Clarifications to the Cruz City 1 Holdings Case: What really happened in Renusagar v. General Electric?

[The
following guest post is contributed by Suprotik Das, a 5th year law student at the Jindal Global Law
School, Sonepat, Haryana.]
On April 11, 2017, the Delhi High Court rendered a judgement
in the case of Cruz City 1 Mauritius Holdings v. Unitech Limited.
As mentioned in this blog
earlier
, this case dealt with enforcement proceedings of a foreign arbitral
award. Unitech Ltd. (the Indian party) argued against the enforcement of such
an award as it dealt with the exercise of a put option with a fixed/assured
rate of return. Put options with a fixed rate of return are against the
provisions of the Foreign Exchange Management Act, 1999, A.P.
(DIR Series) Circular No. 86 dated January 9, 2014
and A.P.
(DIR Series) Circular No. 3 dated July 14, 2014
. As a result, Unitech Ltd.
argued that this award was against ‘public policy’ under section 48 of the
Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).
In coming to this conclusion, the Delhi High Court had
extensively referred to an earlier Supreme Court Case of Renusagar Power Co. Ltd.
v. General Electric Co.
[1] (‘Renusagar’) which dealt with a similar fact
pattern. However, Renusagar itself is
fraught with several problems, and a mere mechanical application of this by the
Delhi High Court has resulted in some serious ramifications. In this post, I
will be exploring what the Supreme Court had actually held in the Renusagar case.
The Renusagar case – the first head of the hydra
For the purposes of this post, I will be restricting my
discussion to the public policy aspect of the case, as this was heavily relied
upon by the Delhi High Court in Cruz.
In Renusagar, an arbitral award was
passed for a sum of USD 2,130,785.52 in favour of General Electric Company
(‘GE’). Renusagar immediately contested the enforcement proceedings of this award
before the Bombay High Court and alleged that the enforcement of the said
foreign award was against ‘public policy’ under section 7(1)(b)(ii) of the then
Foreign Awards Act, 1961 (‘Foreign Awards Act’), and hence that the award ought
not to be enforced. The Court went on to an elaborate discussion as to the
width and scope of the expression ‘public policy’ in section 7(1)(b)(ii) and
concluded that it meant ‘public policy as applied by the Courts of India’.
In paragraph 65 of Renusagar,
the Court opined that ‘public policy’ covers the field not covered by the words
‘and the law of India’, such that contravention of law alone will not attract
the bar of public policy and something more than contravention of law is
required.
Something more
than the violation of the law in India
Paragraph 66 of the case is essentially where the
problem starts. The Court referred jointly to article V(2)(b) of the New York
Convention and section 7(1)(b)(ii) of the Foreign Awards Act and
concluded that they did not contemplate non-recognition and enforcement of a
foreign award on the ground that it was contrary to the law of the country of enforcement. Any ground of infirmity of a
foreign arbitral award had to be pitted against the public policy of the
country, in the country of enforcement of such an award.
Furthermore, the Court stated that there was nothing to
indicate that the meaning of ‘public policy’ in the above two statutes was used
in pari materia with article I(c)
of the Geneva Convention of 1927 and section 7(1) of the Protocol and
Convention Act of 1937. Accordingly, it was opined that public policy ought to
be construed in a narrow sense such that ‘in
order to attract the bar of public policy the enforcement of the award must
invoke something more than the violation of the law of India.’
The Court
finally concluded that if a foreign award was contrary to: (i)
fundamental policy of Indian law; or (ii) the interests of India; or (iii)
justice or morality, then it would be hit by the infirmity of being against the
public policy of India, and would thus be unenforceable. This expression now
finds place in explanation 1 of the amended section 48 of the Arbitration and
Conciliation Act, 1996.
Violation of FERA
equals violation of public policy
Strangely, the Supreme Court did not resonate with its
reasoning in the earlier paragraphs. In paragraph 76, the Supreme Court had
stated that the provisions contained in the Foreign Exchange Regulation Act,
1973 (‘FERA’) have been enacted to safeguard the economic interests of India
and any violation of the provisions would be contrary to the public policy of
India as envisaged in section 7(1)(b)(ii) of the Foreign Awards Act.
In doing this, the Supreme Court completely ignored its ‘something more than the violation of the law of India’ approach and
essentially stated that if there is a foreign award that was is a violation of
the provisions of the FERA, it would be against the public policy of India as
per section 7(1)(b)(ii) of the Foreign Awards Act.
Arbitral award
not against FERA
Mr. K.K. Venugopal, appearing for Renusagar, argued that
the arbitral award was against section 47(3) of the FERA. The Supreme Court
interpreted section 47(3) of the FERA in light of the erstwhile section 21 of
the FERA, 1947 by referring to the case of Dhanrajamal Gobindram v. Shamji Kalidas & Co.[2] and
stated that section 47(3) allowed legal proceedings to be brought to recover
sum due as a debt, damages or otherwise, but no steps would be taken to enforce
the judgment, except to the extent permitted by the Reserve Bank of India. Mr.
Venugopal subsequently argued that section 47(3) postulated seeking of
permission first, and where permission was sought but refused by the government
earlier, section 47(3) was inapplicable. The background to this argument was
that Government of India had rejected a plan to reschedule payment of interest
instalments as it would have resulted in larger outflow of foreign exchange. However,
the Court did not accept Mr. Venugopal’s argument. Previous refusal by the
Government to give an approval for rescheduling of payment of instalments did
not mean that the Government would not allow enforcement of the award in the
present proceedings, in light of subsequent developments.
Not surprisingly, the Court held that the award was not
in violation of any of the provisions of the FERA and was, therefore, not
contrary to the ‘public policy of India’. This also meant that the award was
enforceable in light of section 7(1)(b)(ii) of the Foreign Awards
Act.
Conclusion
If an award has to be against the public policy of India
and is to be set aside (termed as ‘C’) and if ‘something more than the violation of the law in India’ can be
termed as ‘A + B’, where A stands for violation of a law and ‘B’, for something
more, it necessarily means that ‘A + B’ = ‘C’.
The Supreme Court had later stated that if an award
violated FERA, it meant that it was in contravention with the ‘public policy of
India’. This essentially means that notwithstanding the ‘A + B’ = ‘C’ approach,
in practice, the Supreme Court has resorted to ‘A’ = ‘C’ and has ignored ‘B’.
Therefore, the perplexing conclusion is that we are at
odds with the application of the two approaches as the Supreme Court has
enunciated approach ‘A + B’ but has followed approach ‘A’. It is no consolation
to say that the arbitral award was compliant with the FERA in this case.
In a post to follow, I will be analysing how the Delhi
High Court has applied Renusagar and
the other cases in the context of ‘public policy’ under section 48 of the
Arbitration Act to justify a violation of the Foreign Exchange Management Act,
1999.
– Suprotik Das



[1] 1994 Supp (1) SCC 644.

[2] (1961) 3 SCR 1020.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

5 comments

  • While you are right to claim that the violation of a law in force in India simpliciter would not violate public policy, in certain cases the law itself might be of such nature that its mere violation is contrary to public policy. This is because the law being derogated forms the essential feature of the public policy in India. For instance, amendment to a fundamental right will not violate basic structure per se but some fundamental right might be so fundamental that any alteration of itself will violate the basic structure. In the present context, in Renusagar the Supreme Court has held that the particular provision of FEMA forms an essential component of the public policy and thus cannot be derogated. On the other hand, in the instant case, the Court might have reached the conclusion that the provision of FEMA being violated by allowing enforcement did not form an essential feature of the public policy of India and in absence of other surrounding factors enforcement action cannot be declined.

  • In today’s abundantly, and overpoweringly, globalized economy, the point of sharp poser, craving for a truthful answer, is this: -Should not the age old concept of ‘public policy’ need to be given a ultra-fresh look and suitably but inevitably modified, for universal adoption ?

    Offhand: The contents of the write-up @ http://htmedialtd.livemintalerts.com/tr/r/2/475641/190606/dnN3YW1pbmF0aGFuMTNAeWFob28uY29t/10/W10%3D may be found to be of contextual relevance, in general; and the quote of economic wisdom advocated by Adam Smith, in particular !

  • Craving leave to ADD:

    Another equally old, if not older, concept, with a common prefix- ‘public’ that is of contextual relevance is ‘public interest’. Again, its relevance has assumed greater significance in matters of concern in the broader international perspective; for instance, with regard to administration and adjudication of domestic tax laws, in relation to foreign entities, hence having cross-border implications.

    In the published article- “Tax Treaties and Nuisances of Case Law” (2007) 227 ITR 17, accordingly, the viewpoints shared read:

    Q

    “….more importantly, in respect of a dispute of the same or similar kind as in … case, it appears that, the crying need of the hour is that our constitutional experts and jurists must address themselves to two important posers:

     Is it not eminently desirable to keep in view the cross border implications it entails, so as to proceed with circumspection?

     Should not the concept of “public interest” be considered to mean and take within its ambit, also the interests of the public of the other treaty country, not only the Indian public?

    In the interests of our nation’s legal / judicial system, is one not justified in expecting them to do so, and also come to appropriate conclusions?
    UQ

    Now, as before,- Over to eminent law pundits for an incisive deliberation !

  • On the one hand, as was clarified in the Cruz City case itself, FERA and FEMA differ to the extent the former was more rigid in its application and FEMA regulations allow for a case to case interpretation. This is where the Renusagar case differs from the Tata Docomo as well as the Cruz City case. On the other hand, both FEMA and FERA have the same purpose – i.e., to regulate something as important as forex in India. Thus, when the purpose of the laws itself is so wide in nature and so fundamentally important to economic balance in a country – it is no ordinary law! I do agree with the Court in holding that the violation of these laws alone itself pose a threat to the economy – especially when the value of the transactions is so large that it could affect forex values. Do refer the case of COSID v SAIL and LIC v. Escorts Ltd where courts have interpreted a vital segment of public policy to include economic interests of the country.

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