Section 34 of the Arbitration and Conciliation Act, 1996 (Act) sets out the grounds on which arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India can be set aside.  As regards foreign awards (i.e. arbitral awards passed in foreign seated arbitrations), whilst the same cannot be challenged in India, the enforcement of the same in India can be validly objected to by the award debtor on grounds that are set out in Section 48 of the Act. The grounds for setting aside arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India under Section 34 of the Act and the grounds for refusing enforcement of foreign awards in India under Section 48 of the Act are substantially identical. One such ground is if the arbitral award is found to be contrary to the “public policy of India”.

What constitutes “public policy of India” is a question that has been discussed by the Supreme Court in a number of judgments. Recently, in the matter of Vijay Karia. v. Prysmian Cavi E Sistemi SRL (Vijay Karia)[1], the Supreme Court considered and shed light on this question in the context of a foreign award, which was alleged to be contravening the “public policy of India” on the ground that it violated the Indian exchange control laws (i.e. Foreign Exchange Management Act, 1999 (FEMA) and regulations thereunder) as it directed the transfer of shares from parties resident in India to parties resident outside India at a discounted price.

Vijay Karia is a case brought under Section 48 of the Act where an award debtor sought to avoid the enforcement in India of foreign awards passed in arbitration proceedings conducted in London by the London Court of International Arbitration. Among other things, the said foreign awards directed the transfer of securities by the Appellant (an Indian entity) to the Respondent No. 1 (a foreign entity) at a discount of 10%. As foreign exchange regulations under FEMA require that  such transfer be made at the prevailing fair market value, and no lesser, the Appellant resisting enforcement of the awards contended that the awards were in contravention of FEMA and as such, against the public policy of India thus being unenforceable in India.

While examining this question, the Court explained the distinction between the current legal regime under FEMA when compared with the legal regime that existed under its predecessor the Foreign Exchange Regulation Act, 1973 (FERA). The Court emphasised that FEMA is based on a policy of managing foreign exchange, unlike FERA which focused on policing it and pointed out that FEMA contained no provision which voided any transaction violating its provisions unlike FERA which had an express provision (Section 47) which did so. It was also pointed out that unlike FERA, FEMA did not contain any provision for prosecution and punishment. The Court held that in case of a FEMA violation, it would be possible to subsequently obtain permission from the Reserve Bank of India (RBI) to condone the violation. Accordingly, such a breach was a rectifiable one. In the circumstances, it was held that neither the arbitral awards nor the agreement being enforced by the arbitral award, can, therefore, be held to be of no effect in law. The Court placed heavy reliance on the judgment of the Delhi High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited (Cruz City)[2], which had in turn relied on the Supreme Court’s judgment in Life Insurance Corporation of India v. Escorts Limited[3].

The Court highlighted that a violation of the fundamental policy of Indian law must amount to a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. These would be the core values of India’s public policy as a nation, reflected not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. As such, the Supreme Court held that a breach under FEMA can never be held to be a violation of the fundamental policy of Indian law.

This is a departure from the landmark judgment in Renusagar Power Company Limited v. General Electric Company[4] where the Supreme Court delved into the meaning of “public policy” in the context of an award that was alleged to be violative of FERA and held that the provisions contained in FERA were enacted to safeguard national economic interest and any violation of the said provisions would be contrary to the public policy of India.

Interestingly, although passed in the context of enforcement of foreign awards, the findings and conclusions of the Supreme Court in Vijay Karia have a direct bearing on challenges to arbitral awards passed in India-seated international commercial arbitrations raised under Section 34 of the Act. Given that India-seated international commercial arbitrations involve non-resident / foreign parties, the arbitral awards passed in such arbitrations generally contain directions to one party to pay monies to the other thus consequentially entailing the influx and/or outflow of foreign exchange depending on whether the successful party is the resident or non-resident/foreign party. Challenges to such awards on the grounds that the payment directions violate FEMA regulations are routinely made particularly when the award directs payments to be made to a non-resident / foreign party. In fact, in order to avoid a future possible challenge on this ground, parties (more particularly non-resident / foreign parties) consciously style their arbitral claim as a claim for damages rather than a direct claim for the contractual sale price.[5]

The Supreme Court has, in the Vijay Karia judgment, held that in an international commercial arbitration conducted in India, the ground of challenge to an award relating to “public policy of India” would be the same as the ground of resisting enforcement of a foreign award in India. This means that the meaning of the phrase “public policy of India” as found in both Sections 48 and 34 of the Act is the same. In the circumstances, as the Supreme Court has not treated a breach under FEMA as a violation of the “public policy of India” from the perspective of a challenge to the enforcement of a foreign award, it would naturally mean that the same breach (under FEMA) cannot be treated as a violation of the “public policy of India” whilst testing an award passed in an India-seated international commercial arbitration. Thus, going forward, courts are likely to be disinclined to entertain a challenge to an award passed in an India-seated international commercial arbitration premised on the award being in contravention of the “public policy of India” for being violative of FEMA regulations.

In view of the amendments introduced in the Act by way of the Arbitration & Conciliation (Amendment) Act, 2015 (Amendment Act), a party challenging an award passed in an India-seated international commercial arbitration is no longer permitted to mount its challenge on the ground of a patent illegality appearing on the face of the award. A challenge to an award passed in an India-seated international commercial arbitration which is violative of FEMA regulations was generally based on two grounds – (i) patent illegality appearing on the face of the award; and (ii) the award contravening the “public policy of India”. The Amendment Act took away ground (i) and a meaningful reading and application of the Vijay Karia judgment would result in the extinguishment of ground (ii).

In effect, this means that a challenge to an award passed in an India-seated international commercial arbitration which is founded on the ground that the same violates FEMA regulations would no longer be sustainable.  Whilst this position had already been espoused by the Delhi High Court in Cruz City, it has now received the Supreme Court’s conclusive stamp of approval in Vijay Karia.

The decision of the Supreme Court in Vijay Karia brings welcome clarity and finality. It is a firm step forward in preserving the integrity of arbitral awards and protecting awards from trifling technical challenges. It protects foreign parties from being stranded despite holding a favorable award. It is likely to act as a much needed booster shot to the confidence of foreign parties in India as a viable location for arbitration.

[1] 2020 SCC OnLine SC 177

[2] (2017) 239 DLT 649

[3] (1986) 1 SCC 264

[4] 1994 Supp (1) SCC 644

[5] NTT Docomo Inc. vs Tata Sons Limited OMP (EFA) (Comm.) No. 7 of 2016