5 August, 2013

In a seminal decision, Shri Lal Mahal Ltd. v. Progetto Grano Spa (Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012 ), a three judge bench of the Supreme Court of India earlier this month ruled on the scope of a ‘Public Policy’ defense under Section 48 of the (Indian) Arbitration and Conciliation Act, 1996, (“the Act”) against enforcement of a foreign award and distinguished such defense from a ‘Public Policy’ challenge for setting aside an award as available under Section 34 of the Act. 

In Lal Mahal case the Court limited the scope of a ‘Public Policy’ defense relying upon its earlier ruling in Renusagar case (Renusagar Power Co. Limited v. General Electric Co. 1994 Supp (1) SCC 644). The Court further limited the applicability of its interpretation of the term ‘Public Policy’ in its landmark judgment ONGC v. Saw Pipes Limited ((2003) 5 SCC 705 ) to Section 34 of the Act and overruled its earlier decision in the Phulchand case (Phulchand Exports Limited v O.O.O Patriot (2011) 10 SCC 300).

 
Readers would recall that following the decision of the Supreme Court in 2002 in Bhatia International v. Bulk Trading SA. (Bharat Aluminium Company and Ors. v. Kaiser Aluminium Technical Service, Inc. and Ors., (2012) 9 SCC 552), a judgment debtor could challenge a foreign arbitral award under Section 34 of Part I of the Act. However, overruling the Bhatia case in 2012, the Court in BALCO case (Bhatia International v. Bulk Trading S.A. and Anr., (2002) 4 SCC 105), held that Part I of the Act will not apply to foreign seated arbitrations initiated pursuant to arbitration agreements executed after the date of the judgment i.e. 6 September 2012. 

Scope of Public Policy 

The scope of enquiry before the Court in Lal Mahal case was whether the Court, relying on the expansive construction of the ‘Public Policy’ in Saw Pipes case and Phulchand case, can refuse to enforce a foreign award due to ‘patent illegality’. 

In the Saw Pipes case, the Court had held that ‘public policy of India’ in Section 34 was required to be interpreted in the context of the jurisdiction of the court where the validity of the award is challenged before it becomes final as against enforcement of an award after it becomes final. Having this distinction in view, a wider import was given to the term ‘public policy’ and a new category was added – ‘patent illegality’ in addition to the three categories enumerated in the Renusagar case. 

However, in the Phulchand case, the wider construction of public policy was relied upon as a defense for enforcement of foreign award under Section 48 thereby blurring the clear and fine distinction made by the Renusagar case.

Overruling its earlier decision in the Phulchand case, the Court held that the principles laid down in Renusagar case must apply for the purpose of Section 48 and insofar as the proceedings for setting aside an award under section 34 is concerned, the principles laid down in the Saw Pipes case would govern the scope of such proceedings. 

Accordingly, enforcement of foreign awards in India would be refused only if enforcement is contrary to (i) fundamental policy of Indian law; or (2) the interests of India; or (3) justice or morality. 

Analysis 

The decision of the Supreme Court in Lal Mahal case is a welcome development, especially for those seeking to enforce foreign arbitral awards in India. This decision represents a significant step in recognizing the sanctity of foreign awards. The overruling of Phulchand case significantly reduces the ability of Indian courts to refuse enforcement of foreign awards and restricts the re-opening of a matter during enforcement proceedings. 

While the scope of ‘public policy’ defense for section 48 has been limited, ‘patent illegality’ as a ground to challenge an award under section 34 continues to be valid. Resultantly, the decision in Saw Pipes case holding ‘patent illegality’ as a valid ground for challenge, in our view, still remains valid in regard to awards made pursuant to arbitrations commenced in respect of arbitration agreements executed prior to 6 September 2012. 

This article was supplied by Clasis Law

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