Public policy ruling may result in flood of cases

By Vivek Vashi and Shreya Parikh, Bharucha & Partners
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Under the Arbitration and Conciliation Act, 1996, the enforcement of a foreign arbitral award may be refused on the ground that it is contrary to the public policy of India. The Supreme Court in Phulchand Exports v OOO Patriot observed that a foreign arbitral award which is in contravention of Indian law will be considered as being contrary to the public policy of India and could be set aside.

Brief facts

Phulchand Exports Limited and OOO Patriot, Moscow, Russia (Patriot) executed a contract for the sale of 1,000 tonnes of Indian polished rice to be delivered at Novorossiysk, Russia. The rice was shipped by Phulchand after a delay of 16 days and the rice left the port of loading, Kandla, after a delay of about 38 days. Subsequently, as was agreed, Phulchand received payment on presentation of the shipping documents.

Vivek Vashi Partner in the litigation team Bharucha_&_Partners
Vivek Vashi
Partner in the litigation team
Bharucha_&_Partners

The rice did not reach Novorossiysk as the engine of the ship carrying the rice failed, culminating in a declaration of general average loss by the master of the ship (under an international maritime industry loss mitigation convention); subsequent arrest of the ship; and eventual sale of the ship’s cargo to offset the costs for rescue.

Patriot initiated arbitration proceedings before the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation, claiming the amount that had been paid to Phulchand despite Patriot not having received the rice. After considering the parties’ pleadings and arguments, the tribunal held Phulchand and Patriot both liable for the delay, split the losses between the parties and awarded interest and legal costs in favour of Patriot.

Enforcement proceedings

Patriot moved the Bombay High Court seeking enforcement of the award under Part II of the Arbitration and Conciliation Act. Phulchand resisted enforcement on the ground that the award was contrary to public policy. Phulchand’s defence was found to be without any merit and the award was upheld.

The division bench dismissed Phulchand’s appeal, holding that the decision in the case of Renusagar Power Co Ltd v General Electric (1993) meant that the scope for interference under public policy was narrow. Phulchand then filed a special leave petition (subsequently converted to a civil appeal against the dismissal) before the Supreme Court.

Supreme Court decision

Phulchand argued before the Supreme Court that though the division bench had relied on the Renusagar case, in the subsequent case of ONGC v Saw Pipes (2003), the Supreme Court had provided a wider interpretation to the term “public policy of India”, and the latter case upholding the wider construction had to be followed in this case. The Supreme Court found merit in this submission and observed that the award could be set aside if patently illegal or in contravention of Indian law.

The Supreme Court accordingly analysed the award and Phulchand’s defences for compliance with Indian law.

Shreya Parikh Associate Bharucha & Partners
Shreya Parikh
Associate
Bharucha & Partners

Phulchand argued that: (a) the title in the goods had passed to Patriot and therefore Phulchand was not liable by virtue of the provisions of section 26 of the Sale of Goods Act, 1930; and (b) the clause that enabled Patriot to claim reimbursement of the payment made (to Phulchand) on default of delivery amounted to a penalty and such a penalty was contrary to applicable Indian law and consequently violated the public policy of India.

The Supreme Court observed that owing to the delay in shipment, Phulchand remained liable to bear the risk for the rice, and further observed that there was no penalty as argued by Phulchand but rather a clause for reasonable compensation, which therefore was not barred under the provisions of section 73 or section 74 of the Indian Contract Act, 1872.

The Supreme Court accordingly dismissed Phulchand’s appeal.

Open issue

However, an open issue remains. The Supreme Court in the Renusagar case provided a narrow scope of challenge under public policy of India as it was there dealing with enforcement of a foreign award. The Supreme Court in the ONGC case was dealing with enforcement of a domestic award.

In the Phulchand case, the Supreme Court analysed the award on the basis of the decision in ONGC, even though it eventually dismissed the appeal.

This decision will open the floodgates for courts to judge foreign awards for compliance with Indian laws at the stage of enforcement (even in cases where the governing law of the arbitration is not Indian law).

Vivek Vashi is a partner in the litigation department at Bharucha & Partners where Shreya Parikh is an associate.

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