Thursday, September 12, 2013

Public Policy under section 48 of the Arbitration Act

In the light of the decision of the Constitution Bench in BALCO, an Indian court has no jurisdiction to set aside a foreign arbitral award under section 34 of the Arbitration and Conciliation Act, 1996, unless the arbitration agreement was made before 06.09.2012. One consequence of this is that a foreign arbitral award is likely to be scrutinised by the Indian courts only if the successful claimant attempts to enforce it in India under Part II of the Act. Section 48 sets out the circumstances in which an Indian court may refuse to enforce such an award (a Convention award), one of which is that enforcement would be “contrary to the public policy of India”. In Renusagar, dealing with section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961, the Supreme Court decided that the expression “public policy” is confined to: (i) the fundamental policy of Indian law; (ii) the interests of India and (iii) justice or morality. It is well-known that the Supreme Court, in ONGC v Saw Pipes, construed the expression “public policy” more widely for the purposes of section 34, holding that “patent illegality” is a ground on which an Indian court may set aside the arbitral award.

While it was clear that Renusagar was not good law under section 34, doubts remained as to whether section 48 would be governed by Renusagar or by ONGC. In Phulchand Exports v Ooo Patriot, a two-judge Bench of the Supreme Court (Lodha and Khehar JJ.) held that “public policy” bears the same meaning in sections 34 and 48; in other words, ONGC, and not Renusagar, governs section 48. Phulchand was the subject of some criticism and a three- judge Bench of the Court (Lodha, Lokur and Kurian Joseph JJ.) has recently overruled it, in its judgment in Shri Mahal Ltd v Progetto Grano spa. Shri Mahal is an important judgment because it emphasises that there is little room for interference with an arbitral award at the stage of enforcement, particularly since ONGC led to an Indian court routinely reviewing matters of evidence or construction or inferences from primary fact.

The case arose out of a dispute between an Indian seller and an Italian buyer over the conformity of the goods supplied to the contractual description. The contract stipulated that the seller shall supply 20,000 MT of “Durum wheat” but an inspection conducted by an agent appointed by the buyer revealed that the goods supplied were in fact “soft wheat”, worth considerably less in the market. This led to GAFTA arbitration, before which the seller’s principal case was that the buyer was not entitled to appoint an inspection agent since the contract provided that the goods would be inspected by SGS India, as indeed they had been, prior to shipment. The Tribunal rejected this argument on the ground that the inspection carried out by SGS India did not conform to the contractual requirements and therefore accepted the buyers’ case on non-conformity. Damages were awarded on the usual basis (difference between market value and the value of the goods supplied). An attempt by the sellers to challenge this award in the English courts failed.

The buyers then filed an application in the Delhi High Court for enforcement of the award, which was resisted by the sellers on the ground that to enforce the award would be contrary to Indian public policy, since the Tribunal’s award was “contrary to the terms of the contract”: a matter the court is entitled to consider under ONGC but arguably not under Renusagar. In the event, the Delhi High Court concluded that the challenge was in any case without merit and dismissed the application. Before the Supreme Court, the sellers argued that the expression “public policy of India” used in section 48 of the Act was wider than the expression “public policy” used in Renusagar. The Supreme Court rejected this contention, affirmed Renusagar insofar as section 48 is concerned, and overruled Phulchand. The essence of its reasoning appears in the following passage:

28. It is true that in Phulchand Exports , a two-Judge Bench of this Court speaking through one of us (R.M. Lodha, J.) accepted the submission made on behalf of the appellant therein that the meaning given to the expression “public policy of India” in Section 34 in Saw Pipes must be applied to the same expression occurring in Section 48(2)(b) of the 1996 Act. However, in what we have discussed above it must be held that the statement in paragraph 16 of the Report that the expression “public policy of India used in Section 48(2)(b) has to be given a wider meaning and the award could be set aside, if it is patently illegal” does not lay down correct law and is overruled.

Applying this standard of review to the facts, the Court rejected the sellers’ contention that the Tribunal had erred in accepting the buyers’ inspection in preference to the inspection carried out by SGS India and held that it was in any case irrelevant because the court cannot refuse enforcement even if the Tribunal had so erred:

43. Moreover, Section 48 of the 1996 Act does not give an opportunity to have a ‘second look’ at the foreign award in the award -enforcement stage. The scope of inquiry under Section 48 does not permit review of the foreign award on merits. Procedural defects (like taking into consideration inadmissible evidence or ignoring/rejecting the evidence which may be of binding nature) in the course of foreign arbitration do not lead necessarily to excuse an award from enforcement on the ground of public policy.

In sum, this judgment makes it considerably more difficult to mount an attack on a foreign arbitral award at the stage of its enforcement, and that is to be welcomed.

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