Bharat Vasani explores the legislative gap between the arbitration act and foreign exchange regulations by examining key judgments on enforcement applications

India is one of the few countries that still has exchange controls and does not have full capital account convertibility. The Foreign Exchange Management Act, 1999 (FEMA), empowers the Reserve Bank of India (RBI) to frame regulations for the enforcement of FEMA. FEMA regulations contemplate prior RBI approval for certain categories of capital account transactions between residents and non-residents.

The enforcement of international arbitration awards in India, where there is going to be a remittance of foreign exchange from a resident to a non-resident, would invariably have FEMA implications. If the award is not in conformity with the FEMA regulations, the question that arises is whether the court, where enforcement action is filed, can decline enforcement on the ground that the award’s enforcement would be contrary to the country’s public policy.

Relevant provisions

Section 48 of the Arbitration and Conciliation Act, 1996, lays down conditions for enforcement of a foreign arbitral award. Under section 48(2), “Enforcement of an arbitral award may also be refused if the court finds that (a) The subject-matter of the difference is not capable of settlement by arbitration under the law of India; or (b) The enforcement of the award would be contrary to the public policy of India.”

Two explanations are provided. First, it is clarified that an award is in conflict with the public policy of India only if: “(i) The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) It is in contravention with the fundamental policy of Indian law; or (iii) It is in conflict with the basic notions of morality or justice.”

Second, “The test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute … If an application for the setting aside or suspension of the award has been made to a competent authority … the court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.”

Section 48 adopts article V of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958, to which India is a signatory.

Scope of public policy

The scope of enquiry for the court before which the application for enforcement of foreign award is pending is circumscribed by the conditions for refusal set out in section 48(1) and (2). It is not open to a party seeking to resist a foreign award to assail the award on merits as the enforcing court is not the appellate court.

Further, even if the award debtor has not challenged the award or resisted its enforcement under section 48, the court enforcing the award is duty bound to make an independent enquiry to satisfy itself that: (a) the subject matter of the difference is capable of settlement by arbitration under the law of India; and (b) the enforcement of the award will not be contrary to the public policy of India.

The 2015 amendment to section 48 of the arbitration act has significantly restricted the ground of “public policy” by overruling many previous judgments of the Supreme Court. The amendment was based on the 246th Report of the Law Commission of India, which had recommended various amendments to the arbitration act. The Law Commission had recommended restrictions on the scope of “public policy” in both section 34 and section 48. This was to bring the definition in line with the definition propounded by the Supreme Court in the case of Renusagar v General Electric (1993) where the Supreme Court, while construing the term “public policy” in section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961, held that an award would be contrary to public policy if such enforcement would be contrary to: (1) fundamental policy of Indian law (2) interests of India (3) justice or morality.

The amendment made to the definition of public policy in 2015 is stricter and does not include reference to “interests of India”, which is vague and capable of interpretational misuse, especially in the context of challenging awards in international commercial arbitration.

Judicial pronouncements

The effect of the 2015 amendments to the arbitration act has been well explained by the Supreme Court in its judgment of 31 August 2017 in the case of HRD Corporation (Marcus Oil and Chemical Division) v Gail (India).

According to that judgment both sections 34 and 48 have been brought back to the position of law contained in the Renusagar case, “where ‘public policy’ will now include only two of the three things set out therein, viz., ‘fundamental policy of Indian law’ and ‘justice or morality’. The ground relating to ‘the interest of India’ no longer obtains. ‘Fundamental policy of Indian law’ is now to be understood as laid down in Renusagar (supra). ‘Justice or morality’ has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the court as understood in Associate Builders v Delhi Development Authority”.

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Bharat Vasani is the legal adviser to the chairman’s office at Tata Sons.