India – Foreign Arbitral Award – The Pro-Enforcement Trend Continues.

 

23 September 2020

 

 

"The courts of this country should not be places where resolution of disputes begins. They should be the places where the disputes end after alternative methods of resolving disputes have been considered and tried."
 

–Sandra Day O’Connor, Former Associate Justice of the Supreme Court of the United States
 

The law on Arbitration in India is constantly evolving. Arbitration clauses are now the norm that figure in nearly all commercial agreements whether it is domestic in nature or has an international flavour. Over the years, the Arbitration and Conciliation Act, 1996 (Act) has undergone several changes to address various issues arising thereunder. An important aspect of the Act that has seen significant development is enforcement of foreign awards, both through legislative and judicial intervention.
 

Over time, it may be said that in so far as enforcement of foreign awards is concerned, Indian judiciary had been exercising minimal interference, until recently, where the Supreme Court (SC) in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A[1] (Alimenta) broke away from that trend and refused enforcement after having adjudicated the same on the merits of the case. Through GOI v. Vedanta Ltd. (Formerly Cairn India Ltd.) & Ors[2] delivered by a three-judge bench of the SC on September 16, 2020, the Supreme Court reverted to the judicial approach prior to the Alimenta judgment, upholding the enforcement of a foreign award, exercising minimal interference. This judgment not only clarifies the scope of public policy but also lays down the law with regard to how a foreign award is to be dealt with under Part-II of the Act and under Limitation Act, 1963 (Limitation Act).

Background of the Dispute
 

The dispute in this case arose out of an Agreement between Cairn Energy India Pty Ltd. (CIL) (now known as Vedanta Limited), Ravva Oil (Singapore) Pte Ltd. (ROS), Videocon Industries Limited (VIL), Oil and Natural Gas Corporation Ltd. (ONGC) and the Government of India (GOI) in calculation of Base Development Costs (BDC) (which included the costs of establishing facilities as were necessary to produce, process and transport petroleum) incurred by CIL, ROS and VIL (collectively referred to as the Claimants) over and above the cap prescribed in the Agreement. As per the terms of the Agreement, the governing law of the contract was Indian law and the arbitration agreement was governed by the laws of England. The juridical seat of the arbitration was Kuala Lumpur, Malaysia.
 

A three-member tribunal rendered its Award on January 18, 2011 (Award) inter alia holding that the Claimants were not entitled to recover BDC in excess of the cap prescribed under the Agreement for the period 1994-95 to 1999-2000, and that GOI was entitled to be credited with the excess amount recovered by the Claimants. However, the tribunal interpreted the Agreement to hold that the Claimants were entitled to recover the development costs (amounting to USD 278 million) incurred by them for the period thereafter, notwithstanding the cap on BDC. Subsequent challenges to the Award by GOI, were rejected by Malaysian Courts (seat court).
 

In July 2014, GOI issued a Show-Cause Notice (SCN) to the Claimants making certain demands under the Agreement.
 

In October, 2014, the Claimants filed for enforcement of the Award before the Delhi High Court (HC).[3] GOI also filed its objections to the enforcement proceeding inter alia on the grounds that it was barred by limitation and that the Award is in violation of public policy of India.[4] The HC rejected the GOI objection and enforced the Award. This decision was then challenged before the SC.
 

Broad Issues before the SC.
 

The SC in its judgment has dealt with the following broad issues:
 

• Whether the petition for enforcement/execution of the Award was barred by limitation
   

• Whether the Malaysian Courts were justified in applying the Malaysian law of public policy while deciding the challenge to the Award
   

• Whether the Award is against the public policy of India
   

Ruling of the SC
 

Issue 1: Limitation period for enforcement of a foreign award 
 

On the issue of limitation period applicable to foreign awards, there have been divergent views of various High Courts. One view is that Article 137 of the Limitation Act[5] will be applicable when the court is considering enforcement of a foreign award under Section 47 of the Act. Once it is held to be enforceable, it becomes a decree and Article 136 of the Limitation Act[6] will be applicable thereafter.[7] A second view is that the period of limitation for enforcement of a foreign award would be three years from the date when the right to apply accrues as per Article 137 of the Limitation Act.[8] A third view is that Article 136 of the Limitation Act would be applicable in such cases.[9]
 

The HC in this case followed the third view and held that if Article 137 is applicable, the Claimants had made out a case for condonation of delay.[10]
 

In view of conflicting decisions, the SC has clarified the position of law on this issue and held that Article 137 of the Limitation Act will be applicable to foreign awards.
 

The decision of the SC was founded on the reasoning that Article 136 only applies to a decree passed by an Indian Court and not a foreign award.[11] It held that the deeming fiction created by Section 49 of the Act[12] is only for the limited purpose of enforcement and execution of the foreign award, and not for all purposes, or under all statutes.[13] The Court also clarified that the bar contained in Section 5 of the Limitation Act,[14] which excludes an application filed under Order XXI of the Code of Civil Procedure, 1908 (dealing with execution of decrees and orders), would not be applicable to a substantive petition filed under Section 47 of the Act.
 

Applying the above to the facts of the case, the Court held that the right to apply for enforcement accrued only on the date when the SCN was issued by GOI, i.e., on July 10, 2014. Therefore, the enforcement petition filed on October 14, 2014, was well within the period of limitation. However, the Court caveated its decision stating that, in any event, sufficient grounds existed to condone the delay (if any) owing to  lack of clarity on the applicable period of limitation for enforcement of a foreign award.
 

The SC also clarified that a foreign award does not become a “foreign decree” at any stage of the proceedings. Further, that a foreign award is not executable as a decree by itself, but it is only after the stages of Sections 47 and 48 are complete, that the award becomes enforceable as a deemed decree, as provided by Section 49. At the same time, an award holder is entitled to apply for recognition and enforcement of the foreign award by way of a common petition keeping in mind the legislative intent of expeditious disposal of arbitration proceedings.[15]
 

Issue 2: Whether application of Malaysian law of public policy by Malaysian Courts while deciding the challenge to the Award was justified
 

As per the terms of the Agreement, the governing law of the contract was Indian law and the arbitration agreement was governed by the laws of England. The juridical seat of the arbitration was Kuala Lumpur, Malaysia. GOI argued[16] that while deciding the challenge to the Award, Malaysian Courts ought to have applied Indian law, being the substantive law of the contract, especially while adjudicating the issue of conflict with public policy.
 

The SC reiterated the settled principle that courts having jurisdiction to set aside a foreign award are the courts of the State where the award was made, or is determined to have been made i.e. at the seat of arbitration.[17] The enforcement proceedings are distinct from the setting aside proceedings at the seat, and at that stage, courts exercise ‘secondary’ jurisdiction to determine the enforceability of the award in that jurisdiction.
 

In the present case, the Court concluded that Malaysian Courts, being the seat courts, were justified in testing the Award by applying Malaysian law. The SC also refrained from commenting on the judgments passed by Malaysian Courts in view of principles of comity of nations. However, this did not preclude the courts in India from examining the public policy objection at the stage of enforcement in accordance with Section 48 of the Act, without being constrained by the findings of the Malaysian Courts.
 

The Court also distinguished the case of Reliance Industries v. Union of India[18] stating that the observations[19] of the Court in that case were in light of its specific facts involving a challenge to a partial award on the issue of arbitrability of certain disputes, which was not an issue raised in the present case.
 

Issue 3: Whether the Award is against the public policy of India? 
 

For determining the enforceability of a foreign award, Courts in India followed the landmark judgment in Renusagar Power Co. v General Electric Co.[20] (Renusagar), which laid the following three basic parameters:
 

• Whether the award is contrary to the fundamental policy of Indian law?
   

• Whether the award is contrary to interests of India?
   

• Whether the award is contrary to justice or morality?
   

The 2016 Amendment[21] made to the Act watered down the aforesaid parameters and gave a narrower meaning to ‘public policy’. However, the SC held that the amendment is not retrospective and refrained from applying the same in the present case.[22]
 

The SC following the law laid down in Renusagar (Supra) observed that the narrow limits of judicial interference on the grounds of public policy of the enforcement State are well settled in international arbitration. Summarily, enforcement of a foreign award may be refused only if it violates the enforcement State’s most basic notions of morality and justice, which has been interpreted to mean that there should be great hesitation in refusing enforcement, unless it is obtained through “corruption or fraud, or undue means”.[23] Further it held that, at this stage, merits of the award are not open to review by the enforcement court.[24] On an application of these principles to the case before it, the SC has held that GOI did not make out a case for conflict with the basic notions of justice or violation of the substantive public policy of India. The SC also observed that the extension of the Agreement further indicated that it was not contrary to India’s interests.
 

The SC while holding that the contractual interpretation of the Tribunal was a plausible one also noted that erroneous interpretation of an agreement cannot be ground of challenge, since it would amount to impeaching an award on its merits.
 

Conclusion
 

The SC’s judgment in Vedanta (Supra) will go a long way to re-affirm the international community’s confidence in the Indian judicial system’s dealing with foreign arbitral awards. This judgment not only confirms various legal principles of arbitration law in India but also expounds other legal principles on law of limitation, retrospective applicability of amendments and comity of nations. That being said, it will be interesting to see how Courts in India interpret the concept of ‘right to apply’ in the context of determining the period of limitation in enforcement of foreign awards in different factual scenarios.

 

 

For further information, please contact:

 

Sanskriti Sidana, Partner, Cyril Amarchand Mangaldas

sanskriti.sidana@cyrilshroff.com.
 

[1] See: 2020 SCC OnLine SC 381

[2] See: SLP (C) No. 7172 of 2020

[3] Under Section 47 and 49 of the Act

[4] Under Section 48 of the Act

[5] This is the residuary provision in the Limitation Act, 1963, which provides that the period of limitation for any application where no period of limitation is prescribed, would be 3 years from when the right to apply accrues.

[6] This provides for a limitation period of 12 years for enforcement of a decree.

[7] See: Noy Vallesina Engineering Spa v. Jindal Drugs Limited 2006 (3) Arb LR 510.

[8] See: Louis Dreyfous Commodities Suisse v. Sakuma Exports Limited (2015) 6 Bom CR 258.

[9] See: Imax Corporation v E-City Entertainment (I) Pvt. Limited (2020) 1 AIR Bom 82 and M/s. Compania Naviera ‘SODNOC’ v. Bharat Refineries Limited (2008) 1 Arb LR 344.

[10] See: Cairn India Limited v. Union of India 2020 SCC Online SC 324.

[11] See: Bank of Baroda v. Kotak Mahindra Bank (2020) SCC Online 324.

[12] That a foreign award is a deemed decree of a High Court

[13] See: Param Singh Patheja v ICDS Ltd. (2006) 13 SCC 322 (this case was in the context of a domestic award).

[14] See: Section 5, Limitation Act, 1963 reads as follows – “Extension of prescribed period in certain cases: Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period, if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.

Explanation -The fact that the appellant or the applicant was misled by any order, practice or judgment of the High Court in ascertaining or computing the prescribed period may be sufficient cause within the meaning of this section.”

[15] See: Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2001) 6 SCC 356.

[16] See: Reliance Industries v. Union of India (2014) 7 SCC 603.

[17] See: BALCO v. Kaiser Aluminium (2012) 9 SCC 552.

[18] See: (2014) 7 SCC 603.

[19] In paragraph 76.4, the Court observed that – “The conclusion of the High Court that in the event, the award is sought to be enforced outside India, it would leave the Indian party remediless is without any basis as the parties have consensually provided that the arbitration agreement will be governed by the English law. Therefore, the remedy against the award will have to be sought in England, where the juridical seat is located. However, we accept the submission of the Appellant that since substantive law governing the contract is Indian Law, even the Courts in England, in case the arbitrability is challenged, will have to decide the issue by applying Indian Law viz. the principle of public policy etc. as it prevails in Indian Law.”

[20] See: 1994 Supp (1) SCC 644. In paragraph 66, the Supreme Court held that – “…Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.”

[21] See: Arbitration and Conciliation (Amendment) Act, 2015, which came into force w.e.f. October 23, 2015 (“Amendment Act”). The amended Section 48 reads as: “48. Conditions for enforcement of foreign awards. – … (2) Enforcement of an arbitral award may also be refused if the Court finds that—

(a) …

(b) the enforcement of the award would be contrary to the public policy of India.

Explanation 1 — For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if, —

(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2 —For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”

[22]See: Hindustan Construction Co. Ltd v. Union of India & Ors 2019 (6) Arb LR 171 (SC) and Ssangyong Engineering & Construction Co. Ltd. v. NHAI (2019) 15 SCC 131 wherein the Court held that the explanations to Section 34 added by the Amendment Act (which are identical to Section 48) will be applicable prospectively.

[23] See: Parsons & Whittemore Overseas Co. Inc. v. Societe Generale De L’industrie du Papier (RAKTA) 508 F. 2d 969 (2nd Cir 1974) (followed in Renusagar).

[24] See: International Council for Commercial Arbitration (ICCA) Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges (2011).