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  • Ashutosh Kumar

An analysis of Vijay Karia v. Prysmian Cavi (SC)

Updated: Jul 21, 2021

Please see the post on NLSIR Online (https://nlsir.com/a-few-steps-more-supreme-court-of-india-further-evolves-its-jurisprudence-on-the-enforcement-of-foreign-awards/).


A FEW STEPS MORE: SUPREME COURT OF INDIA FURTHER EVOLVES ITS JURISPRUDENCE ON THE ENFORCEMENT OF FOREIGN AWARDS


The Arbitration and Conciliation Act, 1996 (the ‘A&C Act’) places responsibility for enforcement of foreign awards on High Courts.[1] If a High Court decides to enforce a foreign award, then such decision is not subject to appeal,[2] except pursuant to the extraordinary power of the Supreme Court of India (the ‘Supreme Court’) under Article 136 of the Constitution. Of late, the Supreme Court has been restrained in exercising such power and this approach has led to the enforcement of foreign awards becoming significantly faster and more predictable. However, such restraint has also denied opportunities to the Supreme Court to evolve its jurisprudence on the enforcement of foreign awards.


In this context, the recent decision of the Supreme Court in Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.[3] (available here) is certainly welcome. It provides useful guidance on the meaning of s. 48(1)(b) of the A&C Act[4] and attempts to clarify the intricate relationship between ‘the public policy of India’ under s. 48(2)(b) of the A&C Act and the violation of Indian laws — more specifically, the Foreign Exchange Management Act, 2000 (the ‘FEMA’). It also offers helpful guidance on the discretion available to courts to enforce a foreign award despite the existence of grounds under s. 48 of the A&C Act.


SUMMARY


The dispute related to the enforcement of four partial final awards rendered in arbitration proceedings seated in London. The arbitration proceedings were initiated by Prysmian for the resolution of disputes arising under a joint venture agreement between Prysmian, Mr. Vijay Karia and other individuals (the VK Group) and their joint venture company, Ravin Cables Limited. Prysmian contended that the VK Group had committed an event of default under the agreement which entitled Prysmian to require the VK Group to sell its shares to Prysmian at a 10% discount to the fair market value. This stipulation was contrary to Rule 21(2)(b)(iii)[5] of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the ‘NDIR’), promulgated under the FEMA.


The arbitral tribunal decided the dispute in favour of Prysmian. The VK Group did not challenge the resulting awards in London, but raised several objections under s. 48 of the A&C Act when Prysmian sought to enforce the awards before the Bombay High Court. The Bombay High Court rejected these objections and decided to enforce the awards. The VK Group appealed this decision before the Supreme Court under Article 136 of the Constitution.


Before the Supreme Court, the VK Group raised as many as 12 objections which it sought to classify under s. 48(1)(b) and s. 48(2)(b) of the A&C Act. These objections primarily related to – (i) the arbitral tribunal failing to deal with specific counterclaims; (ii) the arbitral tribunal acting contrary to expert evidence, ignoring key evidence and failing to draw an adverse inference; (iii) the arbitral tribunal making perverse determinations / decisions; and (iv) the awards being in breach of Rule 21(2)(b)(iii) of the NDIR. The Supreme Court rejected these objections and affirmed the decision of the Bombay High Court.


LEGAL ISSUES


The Supreme Court considered four legal issues – (i) whether the grounds under s. 48 of the A&C Act permit a challenge relating to the merits of a foreign award; (ii) what is the meaning of s. 48(1)(b) of the A&C Act insofar as it refers to instances where an award-debtor has been “unable to present his case”; (iii) whether a foreign award is contrary to the public policy of India merely due to a violation of Indian laws — and more specifically, the NDIR and/or the FEMA; and (iv) whether there is discretion available to courts to enforce a foreign award despite the existence of grounds under s. 48 of the A&C Act.


Whether the grounds under s.48 of the A&C Act permit a challenge relating to the merits of a foreign award


The Supreme Court relied on its decisions in Renusagar[6] and Shri Lal Mahal[7] and held that the grounds under s. 48 of the A&C Act did not permit a challenge relating to the merits of a foreign award.[8] It also noted that objections based on alleged perversity / patent illegality of a foreign award could not be raised as part of the grounds under s. 48 of the A&C Act because such objections required a review of the merits of a foreign award.[9]


What is the meaning of s. 48(1)(b) of the A&C Act insofar as it refers to instances where an award-debtor has been “unable to present his case”


The Supreme Court considered two specific questions while deciding this issue – (i) whether this ground applies in all cases involving a breach of natural justice or only where a breach of natural justice has occurred during the hearing before the arbitral tribunal; and (ii) whether this ground is applicable if an arbitral tribunal fails to deliver a finding on a material issue or decide a claim or counterclaim.


The Supreme Court decided that the phrase “unable to present his case” could not “be given an expansive meaning” to cover all cases involving a breach of natural justice and had “to be read in the context and colour of the words preceding the said phrase”.[10] It held that the phrase referred to “a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties” and would “apply at the hearing stage and not after the award has been delivered”.[11] It noted that “[a] good working test” to determine whether a party had been “unable to present his case” was to consider “whether factors outside the party’s control [had] combined to deny the party a fair hearing”.[12]


The Supreme Court identified the following examples of a party being “unable to present his case” – (i) where “no opportunity was given to deal with an argument which goes to the root of the case”; (ii) where “findings [are] based on evidence which [goes] behind the back of the party and which results in a denial of justice to the prejudice of the party”; and (iii) where “additional or new evidence is taken which forms the basis of the award on which a party has been given no opportunity of rebuttal”.[13] It nevertheless emphasized that this ground must “be clearly made out on the facts of a given case” and that all foreign awards “must always be read supportively with an inclination to uphold rather than destroy”.[14]


The Supreme Court further held that this ground is not applicable if an arbitral tribunal fails to deliver a finding on a material issue or decide a claim or counterclaim.[15] It nonetheless observed that “if a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counter-claim in its entirety, the award may shock the conscience of the Court [and its enforcement may be refused] on the ground of violation of the public policy of India, in that it would then offend a most basic notion of justice”.[16] It noted that this caveat — based on the reasoning of the Delhi High Court in Campos Brothers[17] — did not apply in cases where a foreign award “addressed the basic issues raised by the parties” and “in substance, decided the claims and counter-claims” or where an issue/claim was rejected based on “poor reasoning” or there was “implied rejection” of an issue / claim.[18]


Whether a foreign award is contrary to the public policy of India merely due to a violation of Indian laws — more specifically, the NDIR and/or the FEMA


The Supreme Court relied on its decision in Renusagar[19] and held that a foreign award is not contrary to the public policy of India merely due to a violation of Indian laws.[20] It held that a foreign award is contrary to the public policy of India only if – (i) it is vitiated by fraud, corruption, etc., (ii) it contravenes the fundamental policy of Indian law, or (iii) it conflicts with basic notions of justice and morality.[21]


The Supreme Court thereafter considered whether a foreign award is contrary to the public policy of India if it violates the NDIR and/or the FEMA — i.e., whether such violation amounts to a contravention of the fundamental policy of Indian law.[22] Endorsing the reasoning of the Delhi High Court in Cruz City,[23] the Supreme Court observed that the FEMA (unlike the erstwhile Foreign Exchange Regulation Act, 1947 (the ‘FERA’) was based on a policy of managing foreign exchange (instead of policing foreign exchange)[24] and there was no provision therein which rendered void any transaction in violation of the FEMA.[25] It also noted that certain actions in violation of the FEMA or the Rules framed thereunder could even be condoned by the Reserve Bank of India.[26] It therefore held that a violation of the NDIR and/or the FEMA did not amount to a contravention of the fundamental policy of Indian law since such violation could possibly be condoned by the Reserve Bank of India, and even if it was not condoned, such violation did not render the underlying transaction void.[27] Thus, a foreign award which violated the NDIR and/or the FEMA did not contravene the fundamental policy of Indian law and was not contrary to the public policy of India.[28]


The Supreme Court also attempted to clarify the meaning of ‘the fundamental policy of Indian law’. It relied on its decision in Renusagar[29] and held that the fundamental policy of Indian law refers to a “legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised”.[30] It further held that ‘fundamental policy’ referred to “the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts”.[31]


Whether there is discretion available to courts to enforce a foreign award despite the existence of grounds under s. 48 of the A&C Act


The Supreme Court observed that grounds under s. 48 of the A&C Act could be classified into three groups – (i) grounds which “affect the jurisdiction of the arbitration proceedings”[32]; (ii) grounds which “affect party interest alone”[33]; and (iii) grounds which “go to the public policy of India”[34].[35] It held that in those cases where grounds existed which “affect the jurisdiction of the arbitration proceedings” or “go to the public policy of India”, courts lacked discretion to enforce foreign awards despite the existence of such grounds.[36] However, in other cases where grounds existed which “affect party interest alone” and are capable of waiver or abandonment, and no prejudice had been caused in spite of the existence of such grounds, courts could exercise such discretion after balancing competing concerns relating to fairness and enforcement.[37]


ANALYSIS


The decision in Vijay Karia further evolves the complex jurisprudence of the Supreme Court on the enforcement of foreign awards. However, it also leaves behind a number of lacunae and ambiguities which are likely to lead to further litigation in the future.


Reviewing the Merits of Foreign Awards


While the Supreme Court held that s. 48 of the A&C Act did not permit challenges relating to the merits of a foreign award, it nonetheless noted that enforcement of a foreign award could be refused if it – (i) contravened the fundamental policy of Indian law by infringing an essential principle of Indian law; or (ii) conflicted with basic notions of justice and morality by failing to decide a material issue, claim or counterclaim. It also noted that enforcement of a foreign award could be refused if a party had been “unable to present his case” because no opportunity was given to such party to deal with crucial arguments or evidence.


These observations clearly indicate that the merits of a foreign award remain susceptible to a degree of review under s. 48 of A&C Act. It is not possible to decide if a foreign award infringes an essential principle of Indian law, fails to decide a material issue, claim or counterclaim or fails to provide adequate opportunity to deal with crucial arguments or evidence without assessing the merits of such award. As a result, award-debtors are likely to continue pursuing challenges relating to the merits of foreign awards — albeit after appropriate window-dressing — which can undermine the goal of fast and predictable enforcement of foreign awards.


Meaning of s. 48(1)(b) of the A&C Act


The Supreme Court adopted the correct approach by limiting the meaning of s.48(1)(b) of the A&C Act insofar as it referred to instances where an award-debtor has been “unable to present his case”. The extension of this ground to all cases where there has been a breach of natural justice would likely cause much confusion regarding its meaning since breaches of natural justice could arguably arise in a wide gamut of situations involving defects in procedure and merits. It would also compel High Courts to closely examine the merits of foreign awards for breaches of natural justice.


However, apart from circumstances involving misconduct relating to evidence, the Supreme Court did not identify specific circumstances covered by this ground. It could have considered whether this ground applied in circumstances involving procedural defects such as a refusal to accept evidence or written submissions or a refusal to permit oral arguments. In the absence of suitable guidance, award-debtors are likely to raise a wide array of alleged procedural defects in order to invoke this ground.


Meaning of Fundamental Policy of Indian Law


Even though the Supreme Court rightly decided that a violation of the NDIR and/or the FEMA did not amount to a contravention of the fundamental policy of Indian law, it did not offer a clear test for determining what constitutes a contravention of the fundamental policy of Indian law. At most, it merely confirmed that a violation of Indian law which could be condoned or did not result in serious consequences (such as the transaction being rendered void) did not amount to a contravention of the fundamental policy of Indian law.


It did not clarify whether violations of Indian law involving serious consequences invariably amounted to contraventions of the fundamental policy of Indian law. Arguably, it would be so only if such violations related to a “legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised”,[38] but the Supreme Court also did not offer any guidance for the identification of such legal principles or legislation. This glaring lacuna has unfortunately left the field open for opportunistic litigation in the future.


Discretion to Enforce Foreign Awards Despite Grounds under s. 48 of the A&C Act


The Supreme Court adopted the correct approach by recognising a limited discretion to enforce foreign awards despite the existence of certain grounds under s. 48 of the A&C Act. This approach is laudable since it takes a nuanced stance which rejects absolute discretion / obligation in favour of a case-by-case assessment. However, the Supreme Court did not provide a complete or clear classification of grounds under s. 48 of the A&C Act which could suitably guide the exercise of such discretion. As a result, the classification of grounds under s. 48 of the A&C Act remains prone to being misconstrued and could result in errors in the exercise of such discretion.

[1] See s. 47 and s. 49 of the A&C Act. [2] See s. 50 of the A&C Act. [3] Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors. 2020 SCC OnLine SC 177. [4] S. 48(1)(b) of the A&C Act permits a High Court to refuse enforcement of a foreign award if it is proved that an award-debtor “was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings” or “was unable to present his case”. The first condition is relatively uncontroversial and applies in such cases where an award-debtor was prevented from participating in arbitration proceedings due to the absence of proper notice. The second condition is evidently ambiguous since it is unclear which circumstances amount to an award-debtor being “unable to present his case”. The Supreme Court in Vijay Karia considered the meaning of this condition in substantial detail. [5] Rule 21(2)(b)(iii) of the NDIR stipulates that - “[unless otherwise prescribed in these rules, the price of equity instruments of an Indian company, transferred from a person resident in India to a person resident outside India shall not be less than,] the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the Securities and Exchange Board of India or a practising Cost Accountant, in case of an unlisted Indian company”. [6] Renusagar Power Co. Ltd. v. General Electric Co. (1994) Supp. (1) SCC 644. [7] Shri Lal Mahal Ltd. v. Progetto Grano SpA (2014) 2 SCC 433. [8] See paragraphs 34-35. [9] See paragraph 38. [10] See paragraph 84. [11] Id. [12] See supra note 10. [13] See supra note 10. [14] See supra note 10. [15] See paragraph 85. [16] See paragraph 86. [17] Campos Brothers Farms v. Matru Bhumi Supply Chain Pvt. Ltd. 2019 SCC OnLine Del 8350. [18] See supra note 16. [19] See supra note 6. [20] See paragraph 34. [21] See paragraphs 34 and 37. [22] See paragraphs 87 and 89. [23] Cruz City 1 Mauritius Holdings v. Unitech Ltd. 2017 SCC OnLine Del 7810. [24] The Supreme Court made this observation after noting the reasoning of the Delhi High Court in Cruz City which held that – “...there has been a material change in the fundamental policy of exchange control as enacted under FERA and as now contemplated under FEMA. FERA was enacted at the time when the India's economy was a closed economy and the accent was to conserve foreign exchange by effectively prohibiting transactions in foreign exchange unless permitted... With the liberalization and opening of India's economy it was felt that FERA must be repealed”. In light of the starkly different policies behind the FEMA and the FERA, a violation of the FEMA cannot be equated to a violation of the FERA. Therefore, even though a foreign award in violation of the FERA is treated as being contrary to the public policy of India (as per Renusagar), a foreign award in violation of the FEMA would not be treated so. [25] See paragraph 91. [26] Id. [27] See supra note 25. [28] See supra note 25. [29] See supra note 6. [30] See supra note 25. [31] See supra note 25. [32] The Supreme Court identified – (i) invalidity of the arbitration agreement; and (ii) non-arbitrability of the subject-matter, as examples of the grounds forming part of this group. However, this classification was problematic because non-arbitrability of the subject-matter is a ground relating to the public policy of the enforcing jurisdiction and not the jurisdiction of the arbitral tribunal. In addition, the Supreme Court did not indicate whether this group also contained other grounds such as – (i) incapacity of the parties to the arbitration agreement; (ii) lack of proper notice of the appointment of an arbitrator or the arbitration proceedings; (iii) the award dealing with differences or matters extraneous to the terms of submission; (iv) errors in the composition of the arbitral tribunal or in arbitral procedure; and (v) the award being set aside or suspended by a competent court at the seat of arbitration proceedings. [33] The Supreme Court identified the inability of a party to present his case as an example of the grounds forming part of this group. It did not indicate whether this group also contained other grounds. [34] The Supreme Court only identified the award being contrary to the public policy of India as forming part of this group. However, as noted above, non-arbitrability of the subject-matter clearly should have formed part of this group. [35] See paragraph 55. [36] See paragraphs 55 and 56. [37] See paragraph 56. [38] See supra note 25.

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