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6 March, 2020
A. Introduction
1. The Supreme Court’s recent judgment dated February 13, 2020 in Vijay Karia v. Prysmian Cavi E Sistemi Srl (‘Vijay Karia’) is a re-affirmation of the pro-enforcement position of Indian Courts. The judgment highlights two significant aspects: (a) it delineates the scope of the ‘due process’ objection taken by parties that they have not been able to present their case before an arbitral tribunal; and (b) it affirms the Delhi High Court’s judgment dated April 11, 2017 in Cruz City 1 Mauritius Holdings v. Unitech Limited and categorically holds that a foreign arbitral award may be enforced even if inconsistent with the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’), inasmuch as an award directing a buyout at a discounted price was held to be enforceable.
B. Brief Background
2. Four arbitral awards (‘Awards’) were passed by a sole arbitrator in the context of a joint venture dispute between the appellants and the respondents therein. The respondents had initiated arbitration proceedings against the appellants alleging material breaches of the joint venture, including loss of effective control over the joint venture company on account of such breaches committed by the appellants. The appellants subsequently filed their own counter claims, including alleging that the respondents had breached (a) non-compete obligations on account of acquisition of competing businesses, (b) interfered with the management of the joint venture company, and (c) breached confidentiality, etc.
3. In terms of the second arbitral award, the sole arbitrator found that the appellants had committed several breaches of the joint venture agreement by inter alia (a) interfering with the effective functioning of the chief executive officer by refusing to implement a board resolution empowering the CEO to operate the joint venture company’s bank accounts; (b) refusing to attend management meetings convened by the CEO; and (c) by inciting staff to surround, sequester, heckle, humiliate and threaten senior management personnel of the joint venture company. The sole arbitrator rejected all of the counterclaims of the appellant.
4. Finally, in terms of the Awards passed by the sole arbitrator and on the basis that they had committed material breaches of the joint venture agreement, the appellants were directed to sell their shareholding to the respondents at a discounted price and to do all such acts as necessary to effect such sale.
5. The Awards were not challenged in the seat of the arbitration proceedings viz. London. Once the Awards were brought to India for enforcement, the appellants put forward their objection under Section 48 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).
These objections centred on
(a) a lack of opportunity to present their case before the arbitral tribunal,
(b) the award being contrary to the provisions of the FEMA inasmuch as a discounted sale to a non-resident entity was not allowed,
(c) lack of impartiality / independence of the sole arbitrator, and
(d) several grounds of challenge in relation to the merits of the Awards.
The Bombay High Court rejected the challenge. Given that no appeal could be filed against such an order under Section 50 of the Arbitration Act[1], the appellants approached the Supreme Court under Article 136 of the Constitution of India seeking special leave to file an appeal.
C. Judgment
Scope of interference against foreign arbitral awards once a challenge to enforcement has been rejected
6. Crucially, the Supreme Court set out the context of the case before it dealt with the contentions of the parties. The Court noted that legislative policy dictated that, insofar as foreign awards were concerned, parties could only have one substantive attempt at challenging such enforcement at the time of putting forward their objections under Section 48 of the Arbitration Act. If such an attempt failed, the Supreme Court ought to be very cautious in interfering with such orders enforcing foreign awards, especially in terms of the limited ambit of Article 136 of the Constitution of India.
Pro-enforcement ‘bias’
7. The Supreme Court expressly noted that the signatories to the New York Convention on Enforcement of Foreign Arbitral Awards, 1958, (‘Convention’) had recognised that a key theme of the Convention was a pro-enforcement ‘bias’. This entailed that the burden of proof must lie on the party challenging enforcement, and the extremely limited grounds set out in the Convention ought to be strictly construed to demonstrate that such grounds were applicable to any given case.
Discretion of the Court to enforce foreign awards
8. The Court also dealt with an interesting question of whether a Court could still refuse to enforce a foreign award even if certain grounds in Section 48 were made out. This argument hinged on the use of the word ‘may’ in Section 48 i.e. a Court ‘may’ (and, not ‘shall’) refuse enforcement of a foreign award if the grounds under Section 48 were made out.
9. The Court classified the grounds set out in Section 48 into three groups: (a) grounds which affect jurisdiction of the arbitration proceedings; (b) grounds which affect party interest alone; and (c) grounds which go to the public policy of India.
10. The Supreme Court held that Courts could not have any discretion if grounds affecting jurisdiction of arbitration proceedings or grounds affecting the public policy of India were made out. However, in terms of grounds affecting party interest alone, the Supreme Court held that Courts did have discretion to enforce such awards even if such grounds were made out. In essence, the Court held that the word ‘may’ in Section 48 would be considered to mean ‘shall’ depending on the context set out above.
Denial of opportunity to present the case before the arbitral tribunal
11. The appellants contended that the sole arbitrator had failed to deal with the counter-claim setting out breach of non-compete obligations by the respondent and had not made a determination on several other counterclaims. Thus, according to the appellants, Section 48(1)(b) was made out as the appellants were unable to present their case.
12. The key question before the Supreme Court was whether the ground under Section 48(1)(b) of being unable to present one’s case was limited to an actual hearing before the arbitral tribunal or whether it extended to the reasoning of the award as well. In other words, could a party sustain his case under Section 48(1)(b) simply because the arbitral award did not consider a claim made by the party.
13. The Court once again pointed out to the pro-enforcement ‘bias’ permeating through Section 48, and observed that Section 48(1)(b) must be strictly construed. Thus, the Court held that the expression ‘unable to present his case’ would be ‘a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties’. Thus, the Court held that the objection of being ‘unable to present’ one’s case would be limited to the arbitration proceedings themselves and would not extend to the award. Examples cited by the Court which would attract the ground were: (a) no opportunity given to deal with an argument which goes to the root of the case; (b) findings based on evidence which go behind the back of a party; and (c) additional / new evidence taken which forms the basis of the award and on which a party had no opportunity to cross-examine.
14. In sum, while noting that much would depend on the facts of each case, the Court held that if an award had addressed the basic issues raised by the parties and had, in substance, decided the claims and counterclaims, the award must be enforced.
Violation of FEMA
15. The appellants argued that the Awards, inasmuch as they directed sale of shares at a discount would violate FEMA, and such violation would amount to a violation of the fundamental policy of Indian law. The Supreme Court rejected this argument by reiterating that contravention of any provision of an enactment would not be synonymous with the contravention of the fundamental policy of Indian law. Indeed, as the High Court recognised, foreign awards would ordinarily be based on foreign law and such laws might not be in conformity with the laws of the country in which enforcement was being sought. If courts of the enforcing country refused enforcement of such awards merely on account of contravention with local laws, the object and purpose of the Convention would be defeated. Seen in this context, the High Court had observed that fundamental policy of Indian law could only mean fundamental and substantive legislative policy which forms the bedrock of Indian laws, and not a mere provision of any enactment.
16. The Supreme Court approved the Delhi High Court’s reasoning and its observations on the object and purpose of FEMA. FEMA, as the short title of the legislation indicated, provided for managing India’s foreign exchange as opposed to policing it under the erstwhile regime of the Foreign Exchange Regulation Act, 1973 (‘FERA’). The Court held that Section 47 of FERA did not exist under the present regime and thus transactions that violated FEMA could not be held to be void. In fact, the Court observed that it was open to the Reserve Bank of India, the regulator, to step in post facto and require that a sale of shares take place at fair market value or allow a sale at a discounted rate. In terms of this, the Court held that a breach of the FEMA could never amount to a violation of fundamental policy of Indian law.
D. Conclusion
17. Terming the Supreme Court’s judgment in Vijay Karia as significant may perhaps be an understatement. The judgment is a recognition of how far Indian law has developed on the subject of enforcement of foreign arbitral awards under the Arbitration Act after the initial hiccups of Venture Global[2] and OOO Patriot[3].
18. The Court’s judgment in the context of FEMA is quite topical and relevant. It will be hard to find fault with the Court’s approval of the position set out in Cruz City i.e. enforcement of foreign awards cannot be refused merely because a provision of FEMA is said to be violated. Importantly, however, this does not mean that the Reserve Bank of India has no powers to interfere in a transaction of shares pursuant to a foreign award – however, such interference, if at all, would be at the stage of the transaction itself and not at the stage of enforcement of the award. In other words, the award itself is enforceable – whether the transaction is allowed to be consummated pursuant to the Award is a matter for the Reserve Bank to look into. In this regard, it may be helpful for claimants to characterise their reliefs in the form of damages / compensation for breach instead of claiming for the price of shares. In such cases, there would be a strong argument that FEMA is not relevant at all as the price of shares is not being sought.
19. The judgment’s coup de grace, however, lies in the imposition of heavy costs on the appellants to sanction an attempt to challenge the enforcement of a foreign award on merits, when such an award was not even challenged in the seat of arbitration.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
[1] Under Section 50 of the Arbitration Act, only an order refusing to enforce an award can be appealed. This is unlike Section 37 in Part I of the Arbitration Act, which grants the right of appeal against orders either setting aside or refusing to set aside an arbitral award made under that Part.
[2] Venture Global Engineering v. Satyam Computer Services, (2008) 4 SCC 190.
[3] Phulchand Exports v. OOO Patriot, (2011) 10 SCC 300.
