Public Policy Defeating Arbitral Awards and Prospective Investments

By | September 5, 2020
Public Policy Defeating Arbitral Awards and Prospective Investments

An unswerving practice of recognition and enforcement of foreign arbitral awards is one of the most vital catalysts to attract international investment. An arbitration ecosystem where such recognition and enforcement is done with minimal interference is considered to be strong and desirable[1] although there may be certain necessary limitations. One of such limitations that have been used to the extent of semantic satiation is ‘public policy’. The New York Convention[2] provides that contravention of public policy is a ground for refusing enforcement of arbitral awards. In India, this limitation is reflected under Section 48 of The Arbitration and Conciliation Act, 1996.

The Supreme Court while interpreting ‘public policy’ in Renusagar Power Co. Ltd. v. General Electric Co[3]provided that enforcement of a foreign arbitral award can be refused if it is contrary to (1) fundamental policy of Indian law; or (2) the interests of India; or (3) justice or morality. The Court gave a narrower meaning to “public policy of India” as opposed to a broader meaning that was later given in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[4]where ‘public policy’ was interpreted concerning enforcement of domestic arbitral awards.[5]

The strengthening or weakening of arbitration ecosystem is at the hands of the Courts in how they interpret ‘Public Policy’. Giving Section 48[6] a broad meaning would be akin to a double-edged sword. On one end it serves a fundamental purpose of safeguarding the public interest. However, on the other, a broad meaning gives immense power to the Courts to set aside arbitral awards which introduces an unfair amount of uncertainty to foreign investors ultimately discouraging investment.[7]

Current Practice in India

In the recent judgment of the Supreme Court in National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S.A.[8], it was held that a foreign award is not enforceable if contract violates government policy and rules. The dispute was regarding a contract for the supply of 5000 metric tonnes of Groundnut. Here, the appellant failed to supply the agreed-upon quantity to the respondent due to unforeseen circumstances.

The remaining quantity was to be supplied later at an inflated rate, but the export was denied as export without the permission of Government was not permissible for Groundnut and without the consent of the Government, the quota of export could not be forwarded to next season. The Court refused the enforcement of award as the export without permission would have violated the law; thus, the award was violative of public policy of India.

The Court in the above case referred to its earlier decision in the Renusagar case[9]wherein while interpreting the meaning of ‘public policy’ under Section 7(1)(b)(ii) of the Foreign Awards Act[10] it stated that “contravention of law alone will not attract the bar of public policy and something more than contravention of law is required”.

The Court had rejected the enforcement of the award as being violative of public policy as it considered the Government’s permission as a fundamental public policy of India. At the same time, it can be argued that such an interpretation of ‘public policy’ is liberal use of Section 48[11]. This interpretation dilutes the arbitral process and gives India a reputation of being hostile towards settling disputes. An arbitral ecosystem where courts come to the rescue of domestic companies displays hostility that would eventually discourage prospective investment.[12]

Practice in other nations

If reference may be drawn towards how other nations interpret ‘public policy’ as a ground for refusing enforcement of a foreign arbitral award, the case of ED & F Man (HK) v. China Sugar and Wine Company (Group)[13] provides an excellent example where the parties had entered into a contract of sale of sugar that had an element of futures in the form of the financial derivatives contract. The dispute, in this case, began when there was a failure of payment by the respondent which led to the termination of the contract. Subsequently, an award was passed in favour of the applicant.

This award was challenged in the Beijing Higher Peoples Court (BHPC) to be in violation of mandatory Chinese laws as trading in futures overseas without permission of Chinese authorities was prohibited. The Court refused the enforcement holding that the award violates public policy.

In an appeal to this decision, the Supreme People’s Court of China made a distinction. Although it did agree with the BHPC that trading in futures was invalid but disagreed that it violates public policy. It made a distinction that breach of mandatory Chinese laws cannot be equated entirely with breach of public policy in order to attract Article V(2)(b) of the New York Convention[14]. The Court allowed enforcement of the award.

There is a sharp contrast between how the Indian Courts and the Supreme People’s Court of China have equated breach of mandatory laws or mandatory permission of the Government with ‘public policy’. The Chinese courts narrowly interpret ‘public policy’ by not considering ‘state interest’ to be part of it. It is their interpretation that ‘public policy’ is something that affects the fundamental interest of a large extent of the population. This approach is indicative of china being more welcoming of international arbitration, and there is no trace of hostility.[15]

Looking ahead

India currently ranks 63 in the ‘Ease of Doing Business 2020’[16] report but ranks 163 out of 190 in ease of enforcing contracts. The cost for enforcing contracts that includes court fees, attorney fees and enforcement fees has been calculated to be 31% in India, and in contrast, it is as low as 23% for China[17].

A leap of 14 ranks from being rank 77 in 2019 is monumental with due credit to the improvements in ease of getting credit, protecting minority investors, getting electricity, and dealing with construction permits. All these developments have supported a forward trajectory in attracting foreign investors. Looking forward towards building an accommodative arbitration ecosystem will go a long way in improving the ease of enforcing contracts and would bring down the cost of enforcement of foreign arbitral awards.

Since 1994, India has signed 86 Bilateral Investment Treaties (BIT) out of which more than 66 have been unilaterally terminated between 2016 and 2019.[18] The effectiveness of BITs has always been in question, and the judiciary has played a part in its weakening.

White Industries Ltd.[19] case is one of such examples. In this case, India was found guilty of violating its Bilateral Investment Treaty with Australia where White Industries had successfully obtained an ICC award against India whose enforcement was delayed for about nine years in Indian Courts before Australia had to seek remedy under India-Australia BIT Tribunal. It was argued that inordinate delay by Indian Courts to give justice violated provisions of Fair and Equitable Trade and Most favoured Nation treatment.[20] Thus, it is an inescapable fact that Courts play a pivotal role in deciding whether India is perceived as an investment destination or not.

Conclusion

The Indian Courts shall not examine ‘public policy’ through a magnifying lens but should do it through binoculars weighing in the interests that lie far ahead in time. A nearsighted public policy may harm in the long run, and the judicial review of foreign arbitral awards must consider that. The importance of a predictable remedy in creating a pro-investment environment is immense where foreign investors prefer minimizing potential legal costs.[21] There is a school of economic protectionists who would prefer the pervasive residual power of Indian courts in the name of protecting the national interest, whereas for a developing nation with inferior bargaining power[22] such interests are misplaced.

Minimal curial intervention in foreign arbitral award would encourage finality of awards and would expose the parties to accept the award due to limited recourse to the courts.[23] While adopting such an approach, a correct balance has to be struck where the Courts can still interfere when it is necessary to protect the short-term and long-term public interest.


Author- Akshat Gogna

Student – School of Law, Christ University (SLCU)


[1] Amanda Perry, An Ideal Legal System for Attracting Foreign Direct Investment? Some Theory and Reality, 15 Am. U. Int’ l L. Rev. 1627 (2000)

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, India Adopted on Oct 11 1960, as The foreign awards (recognition and enforcement) Act of 1961 (an act to give effect to the New York Convention on recognition and enforcement of foreign arbitral awards)

[3] Renusagar Power Co. Ltd. V. General Electric Co. Supp (1) SCC 644 (1994)

[4] Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd 5 SCC 705 (2003)

[5] O.P. Malhotra, The Scope of Public Policy under the Arbitration and Conciliation Act, 1996. Student Bar Review 19, no. 2 (2007): 23-29.

[6] of The Arbitration and Conciliation Act, 1996

[7] Mahajan, Pallavi, The Unruly Horse of Public Policy Exemption in the Enforcement of Foreign Arbitral Awards in India (September 7, 2015). Available Here

[8] National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S.A., 2020 SCC OnLine SC 381

[9] Supra note 3.

[10] The foreign awards (recognition and enforcement) Act of 1961

[11]Arbitration and Conciliation Act, 1996

[12]Bhadra Sinha, Arbitration delays hit investor mood, Judicial intervention in commercial disputes dampen foreign firms’ enthusiasm, (Oct 21, 2007 21:47 IST), Available Here

[13] ED&F Man (HK) v. China Sugar and Wine Company (Group, Min Si Ta Zi [Civil Court Ruling] No.3, (2003)

[14] Supra note 2.

[15] Anusornsena, Veena, Arbitrability and Public Policy in Regard to the Recognition and Enforcement of Arbitral Award in International Arbitration: The United States, Europe, Africa, Middle East and Asia, Theses and Dissertations. 33. (2012).

[16] World Bank. 2020. Doing Business 2020. Washington, DC: World Bank. DOI:10.1596/978-1-4648-1440-2. License: Creative Commons Attribution CC BY 3.0 IGO (2020)

[17] Ibid.

[18]Prabhash Ranjan, India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash, Oxford University Press, (2019)

[19]White Industries Australia Limited v. Government of India, Uncitral Award available at www.iareporter.com/downloads/20120214/download last accessed on 24/08/2020

[20] Shruti Iyer, Redefining Investment Regime in India: Post White Industries, 14 J. World Investment & Trade 595 (2013).

[21] Aloke Ray & Dipen Sabharwal, Indian Arbitration at a Crossroads, White & Case 1 (Jan. 2007)

[22] Amelia C. Rendeiro, Indian Arbitration and Public Policy, 89 TEX. L. REV. 699 (2011).

[23] Nicholas Poon, Striking a Balance between Public Policy and Arbitration Policy in International Commercial Arbitration, 2012 Sing. J. LEGAL Stud. 185 (2012).


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