Introduction

In recent years, the pro-enforcement stance of Indian Courts with respect to foreign arbitral awards has become increasingly pronounced. The Supreme Court’s recent judgment in Vijay Karia and Ors. v. Prysmian Cavi E Sistemi Srl and Ors.[1] (“Vijay Karia”) is not only a re-affirmation of this position but can also be seen as an attempt to plainly discourage litigious parties from seeking to exhaust all possible recourse against enforcement of foreign awards.

The judgment in Vijay Karia 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) perhaps more importantly, it affirms the Delhi High Court’s judgment in Cruz City[2] and categorically holds that a foreign arbitral award may be enforced even if inconsistent with 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.

Brief Background

Four arbitral awards (“Awards”) were passed by a sole arbitrator under the auspices of the London Court of International Arbitration (“LCIA”). The Awards were passed in the context of a joint venture dispute between the Appellants and the Respondents. 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, (c) breached confidentiality, etc.

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.

As far as the primary counterclaim of the Appellants was concerned, i.e. the violation of non-compete obligations, the sole arbitrator observed that the conduct of the Appellants at the time of the acquisition of the competing business indicated that the Appellants were fine with such acquisition at the time and had only changed their minds much later when other disputes cropped up with the Respondents. The sole arbitrator also found that the ‘competing’ business actually operated in a very different market – the allegedly competing business operated in the area of instrumentation cable while the joint venture company operated in the area of power and control cables. Thus, any allegation of diversion of business by such acquisition was found to be unsustainable.

The sole arbitrator also dismissed the Appellants’ counterclaims of mismanagement by the Respondent and breach of confidentiality.

Interestingly, prior to the passing of the fourth Award, the Appellants challenged the appointment of the sole arbitrator on the ground of alleged lack of impartiality/independence. The LCIA Court rejected this challenge on the ground that it was made beyond the time period contemplated under the LCIA Rules.

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.

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 (“A&C 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 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 A&C Act[3], the Appellants approached the Supreme Court under Article 136 of the Constitution of India seeking special leave to file an appeal. Such leave was granted and the matter was heard at length.

Judgment

Scope of interference against foreign arbitral awards once a challenge to enforcement has been rejected

Crucially, the Supreme Court set out the context of the case before it dealt with the contentions of the parties. The Court observed that unlike Section 37 of Part I of the A&C Act which allowed appeals against orders either enforcing or setting aside arbitral awards, Section 50 of Part II of the A&C Act did not provide appeals against orders enforcing foreign arbitral awards after rejecting objections to such enforcement.

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 A&C 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’

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.

This was because parties had a greater leeway in challenging the award in the seat of arbitration under the lex situs arbitri and could not be considered to have a right to raise the same grounds during the time of enforcement of the award in foreign jurisdictions under the Convention.

Discretion of the Court to enforce foreign awards

The Court also dealt with an interesting question of whether a Court could still 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.

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.

The Supreme Court held that Courts could not have any discretion if grounds affecting jurisdiction of arbitration proceedings were made out, as this would make the Award a nullity. Similarly, Courts could not have discretion in cases where 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

The Appellants contended that the sole arbitrator had failed to deal with the counterclaim setting out breach of non-compete obligations by the Respondent. Further, the Appellants contended that the sole arbitrator 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.

The key question before the 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 reasingin  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.

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, read along with the first part of Section 48(1)(b) – a party not being given proper notice of the appointment of an arbitrator or of the arbitral proceedings, 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.

In sum, the Court held that a failure to consider a material issue would not fall within the contours of Section 48(1)(b). However, a failure to consider a material issue which went to the root of the matter or failure to decide a claim in its entirety may shock the conscience of the Court, and could be set aside under Section 48(2)(b).[4] The Court, however, clarified that an award must be read as a whole and if a tribunal considers a particular issue as essential and answers it, it meant, by implication, that other issues were rejected. Once again, 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

The Appellants argued that the Awards, inasmuch as they directed sale of shares at a discount would violate the FEMA and in particular, the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019, and such violation would amount to a violation of the fundamental policy of Indian law.

The Supreme Court rejected this argument. It quoted extensively from the Delhi High Court’s judgment in Cruz City, wherein the High Court had held that contravention of any provision of an enactment would not be synonymous with 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.

The Supreme Court approved the 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 along with the Non-Debt Instrument Rules could never amount to a violation of fundamental policy of Indian law.

Challenge to the enforcement of the Awards on merits

Apart from raising the substantive legal questions dealt with above, the Appellants raised fourteen grounds of challenge to the Awards on merits. The Appellants contended that the sole arbitrator had failed to deal with the counterclaim setting out breach of non-compete obligations by the Respondent. Further, the Appellants contended that the sole arbitrator had not made a determination on several other counterclaims. The Appellants also argued that the sole arbitrator’s interpretation of the joint venture agreement was unsustainable and that ‘critical’ evidence had been ignored while passing the Awards.

The Supreme Court rejected all such grounds finding that none of these objections were even remotely sustainable after perusing the case records.

Imposition of costs

The Appellants’ strategy of using every possible objection against the Awards turned out to be counter-productive. The Supreme Court severely castigated the Appellants for attempting to argue the matter as a ‘first appeal’, given the limited jurisdiction that the Supreme Court had. In the circumstances, the Court imposed costs of INR 50,00,000 on the Appellants, to be paid to the Respondents.

Conclusion

Terming the Supreme Court’s judgment in Vijay Karia as significant may perhaps be an understatement. The judgment is indeed a recognition of how far Indian law has developed on the subject of enforcement of foreign arbitral awards under the A&C Act after the initial hiccups of Venture Global[5] and OOO Patriot[6].

Having said that, one would have hoped that the Court’s reasoning in relation to denial of opportunity of presenting one’s case were more categorical so as to limit future litigants from attempting innovative arguments of making the ground applicable. Unfortunately, given the nature of the ground itself and its dependence on the facts and circumstances of each case, it is perhaps understandable that the Court ultimately left it to the wisdom of Courts deciding future cases on the facts and circumstances of each case.

The Court’s judgment in the context of FEMA is, however, 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 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 the FEMA is not relevant at all as the price of shares is not being sought.

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. One hopes that future award debtors will take lessons from Vijay Karia and refrain from adopting similar litigation strategies, which in the end, may not only be unproductive but end up being counter-productive.

Authors:
Vijayendra Pratap Singh, Senior Partner
Abhijnan Jha, Senior Associate

Footnotes:
[1] Judgment dated February 13, 2020, in C.A. No. 1544/2020 and C.A. No. 1545/2020 (Rohinton F. Nariman, V. Ramasubramaniam, Aniruddha Bose, JJJ).
[2] Cruz City 1 Mauritius Holdings v. Unitech Limited, (2017) 239 DLT 649.
[3] Under Section 50 of the A&C Act, only an order refusing to enforce an award can be appealed. This is unlike Section 37 in Part I of the A&C Act, which grants the right of appeal against orders either setting aside or refusing to set aside an arbitral award made under that Part.
[4] This was done in Campos Brothers Farms v. Matru Bhumi Supply Chain Pvt. Ltd., (2019) 261 DLT 201.
[5] Venture Global Engineering v. Satyam Computer Services, (2008) 4 SCC 190.
[6] Phulchand Exports v. OOO Patriot, (2011) 10 SCC 300.