What Is The Ambit Of Inquiry U/S 48 Of Arbitration Act For Refusing Enforcement Of A Foreign Award? Calcutta High Court Explains

The Calcutta High Court recently had the opportunity to expound on the scope of inquiry for resisting the enforcement of a foreign award under Section 48 (2)(b) in Part II of The Arbitration and Conciliation Act, 1996 (Act).

Justice Moushumi Bhattacharya was adjudicating upon an application for enforcement of a foreign arbitral award dated June 19, 2020 and an addendum dated October 26, 2020 moved by the petitioner (EIG Mauritius) against the respondent (McNally Bharat Engineering Company Limited ). However, such a prayer for execution had been opposed by the respondent on the ground that the enforcement would be contrary to the public policy of India, specifically the fundamental policy of Indian law, since enforcing a Put Option available to the petitioner violates The Foreign Exchange Management Act, 1999 (FEMA) and the Securities Contracts (Regulation) Act, 1956.

Observations

The Court at the outset observed that Section 48 of the Act which outlines the 'Conditions for enforcement for foreign awards' is the roadblock to the facilitators for enforcement of such Awards under Part II, where the onus is placed on the party who would suffer the consequences of the enforcement. However, the facilitators are Sections 46 and 47 which mandate that a Foreign Award shall be treated as binding for all purposes and the requirements for such application, respectively.

Referring to Section 48(2)(b) of the Act, the Court opined that the enforcement of the award may be refused when such enforcement would be contrary to the public policy of India. Explanations 1 and 2 to 48(2)(b) narrows the threshold for refusal of enforcement even further by restricting the public policy argument to the three disjunctive conditions which includes Explanation 1(ii) where the Award is in contravention with the public policy of Indian law. Explanation 2 further clarifies the restricted domain of refusal of enforcement of a foreign award by putting the stops on a review on the merits of the dispute in order to determine whether the award is in contravention of the fundamental policy of Indian law, the Court elucidated further.

It was further observed that although the grounds available for setting aside an arbitral award under Section 34(1) and (2) are substantially mirrored in Section 48(1) and (2), the ground of 'patent illegality' appearing on the face of the Award [Section 34(2A)] is absent from the host of grounds available in Section 48.

"The tighter contours of Section 48 in respect of refusal of enforcement of a foreign award makes it clear that the momentum towards enforcement and a deemed decree of a court is contemplated without speed-breakers unless a party furnishes proof of existence of the conditions under 48(1) or the court finds the enforcement failing the tests under 48(2). It can therefore be concluded that a party seeking to resist the enforcement of a foreign award has to trek through a terrain more arduous than the landscape of Section 34 where the award can trip on multiple pitfalls", the Court opined further.

Threshold for breach of the fundamental policy of Indian law

The Court placed reliance on the Supreme Court judgment in Renusagar Power Co. Ltd. v. General Electric Co wherein the Supreme Court had held that the defence of public policy which is available under Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 should be narrowly construed and that something more than contravention of law is required to attract the bar of public policy. The Court further opined that although Renusagar was decided in the context of Section 7(1)(b)(ii) of the 1961 Act, which was subsequently repealed, the aforesaid view of the Supreme Court in Renusagar has been accorded statutory recognition under 48(2)(b) of the Act.

The Court proceeded to observe further that the statutory framework in Section 48 raises a presumption of enforceability of a foreign award unless the refusal rests on grounds which are 'patent and obvious'.

'If the conditions for refusal under 48(1) and 48(2) are read together with the cited decisions, the irrefutable conclusion appears to be that the threshold for breach of the fundamental policy of Indian law must be a breach of the most basic principles of Indian law which forms the substratum of the laws of the country', the Court underscored.

Section 48 does not permit a review on the merits of the dispute

Justice Bhattacharya further underscored that Section 48 of the Act does not permit a review on the merits of the dispute. Placing reliance on the Supreme Court judgment in Vijay Karia v. Prysmian Cavi E Sistemi, the Court noted that the Supreme Court had frowned "against a foray into the merits of the matter, and which is plainly proscribed by Section 48 of the Arbitration Act read with the New York Convention."

"The mandate of Section 48(2)(b) makes it clear that the statutory intent is to curtail the inquiry on the violation of the fundamental policy of Indian law within the periphery of the obvious without delving into the merits of the dispute", the Court observed further.

The Court further noted that even if it were to be held that the award violates provisions of FEMA, it would not constitute a violation of the fundamental policy of Indian law. Reliance was again placed on the Supreme Court decision in Vijay Karia to contend that transactions which violate FEMA cannot be held to be void and an Award upholding such a transaction could simply not be invalidated on that basis.

"For an Arbitral Award as complete and comprehensive as the one under consideration, any further inquiry into the transaction documents or the construction of the relevant clauses therein or the events culminating in the dispute or even the provisions of the SCRA or the FEMA would amount to an exercise which has precisely been taken out of the present statutory framework. To repeat, the contravention of the law must be such that no further discussion would be warranted to dislodge the finding of contravention. In other words, the enforcement of the Award should be clearly and manifestly contrary to Indian law. The subtle distinction between the 'enforcement' of an award being put to the test in Section 48 as opposed to the 'Award' itself having to pass muster under Section 34 further reins in all possible enquiries on the relevant factual matters on the aspect of contravention of fundamental policy of Indian law", the Court elucidated further. 

Accordingly, the Court held that it is unable to accept the contention of the respondent that the enforcement of the Award should be refused on the grounds urged. Thus, the foreign award was held to be enforceable and binding and the present appeal was dismissed.

Case Title: EIG (Mauritius) Limited v. McNally Bharat Engineering Company Limited

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