Public Policy under section 48 of the Arbitration Act

In
the light of the decision of the Constitution Bench in BALCO, an
Indian court has no jurisdiction to set aside a foreign arbitral award under
section 34 of the Arbitration and Conciliation Act, 1996, unless the
arbitration agreement was made before 06.09.2012. One consequence of this is
that a foreign arbitral award is likely to be scrutinised by the Indian courts only if
the successful claimant attempts to enforce it in India under Part II of the
Act. Section 48 sets out the circumstances in which an Indian court
may refuse to enforce such an award (a Convention award), one of
which is that enforcement would be “contrary
to the public policy of India
”. In Renusagar, dealing with section
7 of the Foreign Awards (Recognition and Enforcement) Act, 1961, the Supreme
Court decided that the expression “public
policy
” is confined to: (i) the
fundamental policy of Indian law; (ii)
the interests of India and (iii)
justice or morality. It is well-known that the Supreme Court, in ONGC
v Saw Pipes
, construed the expression “public policy” more widely for
the purposes of section 34, holding that “patent illegality” is a ground on
which an Indian court may set aside the arbitral award.

While
it was clear that Renusagar was not
good law under section 34, doubts remained as to whether section 48 would be
governed by Renusagar or by ONGC. In Phulchand Exports v
Ooo Patriot
, a two-judge Bench of the Supreme Court (Lodha and Khehar
JJ.) held that “public policy” bears the same meaning in sections 34 and 48; in
other words, ONGC, and not Renusagar, governs section 48. Phulchand was the subject of some
criticism and a three- judge Bench of the Court (Lodha, Lokur and Kurian Joseph
JJ.) has recently overruled it, in its judgment in Shri
Mahal Ltd v Progetto Grano spa
. Shri
Mahal
is an important judgment because it emphasises that there is little
room for interference with an arbitral award at the stage of enforcement,
particularly since ONGC led to an
Indian court routinely reviewing matters of evidence or construction or
inferences from primary fact.

The
case arose out of a dispute between an Indian seller and an Italian buyer over
the conformity of the goods supplied to the contractual description. The
contract stipulated that the seller shall supply 20,000 MT of “Durum wheat” but
an inspection conducted by an agent appointed by the buyer revealed that the
goods supplied were in fact “soft wheat”, worth considerably less in the
market. This led to GAFTA arbitration, before which the seller’s principal case
was that the buyer was not entitled to appoint an inspection agent since the
contract provided that the goods would be inspected by SGS India, as indeed
they had been, prior to shipment. The Tribunal rejected this argument on the
ground that the inspection carried out by SGS India did not conform to the
contractual requirements and therefore accepted the buyers’ case on
non-conformity. Damages were awarded on the usual basis (difference between
market value and the value of the goods supplied). An attempt by the sellers to
challenge this award in the English courts failed.

The
buyers then filed an application in the Delhi High Court for enforcement of the
award, which was resisted by the sellers on the ground that to enforce the
award would be contrary to Indian public policy, since the Tribunal’s award was
contrary to the terms of the contract”:
a matter the court is entitled to consider under ONGC but arguably not under Renusagar.
In the event, the Delhi High Court concluded that the challenge was in any case
without merit and dismissed the application. Before the Supreme Court, the
sellers argued that the expression “public
policy of India
” used in section 48 of the Act was wider than the
expression “public policy” used in Renusagar. The Supreme Court rejected
this contention, affirmed Renusagar insofar
as section 48 is concerned, and overruled Phulchand.
The essence of its reasoning appears in the following passage:

28.
It is true that in Phulchand Exports , a two-Judge Bench of this Court speaking
through one of us (R.M. Lodha, J.) accepted the submission made on behalf of
the appellant therein that the meaning given to the expression “public policy
of India” in Section 34 in Saw Pipes must be applied to the same expression
occurring in Section 48(2)(b) of the 1996 Act. However, in what we have
discussed above it must be held that the statement in paragraph 16 of the
Report that the expression “public policy of India used in Section 48(2)(b) has
to be given a wider meaning and the award could be set aside, if it is patently
illegal” does not lay down correct law and is overruled.

Applying
this standard of review to the facts, the Court rejected the sellers’
contention that the Tribunal had erred in accepting the buyers’ inspection in
preference to the inspection carried out by SGS India and held that it was in
any case irrelevant because the court cannot refuse enforcement even if the
Tribunal had so erred:

43.
Moreover, Section 48 of the 1996 Act does not give an opportunity to have a
‘second look’ at the foreign award in the award -enforcement stage. The scope
of inquiry under Section 48 does not permit review of the foreign award on
merits. Procedural defects (like taking into consideration inadmissible evidence
or ignoring/rejecting the evidence which may be of binding nature) in the
course of foreign arbitration do not lead necessarily to excuse an award from
enforcement on the ground of public policy.

In
sum, this judgment makes it considerably more difficult to mount an attack on a
foreign arbitral award at the stage of its enforcement, and that is to be
welcomed.

About the author

V. Niranjan

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics