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Challenges to Awards passed in International Commercial Arbitration in India

Before the Arbitration and Conciliation Act, there were majorly three regulations for the enforcement of the arbitration awards in India. The enforcement of domestic awards was regulated under The Arbitration Act 1940. Enforcement of the foreign awards there were two different regulations based on conventions firstly it was Execution of Foreign Arbitral Awards which was based on Geneva Convention, and the other was Foreign Awards (Recognition and Enforcement Act) 1961 New York Conventions.


HISTORY OF FOREIGN ARBITRAL AWARD ENFORCEMENT IN INDIA


1. Geneva Convention: Influence

This was a multilateral treaty which came into effect after the First World War. It consisted of Geneva Protocol on Arbitration Clauses of 1923 and The Geneva Convention on the Execution of Foreign Arbitral Awards of 1927. These were supplementary to each other for making it possible to enforce an award in a contracting state other than where the Award was rendered.[i] For the enforcement of the award under the Convention, it was required for both the contracting states of being a party to the Convention. For the enforcement of the award under the Convention, the Award must be recognized as final “i.e. award is not subject to appeal or opposition and the award must not be against the “public policy and principle of Law”.


2. New York Convention: Influence and Adaptations

A significant criticism of the Geneva Convention was that the Convention was non- conclusive to the speedy enforcement of foreign awards which was the requirement of International trade. One of the major loopholes in Geneva Convention was, before the enforcement of the Award, the matter would have become final in the country where it was rendered. Therefore it effectively prevented the execution of awards on the basis that the Award was the subject matter of litigation, which act as a hindrance in the arbitration process[ii] Realizing the interest of developing International trade, it was essential to further the means of obtaining the enforcement in one country of an international arbitral award rendered in another country. ECOSOC in 923rd Plenary meeting 1958 adopted a new International Convention on the recognition and enforcement of Arbitral Award, i.e. The New York Convention. Article VII (2) of the New York convention ceases the effect of the Geneva Convention.[iii] This Convention recognises the enforcement of the arbitral award even if it is not made in the territory of a contracting party. Hence, The New York Convention has widened the area of its operations. However, this Convention, according to Article 1(3) permits the contracting state to limit the jurisdiction for enforcement of the Award.


3. The Foreign Award (Recognition and Enforcement Act 1961)

The Foreign Award Act was passed to give effect to the New York Convention. This Act aimed at providing a mechanism for the speedy enforcement of resultant foreign arbitral awards made in the territory of a state other than the state where the recognition and enforcement of such Award are sought.


4. Indian Laws: Arbitration and Conciliation Act, 1996

The 1940 Act amended the law relating to Arbitration under the Indian Arbitration Act 1899 and 2nd Schedule to the code of Civil Procedure, 1908. The arbitration Act was criticized for its mechanisms as it allowed too much judicial intervention.


Enforcement of awards under this Act: Enforcement of a domestic award is challengeable under this Act under Section 34 of this Act. However, there is no provision of challenging a foreign award under this Act. The enforcement of foreign awards may be denied on the following grounds a) Invalidation of agreement b) No proper appointment of arbitrator C) the decision taken is beyond the subject of arbitration d) Any failure in the composition of the arbitral authority or arbitral procedure with the law of the country.

I. Foreign awards cannot be challenged on merits during a proceeding in India, as mentioned in the Balco case. [iv]

II. Another requirement for enforcing any foreign award in India is that country where the Award has been issued must be notified by the Indian Government to be a country to which the New York Convention applies[v] As given under Sec. 44 (b) of 1996 Act.

III. The court can refuse enforcement of the Award if it goes against the public policy of the country in which the parties seek enforcement.

“Public Policy is a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from sound law. It is never argued at all, but only when other points fail” [vi]


SUPREME COURT’S JUDGMENT IN Vijay Karia & Ors. vs. Prysmian Cavi E Sistemi Srl & Ors.

The Supreme Court, in its recent judgement in this case [vii] has re-affirmed its principle of “least interference” while determining the enforceability of foreign arbitral awards under Section 48 of the Arbitration and Conciliation Act, 1996 (Act).


Section 34 of the Act states the grounds by which arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India can be set aside. Although arbitral awards passed in foreign seated arbitrations cannot be challenged in India, the enforcement of these awards can be challenged on grounds stated in Section 48 of the Act. The grounds for setting aside awards and for refusing enforcement of foreign awards are substantially identical due to which this recent judgment has a direct impact on challenges to arbitral awards under section 34 of the Act as well.


Facts of the case:

1. The respondent had initiated arbitration proceedings against the Appellants in the London Court of International Arbitration (LCIA) concerning a joint venture dispute alleging material breach of the venture.

2. The sole arbitrator passed four arbitral awards.

3. Accordingly, the appellant was directed to sell their shareholdings at a discounted price of 10% and to do all the other necessary acts.

4. These awards were later challenged by the appellant when brought in India for enforcement under section 48 of the Act.

5. The Bombay High Court initially rejected this challenge.

6. The Appellants then approached the Supreme Court under Article 136 of the Constitution seeking special leave to file an appeal.


Issues raised:

Issues raised by the appellant were categorized broadly into three parts:

1. The appellant was deprived of the opportunity to present their case before the tribunal.

2. The tribunal failed to deal with the contentions raised by the appellant, i.e. there was lack of impartiality or independence of the sole arbitrator (under section 48(1)(b) of the Act).

3. The Award was contrary to the provisions of Foreign Exchange Management Act, 1999 (FEMA) thus, contravening the "Public Policy of India" (under section 48(2)(b) of the Act).


Judgement:

The SC rejected the claim of denial of opportunity to present the case made by the appellant because a mere failure to consider a material issue would not fall within the scope of Section 48(1)(b). The SC also rejected the contentions regarding the violation of FEMA because FEMA is based on a policy of managing foreign exchange and it contains no provision which voided any transaction violating its provisions, unlike FERA which focused on policing these exchange and had a provision under Section 47.


The court also relied on the Delhi High Court judgement in Cruz City 1 Mauritius Holdings v. Unitech Limited (Cruz City)[viii] in which the court held that contravention of any provision of enactment would not result into violation of the fundamental policy of Indian law. Therefore, a breach in FEMA does not amount to a violation of the Fundamental Policy of law. Further, various other grounds of challenge were raised by the appellant. The SC rejected all these grounds claiming that these objections are not sustainable.


LAWS REGULATING CHALLENGES TO AWARDS IN INTERNATIONAL COMMERCIAL ARBITRATIONS BEFORE VIJAY KARIA'S CASE.

An award passed in India seated international commercial Arbitration which is violative of FEMA regulations can be divided into two grounds:

Ø Patent illegality appearing on the face of the Award.

Ø Award in contravention to the public policy of India.


As per the Arbitration & Conciliation (Amendment) Act, 2015, a party can no longer challenge the Award on the ground of patent illegality. Moreover, the recent case of Vijay Karia set-asides the second ground. Therefore, an award passed in an India-seated international commercial arbitration cannot be challenged on the ground that it violated the FEMA regulations.


CONCLUSION

The decision of the SC, in the case mentioned above, sets an unprecedented example, keeping in mind the limited jurisdiction of the SC, for the award debtors to refrain from adopting similar litigation strategies which turns out to be counter-productive and exhaust all possible recourse against enforcement of foreign awards. The judgement brings some clarity to this stream of Arbitration and demonstrates a balancing act played by the court at the time of determining the enforceability of a foreign award. This will further protect foreign parties holding a favourable award from these challenges by limiting the future litigants to challenge the enforcement of foreign awards merely because it violates a provision of FEMA.


ENDNOTES

[i] Dr Ashwinie Kumar Bansal, Arbitration Awards, Law on setting aside and execution of arbitration awards, agreement and appointment of arbitrators,, Universal Law Publications Co. New Delhi, 3rd Edition, 6 ISBN:978-93-5035-489-6.

[ii] Ibid

[iii] VII(2)- Protocol on Arbitration Clauses of and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 shall cease to affect Contracting States on their becoming bound and to the extent that they become bound, by this Convention, 1923

[iv] Bharat Aluminum Co. v. Kaiser Aluminum Technical Service, Inc., 9,649, SCC, SC, 2012

[v] The New York Arbitration Convention of 1958

[vi] Richardson vs Mellish 2,229,Bing [1824]

[vii] 2020 SCC OnLine SC 177

[viii] (2017) 239 DLT 649



ABOUT THE AUTHOR

This blog has been authored by Bhoomi Sandesara & Shaivi Awasthy who are 3rd Year B.A., LL.B. (Hons.) students at ILS Law College, Pune.


[PUBLICATION NO. TLG_BLOG_20_1704]

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