Foreign Arbitral Award Can be challenged on Public Policy Ground

The Indian courts have finally awaken to the benefits of alternative dispute redressal mechanism i.e. Arbitration and is continuing to take a pro-arbitration stand in the disputes that are landing before its courts. The Apex Court of the country last year had pronounced the watershed judgment of BALCO v. Kaiser Services wherein it had categorically held that awards passed in arbitration proceeding with arbitration seat outside India cannot be challenged in Indian courts under section 34 of the Indian Arbitration and Conciliation Act, 1996 and this pro-arbitration stance of the Apex court has been continued and reinforced with its recent decision pronounced by it in Shri Lal Mahal Limited v. Progetto Grano Spa in Civil Appeal No. 50857 of 2012 arising out of a Special Leave Petition on 3rd July 2013.

The Apex Court overruled its earlier decision in Phulechand Exports Limited v. Patriot (2011) 10 SCC 300 and held that enforcement of foreign arbitral award cannot be challenged under Section 48 (2) (d) of the Indian Arbitration and Conciliation Act, 1996 on the ground of ‘patent illegality’ or on the ground of the foreign arbitral award being passed in ignorance or contrary to the contractual terms of the agreement agreed between parties. The Apex Court observed that the Indian court enforcing the foreign arbitral award cannot exercise appellate jurisdiction at the time of enforcing the foreign arbitral award and cannot have a second opportunity to have a second look of the award under section 48 (2) (d) of the Arbitration Act.

The dispute in the said case arose in relation to a supply agreement of particular type wheat between an Indian seller (Shri Lal Mahal Limited i.e. party successor in title) and foreign buyer (Progetto Grano Spa i.e. party successor in title) for the supply of wheat. The agreement provided that the said wheat was to be certified by a named authority which was certified to the effect by the Indian seller from that name authority. However, the foreign buyer also got the wheat certified again in his country and stated that it did not matched the sample and initiated arbitration proceeding under the Grain and Feed trade Association (GAFTA) which passed an award in favour of the buyer. The seller appealed against this award before the Board of Appeal of GAFTA but lost his case and thereafter buyer sought enforcement of the award in India in Delhi High Court where the seller also challenged the enforcement of the foreign arbitral award on the ground of it violating public policy and on the ground of it being patently illegal wherein the seller submitted that the foreign award was passed against and in ignorance of the contractual terms of the agreement. The Delhi High Court rejected the plea of the seller and thereafter the seller appealed against this order in Supreme Court of India challenging the enforcement of the foreign arbitral award by placing reliance on the Phulechand case and ONGC Vs. Saw pipes judgments of the apex court wherein the apex court had held that parties to an arbitration proceedings can challenge the enforcement of a arbitral award on the ground of it being patently illegal as this patent illegality of a arbitral award violates the public policy of India and thereby entitles the Indian courts to relook into the merits of the award in appropriate cases even at the stage of enforcement proceedings.

The buyers in this dispute resisted these contentions and by placing reliance upon the Renusagar Power Co. Ltd. v. General Electric company 1994 Supp (1) 644 and submitted that foreign arbitral award cannot be challenged on the ground of it being patently illegal and submitted that foreign arbitral awards can be challenged in enforcement proceedings only on the ground of public policy of India which includes Fundamental policy of Indian law, interest of India and justice and morality. The buyers also submitted that there was a distinction between the applications of meaning provided to the expression of public policy of India in case of domestic awards and foreign arbitral awards as noted and held in the Renusagar case by the Apex Court.

The Apex Court rejected all the contentions of the Indian seller and observed that for the purpose of section 48 (2) (d) of the Arbitration act, the expression public policy must be given a narrow meaning in contradistinction to the meaning provided in case of setting aside of the award under Section 34 of the arbitration act. The Court said that though the expressions used under both section of 34 and 48 refers to public policy of India but meanings provided to the same expressions differs on account of the scope of review provided under the Sections. The Court said that section 34 pertains to the stage of arbitration where the award has not become final and could be set aside under the grounds provided thereby jurisdiction of the court being much more wider in dealing with the domestic arbitral award that is not yet final and not yet executable and this indicates towards adoption of a wider meaning that is to be given to the expression of public policy of India as elucidated in ONGC vs. Saw Pipes. The Court also said that enforcement stage for an arbitral award is a stage arising at the time when the award has attained finality and the award only seeks enforcement which therefore means that court has limited jurisdiction to interfere with the award and therefore requires adoption of narrow meaning to the expression of public policy of India.

The court also noted the fact that jurisdiction of the court under section 48 (2) (d) is limited and it does not exercise appellate jurisdiction over the foreign arbitral award and only in case where it is contrary to the fundamental policy of law or contrary to interest of India or justice or morality that the enforcement of the foreign arbitral award can be refused. The Apex Court also categorically held that the stand taken by it in Phulchand case was not correct position of law and public policy used in section 48 (2) (d) cannot be given wider meaning and enforcement of a foreign arbitral award cannot be challenged on the ground it being patently illegal.

This judgment therefore provides limited grounds for the challenge to the enforcement of foreign arbitral awards and provides India‘s stand on arbitration in sync with the decision of BALCO and international arbitration scenario.