Arbitration - India Supreme Court restricts scope of public policy challenges t

Arbitration - India

Supreme Court restricts scope of public policy challenges to foreign awards


In its recent judgment in Shri Lal Mahal Ltd v Progetto Granpo Spa(1) the Supreme Court held that that the expression 'public policy in India', when used in the context of Section 48(2)(b) of the Arbitration and Conciliation Act 1996 (which sets out the grounds on which the enforcement of foreign awards may be refused), cannot include patent illegality in an award as one of the grounds, as is done in context of the same expression when used in context of Section 34 of the act (which deals with enforcement of domestic awards). In so doing the Supreme Court overruled its earlier judgment in Phulchand Exports Limited v OOO Patriot.(2)

In Lal Mahal the Supreme Court endeavoured to make a distinction between awards made in India and foreign awards, with a view to limiting the scope of grounds to challenge the latter.

Facts

The case involved an agreement for the sale of durum wheat by an Indian seller to an Italian buyer. Disputes arose between the parties when the buyer alleged that the wheat supplied by the seller did not meet the specifications under the agreement and was in fact soft common wheat. Further disputes arose as to whether the inspection was to be conducted by the inspection agency based in Geneva or that based in India, and as to which agency's report was to be considered determinative.

The buyer invoked arbitration under the Grain and Feed Trade Association (GAFTA) arbitration rules and the award was rendered in favour of the buyer. A further award was also rendered in favour of the buyer against the seller's alleged breach of the arbitration agreement in bringing legal proceedings in India concerning the first dispute before it had been determined under the GAFTA rules. Aggrieved by the awards, the seller filed two appeals before the GAFTA Board of Appeal, both of which were dismissed in favour of the buyer. Subsequently, the seller also failed in its challenge to one such order of the board of appeal in the High Court of Justice at London. Both awards thus became final.

Thereafter, the buyer instituted a suit in the Delhi High Court for enforcement of the awards. The seller raised various objections, including that the awards were contrary to Indian public policy as they went against the express provisions of the contract entered into between the parties. The seller submitted before the Delhi High Court that there had been an error in accepting the test report by SGS Geneva, as under the contract it was the test report of SGS India that was material. On the other hand, it was submitted on behalf of the buyer that the grounds taken by the seller were a matter of appreciation of evidence and determination of question of fact, and were beyond the scope of the proceedings under Section 48 of the act.

The buyers submitted that the seller could not be permitted to reopen questions of fact as they had already been decided by the board of appeal and affirmed by the High Court of Justice at London. Thus, seeking enforcement of the awards, it was submitted by the buyer that there was nothing in the awards that could be said to be against public policy.

Context

In order to understand the significance of the Supreme Court's decision, it may be useful to look at the scheme of the act, as well as the law laid down previously by the Supreme Court in the context of the enforcement of foreign awards. Part I of the act pertains to domestic arbitration, while Part II pertains to the enforcement of foreign awards. Section 34 of the act provides for the manner of challenging domestic awards and Section 48 sets out the various objections that may be taken by the parties to prevent enforcement of a foreign award. However, both sections provide for an award to be challenged on the ground of being against public policy.

In Renusagar Power Plant Co Ltd v General Electric Co,(3) while construing the term 'public policy' in accordance with Section 7(1)(b)(ii) of the then Foreign Awards (Recognition and Enforcement) Act, the Supreme Court applied the principles of private international law and held that an award would be contrary to public policy if its enforcement went against:

fundamental policies of Indian law;
the interests of India; or
justice or morality.
It was held in the judgment that an award cannot be set aside on its merits.

However, the expression 'public policy' became a cause of concern when it was interpreted by the Supreme Court in ONGC v SAW Pipes Ltd.(4) The court's judgment in this case expanded the concept to add that the award would be contrary to public policy if it was patently illegal. The Supreme Court distinguished between Saw Pipes and Renusagar on the grounds that the latter was in the context of a foreign award, while the rationale of the former was confined to domestic awards only.

Thereafter, in Phulchand Exports the Supreme Court held that the meaning given in Saw Pipes to the expression 'public policy of India' in Section 34 must be applied to the same expression occurring in Section 48(2)(b) of the act. Therefore, if the award was patently illegal, it would be deemed to be against public policy and therefore serve as a ground on which the Indian court could refuse to enforce even a foreign award.

Decision

In the case at hand, the Supreme Court discussed the law laid down in Renusagar, Saw Pipes and Phool Chand. It overruled the law laid down in Phool Chand and held that the expression 'public policy' used in Section 48(2)(b) in the context of foreign awards did not cover patent illegality. The court observed that the law laid down in Renusagar with reference to Section 7(1)(b)(ii) of the Foreign Awards Act (as in place at that time) must equally apply in ambit and scope to Section 48(2)(b) of the Arbitration Act. Hence, the enforcement of a foreign award would be refused only if it is contrary to Indian public policy, which was one of the three categories enumerated in Renusagar. Although the same expression (ie, 'public policy in India') is used both in Section 34(2)(b)(ii) and Section 48(2)(b), and the concept of the term is the same in nature in both the sections, its application would differ in degree insofar as these two sections are concerned. The term's application for the purposes of Section 48(2)(b) is more limited than its application in respect of domestic arbitral awards.

The Supreme Court also affirmed that Section 48 of the act does not give the court an opportunity to have a second look at a foreign award at the award enforcement stage; neither does the scope of inquiry under Section 48 permit review of the foreign award on its merits. Procedural defects (eg, taking into consideration inadmissible evidence, or ignoring or rejecting evidence which may be of a binding nature) in the course of foreign arbitration will not necessarily lead the court to refuse the enforcement of an award on the ground of public policy.

Comment

This judgment of the Supreme Court is consistent with the recent trend of judgments rendered by Indian courts in general, which have consciously sought to reduce judicial intervention in the arbitral process with the aim of making the process swifter and less time consuming. The Supreme Court has further rightfully affirmed that while considering the enforceability of foreign awards, the court does not exercise appellate jurisdiction over the foreign award; nor does it enquire as to whether, while rendering a foreign award, some error has been committed. This judgment restricts the grounds on which the enforcement of foreign awards can be refused and takes away the ground of patent illegality, which is otherwise available to challenge a domestic award.

For further information on this topic please contact Sanjeev Kapoor at Khaitan & Co by telephone (+91 11 4151 5454), fax (+91 11 4151 5318) or email (sanjeev.kapoor@khaitanco.com).

Endnotes

(1) Civil Appeal 5085/2013.

(2) 2011_ 10 SCC 300.

(3) AIR 1994 SC 860.

(4) AIR 2003 SC 2629.