‘Public policy of India’ and the Arbitration Act

By Vivek Vashi, Bharucha & Partners
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In Penn Raquet Sports v Mayor International Limited a single judge of Delhi High Court has considered the scope of “public policy of India” under section 48(2) and section 34 of the Arbitration and Conciliation Act, 1996.

Brief facts

Penn Raquets Sports (PRS) of the US entered into a trademark license agreement (TLA) with Mayor International (MIL) of India in terms of which it granted MIL a licence to use the Penn trademark. In return MIL was to pay royalties to PRS. Following disputes between the parties that culminated in termination of the TLA, PRS invoked arbitration before the International Chamber of Commerce, Paris, for recovery of the outstanding royalty.

MIL refused to countersign the terms of reference and opposed the arbitration on the basis that PRS breached the TLA by granting a licence to Nebus Loyalty an existing sub-licensee of MIL. Owing to non-payment of MIL’s share of the deposit its counterclaim was not considered. The arbitrator held that PRS had not breached the contract, as the licence to Nebus was permitted under clause 2.2.2 of the TLA. Accordingly, an award for outstanding royalties plus interest was made and PRS filed an execution petition with Delhi High Court seeking its enforcement.

Arguments in court

MIL preferred an application under section 48 of the act and argued that the award was contrary to “the public policy of India” as interpreted by the Supreme Court in ONGC v Saw Pipes Ltd. It argued the arbitrator had wrongly interpreted clause 2.2.2 of the TLA and reached a conclusion that was against the intention of the parties and the express terms of the contract. MIL relied on the Supreme Court’s decision in Venture Global Engineering v Satyam Computer Services Limited and Anr, which held that a foreign award is subject to challenge under section 34 of the act.

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

MIL also challenged the award on the basis that it had been unable to present its case and that the closure of the right of defence was unjust and against the principles of natural justice.

PRS refuted MIL’s objections raised under section 48 of the act, i.e. of enforcement of a New York Convention award, on the ground that the award cannot be challenged on merits as there was no challenge in either Switzerland or India. PRS argued the expression “public policy of India” in relation to section 48(2) does not permit such a challenge. In making this argument it relied on Renusagar Power Co Ltd v General Electric Co, which held that is impermissible to assail a foreign award on merits.

PRS further contended that proceedings under section 48 of the act are distinct from those under section 34. While a challenge under section 34 is to the validity of an award before it becomes a decree (final and executable), section 48 is for the enforcement of an award after it is final.

PRS also relied on Jindal Export v Furest Day Lawson, which held that a narrow meaning must be given to the term public policy of India under section 48 proceedings for enforcement of a foreign award. As such they argued that only when the nation’s “most basic notions of morality and justice” are violated, would the courts refuse the enforcement of a foreign award.

The verdict

Rejecting MIL’s objections the court held there was nothing against the public policy of India in the award. It observed that the expression public policy of India under section 48(2)(b) carries a narrow meaning when compared to the meaning assigned to the same expression in the context of section 34(2)(b)(ii). The court also observed that proceedings under section 48 and 45 are for enforcement of a foreign award, i.e. New York Convention awards.

The court held that as the interpretation of the term “retailer loyalty” under clause 2.2.2 of the TLA fell squarely within the tribunal’s ambit, it would not interfere unless it was shown that the interpretation was contrary to the contractual terms.

The court further observed that MIL had presented no expert opinion or evidence to challenge the arbitrator’s opinion and as the agreement was governed by Austrian law, MIL was not permitted to interpret the agreement using Indian law.

The court observed that “merely because a monetary award has been made against an Indian entity on account of its commercial dealing, would not make the award either contrary to the interest of India or justice or morality”. It also rejected MIL’s argument that the award violated principles of natural justice.

Implication

As such, the enforcement of a foreign award cannot be challenged merely because it is in contravention of the law of India. A foreign award should be contrary to the fundamental policy of Indian law or most basic notions of morality and justice for the courts to deny recognition and enforcement.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.

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