Foreign awards that patently violate Indian substantive law are not enforceable: Supreme Court

Phulchand Exports Ltd. v. OOO Patriot is yet another case of a foreign award being challenged before Indian courts for non-conformity with substantive provisions of Indian law, but this time with more disastrous consequences.

The case surrounded the enforceability of an award dated October 18, 1999 (yes, it has been 12 years!) given by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of Russian Federation, Moscow in a dispute between an Indian seller and a Russian buyer. The arbitral tribunal had found that the seller was in breach and passed an award directing the seller to make partial reimbursement under a contractual clause providing for reimbursement in case of breach. The seller challenged the enforcement of the award claiming that the reimbursement clause was in nature of a penalty and hence violated Section 74 of the Indian Contract Act.

The Supreme Court on October 12th passed its judgment in the matter. It relied on ONGC v Saw Pipes to hold that an award that patently contravenes substantive laws of India will be against the public policy of India. However, the Court refused to engage in detail with the submission that the Saw Pipes judgment dealt with the definition of public policy under Section 34 of the Arbitration and Conciliation Act and there was no reason to extend the same definition to Section 48. The only observation of the Court in this regard is, "There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd., the expression `public policy of India' used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, `if it is patently illegal'."

This is extremely unfortunate as the Court has pronounced a position that can have far reaching implications without giving reasons for the same or considering submissions on this point with the due consideration they deserve. This hurry on the part of the Court to dispose off the matter has is explained by the following sentences in the judgment: "At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the subject award must be brought to an end finally one way or the other." The Court went on to examine whehter the impugned award in this case was patently illegal and held it was not, allowing the enforcement of the award. Thus, the hurried decision of the Court appears to be motivated by the good intention of allowing enforcement of the award without any further delay. But just like the well intentioned judgment in Bhatia (which was motivated by the consideration that if the Court took a different stance, interim measures in support of arbitration could not be granted), this judgment will have devastating effects on the enforceability of foreign awards and the institution of arbitration as a whole.

It is well accepted in statutory interpretation that the same word, when used in different parts of the same statute carries the same meaning. But this is not so, if the context requires the word to be accorded different meanings in different parts of the same statute.

Section 34 is located in Part I and is concerned with the setting aside of awards. Section 48 is located in Part II and deals with the enforcement of awards. Great harm has already been done by Indian decisions holding that 'public policy' under Section 34 includes patent illegality and even foreign awards can be set aside for non-conformity with Indian law. While extending this definition to Section 48 too, the Court appears to have forgotten its own earlier judgment in Renusagar, which drew a clear distinction between public policy considerations in setting aside an award before a domestic court and public policy considerations while enforcing a foreign award:

"The Foreign Awards Act is, therefore, intended to reduce the time taken in recognition and enforcement of foreign arbitral awards. The New York Convention seeks to achieve this objective by dispensing with the requirement of the leave to enforce the award by the courts where the award is made and thereby avoid the problem of "double exequatue'. It also restricts the scope of enquiry before the court enforcing the award by eliminating the requirement that the award should not be contrary to the principles of the law of the country in which it is sought to be relied upon. Enlarging the field of enquiry to include public policy of the courts whose law governs the contract or of the country of place of arbitration, would run counter to the expressed intent of the legislation."

Though Renusagar decision was passed under the Foreign Awards Act, not the 1996 Act, neither the staturtory language nor the legislative intention appears to have undergone a transformation after that decision in such a manner as to permit the stance taken by the Court in the present case.

The present decision will have the effect of subjecting every single arbitral award, irrespective of its country of origin, to Indian law. While this was already achieved by the Venture-Satyam decision which permitted challenge of a foreign award under Section 34, the position has been worsened by the present judgment as a challenge based on Indian substantive law will operate even in cases where the award debtor does not take the active step of challenging the award under Section 34.