Bias towards enforcement of foreign awards

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners

Disputes arose between joint venture partners for the control of Ravin Cables Ltd. Prysmian, the Italian partner, invoked arbitration under the London Court of International Arbitration (LCIA) rules alleging material breaches by the Indian promoters. The promoters also alleged a breach and made counterclaims. The sole arbitrator ruled in favour of Prysmian and ordered the promoters to transfer their shareholding at a discounted price, rejecting all counterclaims. The award was not challenged under English arbitration law and Prysmian applied to the high court for recognition and enforcement.

Karthik Somasundram
Bharucha & Partners

Objections to recognition and enforcement were rejected by the high court as the grounds of challenge did not meet the criteria in section 48 of the Arbitration and Conciliation Act, 1996 (act). Since the act does not provide an appeal mechanism when a foreign award is recognized, the promoters challenged the judgment of the high court, by applying to the Supreme Court to use its inherent powers. In the case of Vijay Karia & Ors. v Prysmian Cavi e Sistemi S.r.l & Ors, the Supreme Court had to decide if the foreign award was contrary to public policy as provided under section 48(2)(b) and whether Vijay Karia had been unable to present his case before the arbitrator as alleged, and the foreign award fell afoul of section 48(1)(b) of the act.

Karia argued that the arbitrator had not considered the evidence of key witnesses, material evidence and admitted facts in making the award. It also argued that the high court had not really made a determination of all the points argued including those relating to bias, perversity and breach of natural justice. However, the court agreed with Prysmian that interference with the merits of an arbitral tribunal’s decision fell outside the scope of section 48 of the act.

Shreya Gupta
Managing Associate
Bharucha & Partners

Relying on its earlier judgment in Ssangyong (2019), which had in turn relied on the ruling in Renusagar (1994), the court noted that the New York Convention (convention) had simplified the method of recognition and rendered enforcement of foreign awards more effective. Article V of the convention does not contemplate a challenge to an award on merits. Section 48 of the act, which deals with recognition and enforcement of foreign awards passed under the convention, is similar to article V. A mistake of fact or law by the arbitrator is not a ground for refusal of enforcement of a foreign award.

In Shri Lal Mahal Ltd. (2014), the court held that challenges to a foreign arbitral award on the grounds of public policy would be limited in scope compared to domestic awards. Inquiry under section 48 does not permit review on the merits relating to procedural defects, inadmissible evidence or ignoring or rejecting material evidence. Section 48 does not afford the opportunity for a second look at the award and does not prevent enforcement on the grounds of public policy.

The court considered judgments from other jurisdictions and noted the pro-enforcement bias of the convention and the consequent narrow meaning of public policy. The court, however, agreed that if a foreign award failed to determine material issues going to the root of the dispute or failed to decide a claim or counterclaim entirely, that would offend the most basic notion of justice and to that extent could be against public policy. However, poor reasoning in the way a material issue is determined or adjudicated will not be classified as being against public policy. This defence applies only in exceptional circumstances. A foreign arbitral award must be read as a whole, fairly and without nitpicking. If the disputes are adjudicated fairly, enforcement must follow. The impugned award did not suffer from material defects and therefore was not against public policy. No review was warranted. The court also rejected Karia’s challenge to the award on grounds that transfer of shares to Prysmian at a discounted value would violate the Foreign Exchange Management (Non-debt Instrument) Rules, 2019, and therefore breach a fundamental policy of Indian law. The court disagreed. Such a breach must be of a legal principle or legislation, which is so basic that it cannot be compromised.

Relying on the Delhi High Court judgment in Cruz City (2017), the court noted that unlike the earlier regime of foreign exchange laws, transactions in violation of the Foreign Exchange Management Act, 1999 (FEMA), were not void. Violation of the FEMA rules as alleged, would not amount to an illegal activity. Approval or permission could subsequently be obtained from the Reserve Bank of India (RBI). The RBI could direct that the shares be sold only at market value or noted discounted value or may choose to condone the breach. A breach rectifiable under the FEMA cannot be in violation of a fundamental policy of Indian law.

Karthik Somasundram is a partner and Shreya Gupta is a managing associate at Bharucha & Partners.

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