[Siddharth S. Aatreya is a V Year B.A., LL.B. (Hons.) Candidate at the National Law School of India University, Bangalore]
The public policy ground for challenging an arbitral award has been the subject of much controversy in India. In the Supreme Court’s decision in Venture Global v. Tech Mahindra (2017) two issues within this broad area entered the spotlight – the applicability of the “patent illegality” limb of public policy to international commercial arbitrations and the determination of whether an award that merely violates Indian municipal law would be rendered unenforceable under this ground. While the matter has been referred to a larger bench, this post will argue that despite the application of the patent illegality standard being justified in this case, the Court erred in equating any breach of Indian municipal law to a public policy violation that would render an award unenforceable.
Facts of the Case
The case arose out of an international commercial arbitral award rendered in London in 2006, pursuant to a Joint Venture Agreement (JV) between Venture Global, an American company and Tech Mahindra. In keeping with the terms of this JV, the award held that there was an ‘event of default’ at Venture Global’s behest and directed that it transfer its 50% share in the JV to Tech Mahindra at book value. Following enforcement proceedings at the High Court level, the matter was taken up on appeal by the Supreme Court. Two main issues were framed – whether the patent illegality standard was to be applied in this case and whether a violation of the Foreign Exchange Management Act (FEMA) arising out of the share transfer directed by the arbitral tribunal would render the award unenforceable in India on public policy grounds.
Patent Illegality and International Commercial Arbitral Awards in India
The Supreme Court’s decision in BALCO v. Kaiser Aluminium, rendered in 2012, held that Parts I and II of the Arbitration and Conciliation Act, 1996 (‘Act’) would apply exclusivelyto domestic and foreign-seated arbitrations respectively. Following this, therefore, the public policy standard under section 34 of the Act would not ever apply to a foreign-seated arbitration – only section 48 would. BALCO, however, applied prospectively, meaning that the separation between Parts I and II would bind courts adjudicating on issues to do with arbitration agreements executed after September 6, 2012 only. For agreements executed prior to this, the old position in Bhatia International v. Bulk Trading (which held Part I to be applicable to foreign-seated arbitrations unless expressly or impliedly excluded) would apply.
Given that the award inVenture Global arose out of an agreement dated October 20, 1999, the Court was correct in applying section 34 of the Act, despite it arising out of a foreign-seated award. This is true because Part I had not been expressly or impliedly excluded in this case. Furthermore, the 2015 Amendment to the Act which provided that the patent illegality standard would not apply to international commercial arbitrations did not apply to this case, since proceedings commenced much before the Amendment (which applies only prospectively). With the patent illegality standard therefore applicable to the foreign award in this case, the Associate Builders standard (that is only applicable to domestic awards post-2015) was applied in this case. As the 2015 Amendment begins to cover a larger number of cases, however, this standard will cease to be applied to international commercial arbitral awards.
Public Policy and Municipal Law in India
While the Court did not have the freedom to break out of the pre-BALCO, pre-2015 Amendment position in respect of the applicability of the patent illegality standard, it can be faulted for the relationship between public policy and municipal law it fashions. Justice Sapre’s observation that a violation of certain provisions of the Foreign Exchange Management Act (‘FEMA’), the Indian Penal Code (‘IPC’) and the Companies Act themselves would also render the award unenforceable on public policy grounds raises alarm bells. Noticeably, while Justice Chelameswar holds that he cannot make out a FEMA violation on the facts, he does not explicitly express an opinion on whether a FEMA violation would itself render an award unenforceable on public policy grounds.
Justice Sapre’s opinion is reminiscent of the decision in Renusagar v. General Electric which equated the FEMA’s predecessor, the Foreign Exchange Regulation Act (‘FERA’) with India’s public policy in a very strict sense. It held that any FERA violation, however technical, would render an international commercial arbitral award unenforceable on public policy grounds. This decision, however, was widely criticized for legitimizing a very interventionist approach to arbitration by Indian courts (by making it easy for them to set aside awards), and has been subsequently diluted.
An important distinction must be borne in mind here. While the award is a foreign-seated one, the public policy standard applicable to it is that under section 34, which otherwise only applies to domestic awards. As a consequence, decisions that have widened Renusagar’sscope in the context of public policy as applied to the enforcement of an international commercial arbitral award under section 48 (in Part II) would not have a direct legal impact on the validity of the Court’s decision in this case.
This does not suggest, however, that the Court’s decision in this case is in keeping with section 34’s public policy standard either. In ONGC v. SAW Pipes, the specific heads created under section 34’s public policy (fundamental policy of Indian law, interest of India, justice or morality or patent illegality) broadened the scope of a potential setting aside of an award on these grounds. For instance, in ONGC v. Western Geco International, the fundamental policy of Indian law was held not to amount to every Indian statutory enactment, but only breaches of foundational principles of Indian law like the principles of natural justice and the Wednesbury reasonableness principles. Furthermore, in the Associate Builders case that the Court itself cited, the patent illegality requirement was held to amount to a violation of substantive law only if such violation went to the root of the matter, while in McDermott v. Burn Standard the Court held that a patent illegality would be made out only if the decision was so unfair that it shocked the conscience of the court, holding that a mere transgression would not meet this standard. Indeed, all of these decisions are grounded in a clear understanding of the need for courts to adopt a hands-off approach when enforcing arbitral awards, with them having the power to set awards aside in exceptional cases alone. Thus, Justice Sapre’s approach of using a lower standard to justify an alleged public policy violation is a regression from this understanding and would affect India’s arbitration-friendliness by legitimizing an interventionist approach to enforcement.
While section 48 was not applicable to this case owing to the aberration discussed above, the position under that provision is also completely opposed to Justice Sapre’s holding. For instance, in Shri Lal Mahal v. Progetto Grano SpA, section 48 was explicitly de-linked from a mere technical violation of domestic law, with the Court holding that a public policy violation would only take place if the basic rationale, values and principles which underpin a domestic law have been breached. In Cruz City I Mauritius Holdings v. Unitech, this was applied by the Delhi High Court to the specific context of the FEMA to hold that mere violations of it would not amount to public policy violations. Furthermore, the 2015 Amendment to the Act clearly limited the grounds under the public policy exception, completely removing any reference to “patent illegality” under section 48 and pegging the fundamental policy of Indian law requirement very high too – holding that no test under this could entail a review of the merits of a dispute already adjudicated upon by an arbitral tribunal. Indeed, the position under section 48 has also recognized the importance of such provisions in preserving the independence of arbitral tribunals and the system’s viability as an ADR mechanism.
Global Perspectives on Public Policy and Municipal Law
Setting the Court’s decision aside in this case would also be in keeping with global perspectives. In fact, the Explanatory Note of the UNCITRAL Secretariat on the Model Law itself notes that a violation of public policy to set an award aside under article 36(1) of the Model Law must arise out of a serious departure from a fundamental notion of procedural justice. Furthermore, courts in the UK, Germany, and Singapore have held that public policy standards affecting the enforceability of an award would not be merely equated to technical violations of domestic legislations. In this sense, therefore, it is clear that leading arbitration-friendly jurisdictions around the world see no place for technical municipal law violations in the public policy standard.As a Model Law country, India’s deviation from this standard as seen in the decision under discussion will further an image of it being arbitration-unfriendly, and retard recent developments that have started to challenge this characterization.
– Siddharth S. Aatreya
 German Charterer v. Romanian Shipowner, 1978 Y.B. Com. Arb.
 Astro Nusanantara International v. PT Ayunda Prima Mitra,  SGHC 212 (HC)