[The
following guest post is contributed by Suprotik Das, a 5th year law student at the Jindal Global Law
School, Sonepat, Haryana.]
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 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.
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’.
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.
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
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.
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.
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
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.
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
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.
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.
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’.
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’.
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.
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.
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