By Nakul Sachdeva and Mohit Mahla*
The metaphor once used by Justice Burrough in 1824 – public policy is an ‘unruly horse’ (Richardson v. Mellish) still stands apt in the context of arbitration in India. Over the years, reliance on public policy to challenge an arbitral award or to resist its enforcement has become one of the main arrows in the quiver of the party challenging an arbitral award or resisting its enforcement. With time, however, the odds of the arrow hitting the target – especially in the enforcement of foreign awards proceedings – seems to have declined.
What can be called as the “pro-enforcement bias” under Article V of the Convention on Recognition and Enforcement of Foreign Awards, 1958 (“New York Convention”), has been implemented in India by the Supreme Court of India (“Supreme Court”) in varying degrees through multiple decisions (see Renusagar Power Plant Co. Ltd. v. General Electrical Co.; Shri Lal Mahal Ltd. v. Progetto Grano SPA; Ssangyong Engineering & Construction Co. Ltd. v. NHAI; Vijay Karia v. Prysmian Cavi E Sistemi SRL)and by the legislature through the amendments brought in 2015 to Section 48 of the Arbitration and Conciliation Act, 1996. In a recent Supreme Court judgment in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. (“NAFED”), the unruly horse of public policy, however, seems to have jumped sideways. NAFED not only goes against the “pro-enforcement bias” of Article V of the New York Convention, but also against the overall theme laid by some previous judgments of the Supreme Court on the enforcement of foreign awards in India. This post highlights some aspects of NAFED which are problematic.
Background: Award and Enforcement Proceedings by Alimenta S.A. in NAFED
The original dispute in NAFED addressed non-performance of a contract for the supply of 5000 MT Indian groundnut entered into between NAFED Ltd. and Alimenta S.A. (the “Contract”). In 1989, an arbitral award was issued in favour of Alimenta S.A. in the amount of USD 4,681,000 plus 10.5% interest from 1981 till 1989 (which was later enhanced on appeal to 11.25 %) (the “Award”). In the enforcement proceedings, NAFED Ltd. argued that the enforcement of the Award should be refused because it was contrary to the public policy of India – since the Award granted damages under the Contract, which was cancelled due to frustration. NAFED Ltd. during the enforcement proceedings argued that the export restriction imposed by the government of India was an event which was already contemplated and properly addressed by parties when they entered into the Contract and thus enforcing the Award, dealing with this issue, was contrary to public policy.
Non-Interference with Merits at Enforcement Stage: A Principle Overlooked
The Supreme Court refused to enforce the Award under Section 7(1)(b)(ii) of the Foreign Award (Recognition and Enforcement) Act, 1961 (the “FA Act”), finding that the enforcement of Award would be contrary to public policy since it overlooked the export restrictions imposed upon by the government of India which as per the Supreme Court formed part of the fundamental policy of Indian law. In reaching this conclusion, the Supreme Court carefully analysed and detailed the impact of the export restriction on NAFED Ltd.’s ability to perform the Contract and even, to some extent, the accuracy and basis of such export restrictions imposed by the government of India. In doing so, it appears that the Supreme Court addressed the merits of the case, which is an area of review that should not be addressed during the enforcement of an international arbitral award, as per numerous Indian judgments (see e.g., Associate Builders v. Delhi Development Authority; Ssangyong Engineering & Construction Co. Ltd. v. NHAI). Whether the arbitrator was correct or not to consider the impact of the export in finding NAFED Ltd. liable for damages, the Supreme Court overstepped precedent in reaching an opinion that was based in part on the merits of the arbitration.
Indian Precedents Indicates NAFED Widened the Scope of Public Policy
In Renusagar, the Supreme Court held that a foreign award would be unenforceable under Section 7(1)(b)(ii) of the FA Act on the ground of being contrary to public policy if the enforcement was contrary to “fundamental policy of Indian law”. In NAFED, the Supreme Court found the export restriction to be part of the fundamental policy of Indian law and thereby rendered the Award unenforceable. The view that the export restrictions formed a part of the fundamental policy of Indian law is somewhat questionable – especially in light of Vijay Karia – a judgment, which despite being relevant, was not even referred to, let alone discussed, in NAFED.
In Vijay Karia the Supreme Court was faced with a similar situation when the enforcement of a foreign award was resisted on the grounds that it was in violation of the Foreign Exchange Management Act, 1999 and its rules. While declining to resist the enforcement of the award, the Supreme Court narrowed the interpretation and defined ‘fundamental policy of Indian law’ to be the “core values of Indian 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.” This was in line with a seeming global convergence on narrow interpretation of public policy, including in jurisdictions such as Singapore (see PT Asuransi Jasa Indonesia (Persero) v. Dexia Bank, (2007) 1 SLR (R) 597), the United Kingdom (see RBRG Trading (UK) Ltd. v. Sinocore International Co. Ltd. (2018) EWCA Civ. 838), and the United States (see Matter of Daesang Corporation et al. v. NutraSweet Company et al.167 A.D.3d (1st Dept. Sept. 27, 2018)). In NAFED, the Supreme Court widened its interpretation of public policy by stating that the Award was contrary to the export restriction policy and thus was against the fundamental policy of Indian law. This is a discrepancy to its previous decisions and also from the global trend on narrow interpretation of public policy.
NAFED Highlights A Troubling Aspect of the Indian Judicial System
NAFED highlights, yet again, a troubling aspect of the Indian judicial system: excessive judicial delay. In White Industries v. The Republic of India, India attempted to hide the apparent failures of its judiciary in bringing justice through expeditious proceedings, however, failing to do so, led the tribunal to find India in breach of its treaty obligations under India-Australia BIT for delaying the enforcement of a foreign award for 9 years. In NAFED, the delay in deciding on the enforcement of the Award almost tripled to 27 years. While India has terminated its BITs and is in the process of signing new bilateral agreements (the latest being with South Africa), a policy level guideline on expedited decisions on the enforcement of foreign awards, would save India from such future claims being brought by investors relying on India’s treaty obligations, which may survive due to the “sunset clauses” under the terminated BITs.
NAFED has clearly created some confusion regarding the previous views on narrow interpretation of public policy in the enforcing of foreign awards in India. It has also gone against the tide of pro-enforcement of foreign awards seen in, for example, Cruz City 1 Mauritius Holdings v. Unitech Limited;Daiichi Sankyo Company Ltd. v. Malvinder Mohan Singh & Ors.; Glencore International AG v. Indian Potash Limited & Anr. When seen from an optimistic point of view, however, it seems that the Supreme Court’s decision in NAFED may not have changed the precedent on the subject. It relied on some of its previous judgments, which paved the way for the principles of narrow interpretation of public policy, and the pro-enforcement bias of Article V of the New York Convention. However, despite relying on the precedents of narrow interpretation, it decided to opt for a wider interpretation of public policy – not as a general rule, but only on particular facts in NAFED. Therefore, in the future it may not be possible for parties resisting enforcement of foreign awards to argue for wider interpretation of public policy at the enforcement stage on the basis of NAFED. Following the observation of Lord Denning M.R. in Enderby Town Football Club Ltd v. The Football Association Ltd., ( 1 All ER 215) that: “[w]ith a good man in the saddle, the unruly horse can be kept in control”, it may still be possible to keep the unruly horse of public policy in control in the future cases on enforcement of foreign arbitral awards in India.
* The views expressed in this blog are those of the authors’ own and should not be regarded as those of their employers, law firms, or of any organisation they are associated with.