Introduction
Globalization and the opening of trade routes have significantly increased the volume of cross-border trade in today’s world. Trade directs contractual obligations and rights towards the parties involved. These obligations need to be fulfilled, and rights protected, for the successful discharge of contracts without disputes. However, conflict among parties is an inevitable part of contractual relationships.
Parties have increasingly adapted to alternate forms of dispute resolution to obtain speedy remedies without resorting to the courts. Nations today operate on a cooperation-based model, promoting bulk international trade and modifying their legal frameworks to facilitate these processes efficiently. Contractual disputes between parties to commercial trade could be resolved using mechanisms such as arbitration and mediation. Arbitration can help in maintaining cordial trading relationships between trading partners. This prevents any unwanted rupture of ties. Arbitration enhances the chance of reaching an amicable solution to the dispute as the parties mutually conclude.
Commercial Arbitration
Arbitration in India is governed by the legislative provisions of the Arbitration and Conciliation Act, of 1996. India signed the New York Convention in 1958 and ratified it in 1960. The present A &C Act was enacted as a consolidated version succeeding the Arbitration Act of 1940 and the Foreign Awards (Recognition and Enforcement) Act, of 1961. The ‘place of arbitration’ plays an important role in the arbitration procedure to determine the governing laws applicable to the parties. It defines that all the provisions of the A&C Act would attract to arbitrations where the place of arbitration is India. International Arbitration taking place in India also comes under the ambit of Indian Arbitration Law.[i]
The parties to international commercial arbitration to avoid the application of the A&C Act must opt for a jurisdiction other than India.
A&C Act under Sec 2(1)(F) defines international commercial arbitration – “International commercial arbitration means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—
- an individual who is a national of, or habitually resident in, any country other than India; or 3
- a body corporate which is incorporated in any country other than India; or
- an association or a body of individuals whose central management and control is exercised in any country other than India; or
- the Government of a foreign country;”
Objective of FEMA
The Indian government scrutinizes the flow of cross-border trade through the Foreign Exchange and Management Act, of 1999. This act is a replacement for the earlier Foreign Exchange Regulation Act. FEMA was introduced to liberalize trade and the economy. The legislative intent of the act is to facilitate and monitor external payments and transactions i.e. Capital account and current account transfers. FEMA aims to maintain the Indian Forex Market.
Enforcement of Foreign Arbitral Award
Article V of the New York Convention provides for limited grounds under which the enforcement of a foreign award can be challenged. In India, the same has been mentioned under Section 48 of the A&C Act.
These grounds under which the arbitration award passed in a country different from the one where enforcement takes place can be suspended if:
1.When the parties to the agreement are incapable under the applicable law or the agreement to which they are subjected is invalid according to the applicable law.
2. The aggrieved party was not furnished with the notice before the appointment of the Arbitrator or the procedure of arbitration
3. The award deals with issues that were outside the scope of submissions made by the parties.
4. The composition of the arbitral authority was not according to the arbitration agreement or was contrary to the provisions of the law of the country where the arbitration took place.
5. The award passed as a result of arbitration has been suspended or set aside by a competent authority.
In NTT Docomo v Tata Sons Limited (O.M.P.(EFA)(COMM.) 7/2016 & IAs 14897/2016, 2585/2017), Delhi HC decided on the question of enforcement of a foreign arbitral award. The facts of the case were that a conflict erupted between the two parties i.e. NTT Docomo Inc and Tata Sons Limited (an Indian company), wherein the Japanese company NTT Docomo had invested in an Indian Joint Venture Company, TTSL. The award passed in 2016 granted NTT Docomo to exercise its right claim its shares in the joint venture bought by Tata Sons at a price which was equal to 50% of its original investment under the shareholder’s agreement. Tata Sons and RBI opposed the enforcement of the award.
The learned court held in its decision that –
1.RBI had no power to challenge the enforcement of award passed
2. And since the award was of the nature of damages, it does not come under the purview of FEMA.[ii]
Public Policy
Article V(2)(b) of the New York Convention interprets public policy as “the public policy of that country” highlighting that the notion of public policy varies according to the domestic laws of a country. The Model Law offers a similar definition of public policy in Articles 34(2)(b)(ii) and 36(1)(b)(ii), as the public policy of the jurisdiction where the set-aside. or enforcement application is made
Section 48(2)(b) of the A&C Act, provides that the enforcement of a foreign award may be refused if such enforcement is contrary to the public policy of India.
In 2015, the Parliament introduced two explanatory provisions to Section 48(2)(b) in order to further restrict its scope. These additional grounds for setting aside of foreign arbitral award are:
1. If the award was affected by means of fraud or corruption
2. The award contravenes with the fundamental policy of Indian Law however, this does not lead to a review of the merits of the dispute
3. If it conflicts with the notions of morality and justice
The SC delivered the landmark ruling of public policy in the case of Renusagar Power Co. Ltd. v. General Electric Co. (1994 AIR 860) wherein the contention before the court was of an alleged violation of the provisions of FERA. Renusagar Power Co. Ltd. brought the petition to set aside the enforcement of a foreign award.
The Court observed in this case that the phrase “public policy” to be attracted “must invoke something more than the violation of the law of India”.
The Court established the following grounds to reject the enforcement of a foreign arbitral award, which were as follows:
- fundamental policy of Indian law; or
- (ii) interests of India; or
- (iii) justice or morality.[iii]
In Vijay Karia v. Prysmian Cavi E Sistemi SRL (AIR 2020 SUPREME COURT 1807) the Supreme Court of India dealt with a significant question: whether enforcing a foreign arbitration award, which required a non-resident to purchase shares from a resident at a discounted price, would breach the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) and consequently violate the ‘fundamental policy of Indian law’ under Section 48(2) of the Arbitration Act.
The appellants argued against enforcing the award, claiming it violated the pricing guidelines under Rule 21 of the NDI Rules. They contended that the award mandated the transfer of shares at a price below their fair value, which they argued was against the NDI Rules and thus should render the award unenforceable.
However, the Supreme Court disagreed with the appellants. The Court pointed out that the Foreign Exchange Management Act (FEMA) is different from its predecessor, the Foreign Exchange Regulation Act (FERA). FEMA is primarily focused on managing foreign exchange rather than policing it, with the Reserve Bank of India (RBI) no longer serving as the strict enforcer it was under FERA.
Importantly, the Court also highlighted that even if there was a violation of FEMA or its rules, the situation could be rectified by seeking post-facto approval from the RBI. As a result, the Court held that a breach that can be corrected under FEMA does not equate to a violation of the fundamental policy of Indian law. Thus, the foreign award and the agreement it enforced could not be deemed legally invalid on these grounds.[iv]
Conclusion
An arbitration-friendly environment essentially involves recognition of foreign arbitral awards. Indian Legislature gives a free hand to parties to enforce foreign arbitral awards through Indian courts. However, certain economic welfare legislation like FEMA aims to regulate foreign transactions flowing in India. These transactions are kept in sight and recorded by RBI. The judiciary tends to limit its interference in matters of non-litigation dispute mechanisms therefore an arbitral award can only be challenged on enforceability in limited circumstances one of which is Public Policy.
This approach of least judicial interference motivates parties to enter into arbitration and other forms of alternate mechanisms without knocking on the court’s doors. This approach aims to reduce the load of cases in the courts save the parties from bearing the unnecessary burden of litigation expenses and invest a large fraction of time to be remedied.
[i] Kunal Arora and Archit Gupta, ‘Arbitration Clauses in Cross-border transactions- Indian Perspective’ (LKS 22 September 2023) https://www.lakshmisri.com/insights/articles/arbitration-clauses-in-cross-border-transactions-indian-perspective/ accessed 5 August 2024
[ii]Bharat Vasani and Varun Kannan, ‘Legislative gap between the Arbitration Act and FEMA: Should Parliament step in’ (CAM 29 November 2022) https://corporate.cyrilamarchandblogs.com/2022/11/legislative-gap-between-the-arbitration-act-and-fema-should-parliament-step-in-part-ii/ accessed 5 August 2024
[iii] Abhijnan Jha and Urvashi Misra, ‘Enforcement of Foreign Arbitral Awards and Challenges based on India’s foreign exchange laws’ (AZB & Partners 17 June 2020) https://www.azbpartners.com/bank/enforcement-of-foreign-arbitral-awards-and-challenges-based-on-indias-foreign-exchange-laws/ accessed 5 August 2024
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