In this blogpost, Sudhi Ranjan Bagri, Student, National Law Institute University, Bhopal, writes about what is the doctrine of public policy, the recognition and enforcement of the arbitral award it’s position in India, England and Russia.
Introduction
International economic cooperation has increased exponentially in the past decade and has resulted in a number of cross-border contractual disputes and complex questions of law such as choice of governing law, the jurisdiction of the chosen forum, consequences of the ambiguity of contractual provision et cetera. Litigation is not a viable alternative for dispute settlement on the international stage due to the costs involved.
Arbitration, sometimes preceded by some non-adjudicatory method of dispute resolution, has emerged as the popular method due to its well-known advantages. However, enforcement of arbitration is a contentious issue as the arbitral awards have to be enforced by the courts of the respective country which interpret with respect to their own laws. This project shall deal with the enforcement of foreign arbitral awards in accordance with the enforcing country’s public policy.
Doctrine of public policy
The doctrine of public policy, in the context of arbitration, entails that not all subject matter of dispute between two or more parties can be subjected to arbitration owing to the ‘public’ nature of the subject matter. In other words, if the subject matter is such that impacts society at large, then, it shall not be allowed to be settled by a tribunal constituted at the whim of the contracting parties and shall not be enforceable in rem. Matters affecting the general public shall be decided by the lawful public authorities of the country, i.e. the Courts and tribunal constituted under statutory authority, in pursuance of the interest of its citizens and furtherance of national law, which may or may not be in accordance with international law. e.g. disputes relating to fraud, corruption, crime, human rights, foreign policy, etc.
Article V (2) of the New York Convention of Recognition and Enforcement of Foreign Arbitral Awards, 1958, gives the signatory countries leeway to not enforce a foreign arbitral award if:
- It is found to deal with a subject matter which is not arbitrable under the laws of that country
- It is found to be contrary to public policy of that country
Sections 34 and 48 of the Arbitration and Conciliation Act, 1996, based on Article 34 of the UNCITRAL Model Law also provide for the same conditions. Section 23 of the Indian Contract Act, 1872, encapsulates the concept of public policy as follows:
“The consideration or object of an agreement is lawful, unless it is forbidden by law; or is such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement, of which the object or consideration is unlawful, is void”.
Section 68 of the English Arbitration Act, 1996, provides that an award can be set aside in whole or in part on the ground of serious irregularity. Section 68(2)(g) states that “Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant: (g)the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy.” Setting aside an award under Section 68(2) (g) of the English Arbitration Act, 1996, has a higher threshold than under Article 34(b) (ii) of the Model Law. RECOGNITION AND ENFORCEMENT OF ARBITRAL AWARDS: EMERGING TREND
Recognition and enforcement of arbitral awards: Emerging trend
Arbitral awards obtained in one country sought to be enforced in another can be enforced by its Courts only if that country is party to the New York Convention.
Indian position
Public policy in India has been redefined from time to time. The question of public policy arose for the first time in the case of Renusagar Power Co. Limited v. General Electric Company[1] (“Renusagar case”), wherein the court held that mere violation of any provision of Indian laws would not suffice to attract the bar of public policy.
Subsequently, the SC in the case of ONGC v. Saw Pipes[2] (“ONGC case”) expanded the ambit of ‘public policy’ so as to include any awards which violate any statutory provision of Indian laws Such an award is considered as ‘patently illegal’ and therefore in violation of public policy. The point worth noting here is that in the Renusagar case, the enforcement of an award was being challenged, however in ONGC case the validity of arbitral award itself was being challenged under Section 34 of the Act.
Thereafter, with the impact of the decision in the case of Venture Global v. Satyam Computers[3] (“Venture Global case”), awards which were being passed in arbitrations seated outside India, became open to challenge under Section 34 of the Act. This resulted in foreign awards being subject to the broader test of “public policy” as enunciated in ONGC case.
In case of Bhatia International v. Bulk Trading S.A[4] (“Bhatia International case”), ONGC along with Venture Global caused an unfavourable situation opening the doors for many petitions challenging the arbitral awards on the ground of ‘patent illegality.’ These awards involving Indian parties were challenged before the courts in India which were again heard on merits thereby defeating the very objective of arbitration.
The Supreme Court gave a wider meaning to the term ‘public policy’ in the case of Phulchand Exports Limited v. O.O.O. Patriot [5](“Phulchand case”) under Section 48 of the Act, and laid down that the scope and purpose of the public policy is same under Section 34 and 48. Thus, in a case where the parties challenge the enforcement of the foreign award, Section 34 of the Indian Act can be invoked by virtue of the decision in Phulchand which gave a wide interpretation to the expression public policy and almost re-open the entire matter.
The decision given in Phulchand case has now been overruled by Shri Lal Mahal Ltd. v. Progetto Grano Spa[6]. In this matter, an award passed under the rules of the Grain and Feed Trade Association, London and upheld by courts in the UK was sought to be enforced in India. Objection to the enforcement of the award was raised under Section 48 of the Act on the ground that the award was contrary to the terms of the contract and thus patently illegal and in violation of ‘public policy’.
The Supreme Court is of the opinion that, the ground of ‘patent illegality’ is not included in the expression of ‘public policy’ under section 48 of the Act. Further, such ground is limited to section 34 of the Act where the question about the setting aside of the award arises.
In cases that involve the matters related to foreign arbitral seat and conflict of laws, the doctrine of public policy is limited. It was decided by the court that the ‘public policy of India’ under Section 34 would be interpreted in the relation of the jurisdiction of the seat where the authority of the award is challenged before such award becomes final and executable.
According to Section 48, the Supreme Court does not have any power to review the award at the stage of enforcement. The court is also restricted to review such an award on the merits. Therefore, the Supreme Court limited the meaning of ‘public policy’ to:
- Fundamental policy of India;
- Interests of India;
- Justice and morality.
English position
In England, the pro-enforcement bias under the New York Convention has been faithfully and consistently observed. The national courts in England are reluctant to excuse an award from enforcement on grounds of public policy and interpret it restrictively.
In Soleimany v. Soleimany[7], the courts refused the enforcement of the award and held it to be contrary to public policy to give effect to an agreement to carry out an illegal act, as the case involved smuggling of carpets out of Iran.
In Westacre Investments Inc. v. Jugoimport[8], the Court of Appeal held that the enforcement of an award would not be denied, merely on the ground that there was an allegation of bribery to the Kuwaiti officials. The Court held that as the arbitral tribunal rejected the allegations and that the substantive law of the dispute was Swiss law it would respect the decision of the tribunal. The court further stated that there was a need to maintain equilibrium between public policy considerations of discouraging illegality and principles of comity in not enforcing awards made in violation of other States’ laws and against the policy of giving the effect of the finality of awards.RUSSIAN POSITION:
Russian position
The most illustrative case concerning violation of Russian public policy is United World v. Krasny Yakor[9]. Here, United World was awarded a sum of US$37,600 against Krasny Yakor and enforcement was granted by the Russian court of the first instance. However, the enforcement decision was set aside by the Federal Arbitrazh Court of the Volgo-Vyatsky Region. The cassation court held that enforcement of the arbitral award would lead to the bankruptcy of Krasny Yakor (a state-owned company), which would consequently have a negative influence on the social and economic stability of the city of Nizhi Novgorod, and consequently on the Russian Federation as a whole, as Krasny Yakor manufactured products of strategic value for the security and national safety of the state. Therefore, such damages were declared to be in contravention of public policy.
A different approach towards violation of public policy was taken in O&Y Investments Ltd. v. OAO Bummash[10]. In this case, arbitration proceedings were initiated against Bummash. While the arbitration proceeding was pending; Bummash sought a declaration from the Russian courts that the marketing and sale-purchase agreement, which contained the arbitration clause, was invalid. By decision of the Arbitrazh Courts of the Udmurtsk Republic, the agreement was deemed invalid because of a violation of Articles 81 and 83 of the Federal Law on Joint-Stock Companies. Despite this decision, the arbitral tribunal in the Netherlands decided in favor of O&Y Investments on March 4, 2004, after the Russian court’s decision on the invalidity of the agreement had entered into legal force. O&Y Investments then sought to enforce the arbitral award in Russia. However, the Arbitraz Court of the Udmurtsk Republic denied enforcement under Article V (2)(b) of the New York Convention because the enforcement would violate Russian public policy. This decision was affirmed by the Federal Arbitrazh Court of the Ural District.
The court held that the enforcement would lead to the existence of judicial acts of equal force, containing mutually exclusive holdings, within the territory of the Russian Federation. Enforcing an award based on an agreement that Russian courts previously deemed invalid would contradict the principle that judicial acts of the Russian Federation “are mandatory in nature.” As this principle is an inalienable part of Russian public policy, enforcement would lead to its violation and could therefore not be granted.
Two extreme positions on enforcement of foreign arbitral awards are seen in the case of European and Latin American countries along with Russia. The former, especially Switzerland and France, are willing to arbitrate white collar crimes and issues of competitions law, excluding only human rights issues and other crimes in the name of public policy. The latter, especially Brazil and Argentina, avoid enforcement at the slightest violation of national law or inconsistency with their Courts’ previous rulings.
Conclusion
European countries are more restrictive in using the public policy shield in the face of unfavourable foreign awards following the principle of international comity and uniformity in the international law. Latin American countries, on the other hand, seek to avoid enforcement in case of violation of national law. However, the general trend emerging among most countries is a favourable turn towards enforcement respecting the principles of party autonomy and the laws of other countries unless it leads to a violation of morality or causes gross injustice.
[1] 1994 Supp (1) SCC 644
[2] (2003) 5 SCC 705
[3] (2008) 4 SCC 190
[4] (2002) 4 SCC 105
[5] (2011) 10 SCC 300
[6] Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012
[7] [1999] QB 785
[8] [2000] QB 288
[9] ICC Paris, Judgment, Oct. 20, 2000
[10] Federal Arbitrazh Court of the Volgo-Vyatsky Region, decision of Feb. 17, 2003,
Case No. A43-10716/02-27-10
