussed above that India’s stance is at par with pro-enforcement developments across the globe. That being said, there are still instances where the Indian judiciary has taken a step backward and interpreted the exception widely. One such example would be the case of ONGC v. Western GECO. It is pertinent for the judiciary to strike a balance between having a pro-enforcement stance and keeping the checks and balances in place. Such a balanced approach would increase the inflow of foreign trade in the country, reduce the chances of parties ending up in fruitless litigations in foreign courts, and take India a step forward in achieving its dream of becoming a global arbitration hub.
* Rishav Ray is a penultimate-year undergraduate [B.A. L.L.B. (Hons)] student at the School of Law, Christ University Bangalore. He is interested in International Commercial Arbitration, Commercial Litigation, and White Collar Defence. He is currently serving as an Editor for International Arbitration and Trade Law at The Hague International Law Review.
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