[Pratyush Singh and Dhawal M are second year students at NLSIU, Bangalore]
An arbitral award can be rejected on grounds of violating the public policy of the country where it has to be enforced under the New York Convention, 1958. However, “public policy” has not been defined by the Convention. This has led to much uncertainty across jurisdictions as every country applies their own standards which are subject to regular changes. However, it is internationally acknowledged that “public policy” needs to be construed narrowly to make the enforcement process as easy as possible to make the jurisdiction arbitration friendly. The Indian treatment of the public policy doctrine has kept investors on their toes. In the past, courts have flexed their discretion to give a wide interpretation to public policy which has ended up being a big hurdle in the enforcement of awards. However, the courts have now recognized the necessity to restrict judicial intervention on public policy ground to foster a pro-enforcement jurisdiction.
Moushumi Bhattacharya delivered a single judge bench order of the Calcutta High Court in EIG (Mauritius) v. McNally Bharat Engineering. The order allowed a foreign arbitral award’s enforcement which carried a question regarding the public policy provisions in the Arbitration and Conciliation Act, 1996.
The transaction that formed the core of the dispute between EIG Mauritius and McNally Bharat Engineering (consisted of various agreements which included a Shareholder’s Agreement (“the Agreement”) and an Agreement concerning EIG’s put-right. The Agreement endowed EIG and McNally with specific obligations which included requiring McNally to list its shares on the stock exchange or provide for a public offer of these shares. The failure to meet these conditions would empower EIG to exercise the put option and required McNally to find a third-party to purchase EIG’s portion of the shares at the ‘put price’. The Agreement further stated that none of its contents would be deemed to be in conflict with any applicable law. When McNally failed to fulfill the terms of the Agreement, EIG sent a put notice to them. However, McNally contended that the put option is in contravention of the Securities Contract Regulation Act, 1956 (“SCRA”) and the Foreign Exchange Management Act, 1999 (“FEMA”) and hence should not be enforced.
The Arbitral Tribunal through its majority opinion upheld the validity of the put option and asked McNally to pay a sum total of INR 114.01 crore as damages to EIG. EIG approached the High Court of Calcutta for the enforcement of the foreign Arbitral award, while McNally contended that such a decree of enforcement would run contrary to the public policy of India and would be unenforceable according to section 48(2)(b) of the Act. The Calcutta High Court accordingly framed two issues. First, the degree of inquiry permitted under the Act and second, whether the Award is in conflict with the provisions of FEMA and SCRA.
The Decision of the Court
Degree of inquiry permitted under the Act:
The Court looked at sections 46 and 47 of the Act to explain that the foreign arbitral awards are considered binding for all effects and purposes. Furthermore, any refusal of enforcement of such foreign awards is restricted to the reasons mentioned under sections 48(1) and 48(2). The Court also referred to section 34, to show that even though it is substantially similar to section 48, the absence of ‘patent illegality’ as a ground from the latter means that a higher standard has to be met while seeking to oppose the enforcement of an arbitral award under section 48. Moreover, there is a requirement of proof of existence of conditions under section 48 for an award to be made unenforceable.
To explain the threshold of the bar of public policy, the Court referred to the principle laid down in Renusagar Power Co. Ltd. vs. General Electric Co. Although the section from the erstwhile Arbitration Act with which the case dealt were subsequently repealed, the principle was approved by the Supreme Court in Vijay Karia vs. Prysmian Cavi E Sistemi SRL where it was held that a violation of public policy should “offend a most basic notion of justice” of India. Hence, the inquiry would then shift to whether the breach of the provisions of SCRA and FEMA would be in contravention of the public policy of India.
Question of conflict with the provisions of FEMA and SCRA
For the second issue, the Court stated that the findings of the Arbitral Tribunal with regards to the provisions of FEMA and SCRA were based on a “reasonable and commercial interpretation of the Shareholder’s Agreement upon considering the commercial intentions of the parties and the relevant case-law on the subject”. The Arbitral Tribunal compared the put option in the present case with the ‘Spot Delivery Contract’ in Edelweiss Financial Services v. Percept Finserve as both these agreements provided for a buyer of shares to have the right to resell those shares to the original seller if a future event did not materialize. Relying on the rationale held in Edelweiss, the tribunal held that the present agreement in substance involved a simultaneous exchange of shares and payment and hence was not in violation of SCRA.
With regards to the issue of the conflict of the agreement with FEMA, the Court looked at the centrality of the agreement and the intention of parties to conclude that the third-party requirement in the agreement includes a ‘non-resident third party’. The Tribunal further relied on NTT Docomo. vs. Tata Sons to hold that the promoter in the case could have legally fulfilled its obligation of providing an exit to the investor through a non-resident purchaser as FEMA would not apply to such a purchaser.
Hence, the Court refused to modify the stance taken by the Arbitral Tribunal as it considered their interpretations of the provisions of SCRA and FEMA to be comprehensive in nature and any other inquiry would not be part of the current statutory framework.
Contextualizing the Judgment with Section 48 Jurisprudence
The decision of the High Court warrants appreciation. It has affirmed the pro-enforcement stance of the Court. One of the major concerns with the enforcement of foreign arbitral awards has been the unruly horse of public policy under section 48 of the Act. The courts have been steadily moving away from a broad understanding of the same. The Supreme Court in Oil & Natural Gas v. Western Geco International adopted the Wednesbury principles of unreasonableness and allowed judicial intervention even on merits. This hurt the fundamental nature of arbitration and had to be rectified by the 2015 Amendment. The amendment added delineated ‘contravention of the fundamental policy of India’ as a specific ground for an award being against public policy and added an explanation barring courts from reviewing the award’s merits. Subsequently in Vijay Karia, it was held that a mere statutory violation is not enough to constitute a contravention of the fundamental policy of India. The Court asserted that it “refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts.” The ruling in EIG v. McNally was the next step in the evolution of the Indian understanding of public policy.
On one hand, the Court recognized the bar on its power to review the award on merits, but on the other, it assumed restricted scrutiny of the arbitral tribunal’s position and then affirmed its findings. This pushes the law into a grey area as to whether they can or even should delve into the arbitral tribunal’s reasoning while affirming its correctness. The confusion pertains to the standard of scrutiny of the arbitral tribunal’s decision to be adopted by courts while adjudicating a public policy question.
While the Court held that a violation of the provisions of FEMA does not ipso facto contravene the public policy, it fell short of answering if a breach of the Securities Contracts (Regulation) Act or securities law in general would attract a similar response. Nevertheless, the courts have consistently adopted a pro-enforcement approach and have tried to make the arbitration process congenial, while also approving call and put options as exit routes. It can be expected that a breach of the law on securities would not amount to a breach of the fundamental policy of Indian law.
One can also appreciate the pro-investment attitude adopted by the Court. Following the decision in LMJ International v. Sleepwell Industries, the Court held that no further proceedings are necessary for the execution of the award once it has been recognized under section 49 as a decree of the court. The court demystified the dispute by deeming it to be a simpliciter money award. This allowed the court to reject the put option’s enforcement and rather provide the EIG with damages for McNally and its wholly owned subsidiary, MSEL under the Shareholders Agreement. The decision is a welcome step to make the Indian stance more pro-enforcement.
– Pratyush Singh & Dhawal M