The End of Doctrine of Patent Illegality for Foreign Awards in India?

In a remarkable recent decision, the Supreme Court of India in Shri Lal Mahal Ltd v Progetto Grano SpA, Civil Appeal No. 5085 of 2013, has bolstered its pro-arbitration and pro-enforcement credentials. The court definitively held that the doctrine of “patent illegality” was not an argument against the recognition and enforcement of a foreign arbitral award.

However, it is important to note that the court did not go as far as to decide that patent illegality was irrelevant to any challenge of an arbitral award. A distinction was drawn between a challenge of a foreign award (refusal of recognition and enforcement) and a challenge of a domestic arbitration award or an international arbitration award where the seat was in India.

What is this doctrine of “patent illegality”?

In a previous post, we explained the concept of patent illegality and recent (positive) developments in India, particularly with the decision of the Indian Supreme Court in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc, Civil Appeal No. 7019 of 2005 (also commonly known as the BALCO decision). We wrote,

“The concept of “patent illegality” is derived from the Indian Supreme Court decision of ONCG v Saw Pipes, 2003 (2) Arb.LR 5 (SC), and is part of the ambit of public policy of India, violation of which entitles the Indian courts to set aside an arbitral award. This is in addition to the usual grounds for setting aside an arbitration under Article 34 of the Model Law or Article V of the New York Convention. However, the concept of “patent illegality” only applies to arbitrations under Part I of the Indian Arbitration Act i.e. domestic arbitrations and international arbitrations with their seat in India.

There was mounting concern within the arbitration community when the Indian Supreme Court then set aside a foreign international arbitration award on the basis that Part I applied and that the award was “patently illegal” – in Venture Global Engineering v Satyam Computer Services Ltd, (2008) 4 SCC 190 the Indian Supreme Court applied section 34 of Part I of the Indian Arbitration Act and set aside a London LCIA award on that basis.

The Bharat Aluminuium decision reverses that by holding that Part I of the Indian Arbitration Act does not apply to arbitrations held outside of India. However, as a result, the Indian Supreme Court also held that the Indian courts were not able to render interim or interlocutory relief in assistance of foreign arbitral proceedings”.

Facts

The respondent, Progetto (as successor in title to the contractual buyer of grain) obtained two GAFTA arbitration awards in its favour against the appellant, Shri La Mahal Ltd (as successor in title to the contractual seller of the same grain) (“SLM“). The awards were made on the basis that the sold grain plainly did not conform to contractual specifications. This was notwithstanding that the contractually appointed certification body (SGS India) had certified the wheat as conforming to specifications.

SLM sought to set aside the awards in London where the arbitration was seated, but failed. Progetto then sought to enforce the awards in the Delhi High Court and succeeded. SLM appealed to the Indian Supreme Court, which ultimately upheld the High Court’s decision.

Legal arguments and analysis

SLM sought to argue that the Indian court was entitled to “refuse to enforce a foreign award if it is contrary to the contract between the parties and/or is patently illegal” on the basis of the previous Indian Supreme Court decisions of Saw Pipe and Phulchand Exports Limited v. O.OO. Patriot, (2011) 10 SCC 300. In this respect, particular attention was paid to the phrase “public policy of India” as used in section 48(2)(b) of the Indian Arbitration Act. SLM argued that to the extent this phrase was used in connection with refusing to recognise and enforce a foreign arbitral award, it should be interpreted in the same manner as in section 34 of the Indian Arbitration Act and include the doctrine of patent illegality.

In other words,

“The expansive construction given by [the Supreme Court of India] to the term “public policy of India” in Saw Pipes must also apply to the use of the same term “public policy of India” in Section 48(2)(b)” (see paragraph [20])

Progetto in turn relied on Renusagar Power Co. Limited v. General Electric Company, 1994 Supp (1) SCC 644 for the argument that public policy in section 48(2)(b) was narrower than in section 34 (see paragraph [21]). In this respect, the respondent sought to explain away the case of Phulchand Exports which had held that the Saw Pipes scope of patent illegality applied to section 48(2) of the Indian Arbitration Act. The respondent argued that Saw Pipes had never intended for patent illegality to apply to Section 48. Further and in the alternative, the Supreme Court should prefer the 3 judge bench decision in Renusagar over the decisions of the 2 judge bench in Saw Pipes and Pulchand Exports.

As a result, the Indian Supreme Court went into a fine and detailed discussion of the three cases (see paragraph [22] onwards). Critically, the Supreme Court highlighted that its previous decision in Saw Pipes drew a distinction between a challenge to an Indian award and a foreign award. In Saw Pipes, the court was

“[a]live to the subtle distinction in the concept of ‘enforcement of the award’ and ‘jurisdiction of the court in setting aside the award’ and the decision of this Court in Renusagar, this Court held in Saw Pipes that the term “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 and executable in contradistinction to the enforcement of an award after it becomes final. Having that distinction in view, with regard to Section 34 this Court said that the expression “public policy of India” was required to be given a wider meaning. Accordingly, for the purposes of Section 34, this Court added a new category – patent illegality – for setting aside the award”.

(see paragraph [23], see also fn 18 which sets out how the Supreme Court had taken a similar position earlier in Renusagar)

Accordingly, the Supreme Court held that the Renusagar position with respect to Section 7(1)(b)(ii) of the Foreign Awards Act “must equally apply to the ambit and scope of Section 48(2)(b) of the 1996 [Indian Arbitration Act]” (see paragraph [25]).

As such, “the expression “public policy of India” [in Section 48(2)] must be given narrow meaning and the enforcement of foreign award would be refused on the ground that it is contrary to public policy of India if it is covered by one of the three categories enumerated in Renusagar” (see paragraph [25]), namely, where such enforcement would be contrary to (see paragraph [27]):

  • Fundamental policy of Indian law; or
  • The interest of India; or
  • Justice or morality.

In this respect, the Indian Supreme Court took the opportunity to overrule Phulchand Exports to the extent that it sets down the law that “the expression “public policy in India used in Section 48(2)(b) has to be given a wider meaning and the award could be set aside, if it is patently illegal” (see paragraph [28]).

Decision of the Supreme Court

The Supreme Court considered that the challenge against the award boiled down to this. The GAFTA Board of Appeal had “gone beyond the terms of the contract by ignoring the certificate of quality obtained at the load port from the buyers’ nominated certifying agency, i.e., SGS India which was final under the contract” and in considering inadmissible evidence as to the non-conformity of the wheat (see paragraph [40]).

The Supreme Court held that the challenged could not be sustained on the basis that it was essentially an appeal on the merits of a foreign award and entailed an impermissible “opportunity to have a “second look” at the foreign award” under Section 48 (see paragraph [43]). The court went on to hold that such alleged errors of fact (even if made out) could not justify refusing recognition and enforcement of the award,

“The scope of inquiry under Section 48 does not permit review of the foreign award on merits. Procedural defects (like taking into consideration inadmissible evidence or ignoring/rejecting the evidence which may be of binding nature) in the course of foreign arbitration do not lead necessarily to excuse an award from enforcement on the ground of public policy”.

and further (at paragraph [45]),

“While considering the enforceability of foreign awards, the court does not exercise appellate jurisdiction over the foreign award nor does it enquire as to whether, while rendering foreign award, some error has been committed. Under Section 48(2)(b) the enforcement of a foreign award can be refused only if such enforcement is found to be contrary to (1) fundamental policy of Indian law; or (2) the interests of India; or (3) justice or morality”.

In any event, the awards could be justified on the facts itself. The court, relying on the findings of the Board of Appeal, noted that the SGS India certificate was not in compliance with the contractual terms of how testing was to be carried out (see paragraph [40] and [41]).

Finally, the Supreme Court placed reliance on the fact that the attempt to set aside one of the awards before the London High Court had failed (see paragraph [42]). The court commented that the London court was presumed to “have full knowledge of” the English position and English case law relied upon by the appellant but had nonetheless “found no ground or justification for setting aside the award“. In this vein,

“If a ground supported by the decisions of that country was not good enough for setting aside the award by the court competent to do so, a fortiori, such ground can hardly be a good ground for refusing enforcement of the award”

Accordingly, the Indian Supreme Court saw no reason to overturn the decision of the Delhi High Court below.

Conclusion

Following Bharat Aluminium, the Indian Supreme Court has continued to manifest a pro-arbitration and pro-enforcement policy, at least with respect to foreign arbitration awards. This decision confirms that commercial parties contemplating arbitration in India face a very stark choice.

If the arbitration is seated in India, commercial parties will have the benefit of the court’s assistance in granting interim relief in aid of the Indian arbitration. However, parties also face an expanded inquiry into the merits of the Indian award by way of the doctrine of patent illegality (see our post here, where we analyse a Delhi High Court case which further expanded the scope of patent illegality to include errors of fact and not just law).

On the other hand, if parties choose to have their arbitrations seated outside India, they may not get the assistance of the Indian courts with respect to interim relief but do not face any appeal on the merits of the award obtained.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
This entry was posted in Arbitration, India and tagged , , , , , , , . Bookmark the permalink.

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