Resolvable clash?

The Tata-Docomo case highlights the conflict between party autonomy and public policy in international commercial arbitration

Priyanka Dasgupta explains

Although international commercial arbitration is increasingly popular as a means of dispute resolution in cross-border transactions, there continue to be challenges with respect to enforceability of arbitral awards.

When a transaction involves parties of different nationalities, then in order to avoid having to approach the courts of the country of one of the parties and to ensure a level playing field, parties tend to choose a third country’s law as the governing law and arbitration as the means of dispute resolution. The principle of party autonomy, which is central to international commercial arbitration, allows parties to choose a third country’s law as the governing law. Yet this can result in conflicts with public policy in the jurisdiction where an award is sought to be enforced, which is often the home jurisdiction of one of the parties.

An ongoing dispute between Tata Sons and NTT Docomo (a subsidiary of Japan’s Nippon Telegraph and Telephone Corporation), over Docomo’s stake in Tata Teleservices, provides an opportunity to study the scope of challenge to foreign arbitral awards in India and analyse the conflict between party autonomy and public policy in international commercial arbitration.

BACKGROUND TO THE DISPUTE

In 2009, when Docomo acquired 26.5% of Tata Teleservices, Tata Sons, Docomo and Tata Teleservices entered into a shareholders’ agreement. Under the terms of the agreement, Docomo had the right to exit from Tata Teleservices, and Tata Sons had the obligation to provide an exit opportunity by either buying Docomo’s shares or arranging for another purchaser to buy the shares.

Such a sale was to be at an assured purchase price, which was either the fair price of the shares at the time of exit or 50% of the acquisition price (₹58.045 per share), whichever was higher. In 2014, Docomo decided to exercise this right to exit and as Tata Sons had failed to find another purchaser to buy the shares, it agreed to buy the shares at the assured price.

However the Reserve Bank of India (RBI) did not allow Tata Sons to do so, as the exit at assured price was in violation of the regulations under the Foreign Exchange Management Act, 1999 ( FEMA), in relation to pricing of shares, as in force on the relevant date. Following the RBI’s decision, Tata Sons offered to buy the shares at ₹23.34 per share on the basis of fair market value as laid down by the FEMA regulations.

Invoking the arbitration clause in the shareholders’ agreement, in January 2015 Docomo approached the London Court of International Arbitration (LCIA) to resolve the dispute. On 23 June this year the LCIA tribunal awarded Docomo damages of US$1.17 billion for Tata Sons’ breach of the shareholders’ agreement. Docomo has since approached Delhi High Court for enforcement of the award and Tata Sons has deposited the compensation amount before the court without prejudice to its legal rights.

CAN COURTS INTERVENE?

In light of these facts, the pertinent question is the enforceability of the award in India, the country with which the agreement has the closest nexus. Over the years, Indian courts have adopted different views on their extent of review of foreign arbitral awards (see Evolving views, page 42).

The latest position clearly distinguishes between the standard of review for enforcement of a domestic and a foreign award. This position was incorporated into the Arbitration and Conciliation Act, 1996, by way of the Arbitration and Conciliation (Amendment) Act, 2015. Section 48, which deals with enforcement of foreign awards, now clarifies the meaning of public policy and lists the following three grounds on which a foreign award can be set aside for violating public policy: (i) the making of the award was induced or affected by fraud or corruption; or (ii) it contravenes the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.

Thus, unlike in the case of a challenge to a domestic arbitral award under section 34, patent illegality – as added by the court in Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) – is no longer a ground to challenge or set aside a foreign award. Further, the amendment specifically clarifies that when testing whether a foreign award contravenes the fundamental policy of Indian law, the court cannot review the merits of the dispute.