As you are aware that India is one of the few countries that still has exchange controls and does not have full capital account convertibility. The Foreign Exchange Management Act, 1999 (FEMA), empowers the Reserve Bank of India (RBI) to frame regulations for the enforcement of FEMA. FEMA regulations contemplate prior RBI approval for certain categories of capital account transactions between residents and non-residents.
The enforcement of international arbitration awards in India, where there is going to be a remittance of foreign exchange from a resident to a non-resident, would invariably have FEMA implications. If the award is not in conformity with the FEMA regulations, the question that arises is whether the court, where enforcement action is filed, can decline enforcement on the ground that the award's enforcement would be contrary to the country's public policy.
RELEVANT PROVISIONS
SECTION 48 OF THE ARBITRATION AND CONCILIATION ACT, 1996
This lays down conditions for enforcement of a foreign arbitral award. Under section 48(2), "Enforcement of an arbitral award may also be refused if the court finds that
(a) The subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
(b) The enforcement of the award would be contrary to the public policy of India."
Two explanations are provided.
FIRST, it is clarified that an award is in conflict with the public policy of India only if:
"(i) The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
(ii) It is in contravention with the fundamental policy of Indian law; or
(iii) It is in conflict with the basic notions of morality or justice."
SECOND, "The test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
If an application for the setting aside or suspension of the award has been made to a competent authority … the court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security."
Section 48 adopts article V of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958, to which India is a signatory.
ENFORCEMENT UNDER THE NEW YORK CONVENTION
Sections 44 to 52 of the Arbitration and Conciliation (Amendment) Act, 2015 deals with foreign awards passed under the New York Convention.
The New York Convention defines "foreign award" as an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960-
a. In pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
b. In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.
From the abovementioned conditions, it is clear that there are two pre-requisites for enforcement of foreign awards under the New York Convention. These are:
a. The country must be a signatory to the New York Convention.
b. The award shall be made in the territory of another contracting state which is a reciprocating territory and notified as such by the Central Government.
Section 47 provides that the party applying for the enforcement of a foreign award shall, at the time of the application, produce before the court (a) original award or a duly authenticated copy thereof; (b) original arbitration agreement or a duly certified copy thereof; and (c) any evidence required to establish that the award is a foreign award. As per the new Act, the application for enforcement of a foreign award will now only lie to High Court.
Once an application for enforcement of a foreign award is made, the other party has the opportunity to file an objection against enforcement on the grounds recognized under Section 48 of the Act. These grounds include:
a. the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
b. the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
c. the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or
d. the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
e. the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
f. the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
g. the enforcement of the award would be contrary to the public policy of India.
The Amendment Act has restricted the ambit of violation of public policy for international commercial arbitration to only include those awards that are: (i) affected by fraud or corruption, (ii) in contravention with the fundamental policy of Indian law, or (iii) conflict with the notions of morality or justice.
It is further provided that if an application for the setting aside or suspension of the award has been made to a competent authority, the Court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.
Section 49 provides that where the Court is satisfied that the foreign award is enforceable under this Chapter, the award shall be deemed to be a decree of that Court.
ENFORCEMENT UNDER THE GENEVA CONVENTION
Sections 53-60 of the Arbitration and Conciliation (Amendment) Act, 2015 contains provisions relating to foreign awards passed under the Geneva Convention.
As per the Geneva Convention, "foreign award" means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924,-
a. in pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and
b. between persons of whom one is subject to the jurisdiction of some one of such Powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the Powers aforesaid, and
c. in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, by like notification, declare to be territories to which the said Convention applies, and for the purposes of this Chapter, an award shall not be deemed to be final if any
d. proceedings for the purpose of contesting the validity of the award are pending in any country in which it was made.
Section 56 provides that the party applying for the enforcement of a foreign award shall, at the time of the application, produce before the court;
(a) original award or a duly authenticated copy thereof;
(b) evidence proving that the award has become final and
(c) evidence to prove that the award has been made in pursuance of a submission to arbitration which is valid under the law applicable thereto and that the award has been made by the arbitral tribunal provided for in the submission to arbitration or constituted in the manner agreed upon by the parties and in conformity with the law governing the arbitration procedure.
As per the new Act, the application for enforcement of a foreign award will now only lie to High Court.
The conditions for enforcement of foreign awards under the Geneva Convention are provided under Section 57 of the Arbitration and Conciliation Act, 1996.
These are as follows:
a. the award has been made in pursuance of a submission to arbitration which is valid under the law applicable thereto;
b. the subject-matter of the award is capable of settlement by arbitration under the law of India;
c. the award has been made by the arbitral tribunal provided for in the submission to arbitration or constituted in the manner agreed upon by the parties and in conformity with the law governing the arbitration procedure;
d. the award has become final in the country in which it has been made, in the sense that it will not be considered as such if it is open to opposition or appeal or if it is proved that any proceedings for the purpose of contesting the validity of the award are pending;
e. the enforcement of the award is not contrary to the public policy or the law of India.
The Amendment Act has restricted the ambit of violation of public policy for international commercial arbitration to only include those awards that are:
(i) affected by fraud or corruption,
(ii) in contravention with the fundamental policy of Indian law, or
(iii) conflict with the notions of morality or justice.
However, the said section lays down that even if the aforesaid conditions are fulfilled, enforcement of the award shall be refused if the Court is satisfied that-
a. the award has been annulled in the country in which it was made;
b. the party against whom it is sought to use the award was not given notice of the arbitration proceedings in sufficient time to enable him to present his case; or that, being under a legal incapacity, he was not properly represented;
c. the award does not deal with the differences contemplated by or falling within the terms of the submission to arbitration or that it contains decisions on matters beyond the scope of the submission to arbitration: Provided that if the award has not covered all the differences submitted to the arbitral tribunal, the Court may, if it thinks fit, postpone such enforcement or grant it subject to such guarantee as the Court may decide.
Furthermore, if the party against whom the award has been made proves that under the law governing the arbitration procedure there is any other ground, entitling him to contest the validity of the award, the Court may, if it thinks fit, either refuse enforcement of the award or adjourn the consideration thereof, giving such party a reasonable time within which to have the award annulled by the competent tribunal.
Section 58 provides that where the Court is satisfied that the foreign award is enforceable under this Chapter, the award shall be deemed to be a decree of the Court.
SECTION 48 (2) - THE ARBITRATION AND CONCILIATION ACT, 1996
48. Conditions for enforcement of foreign awards.-
(2) Enforcement of an arbitral award may also be refused if the Court finds that-
(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
(b) the enforcement of the award would be contrary to the public policy of India.
Explanation.- Without prejudice to the generality of clause (b) of this section, it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.
SECTION 75 IN THE ARBITRATION AND CONCILIATION ACT, 1996
Confidentiality.- Notwithstanding anything contained in any other law for the time being in force, the conciliator and the parties shall keep confidential all matters relating to the conciliation proceedings. Confidentiality shall extend also to the settlement agreement, except where its disclosure is necessary for purposes of implementation and enforcement.
SECTION 81 IN THE ARBITRATION AND CONCILIATION ACT, 1996
Admissibility of evidence in other proceedings.- The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the subject of the conciliation proceedings,-
(a) views expressed or suggestions made by the other party in respect of a possible settlement of the dispute;
(b) admissions made by the other party in the course of the conciliation proceedings;
(c) proposals made by the conciliator;
(d) the fact that the other party had indicated his willingness to accept a proposal for settlement made by the conciliator.
SCOPE OF PUBLIC POLICY
The scope of enquiry for the court before which the application for enforcement of foreign award is pending is circumscribed by the conditions for refusal set out in section 48(1) and (2). It is not open to a party seeking to resist a foreign award to assail the award on merits as the enforcing court is not the appellate court.
Further, even if the award debtor has not challenged the award or resisted its enforcement under section 48, the court enforcing the award is duty bound to make an independent enquiry to satisfy itself that: (a) the subject matter of the difference is capable of settlement by arbitration under the law of India; and (b) the enforcement of the award will not be contrary to the public policy of India.
The 2015 amendment to section 48 of the arbitration act has significantly restricted the ground of "public policy" by overruling many previous judgments of the Supreme Court.
The amendment was based on the 246th Report of the Law Commission of India, which had recommended various amendments to the arbitration act.
The Law Commission had recommended restrictions on the scope of "public policy" in both section 34 and section 48.
This was to bring the definition in line with the definition propounded by the Supreme Court in the case of Renusagar v General Electric (1993) where the Supreme Court, while construing the term "public policy" in section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961, held that an award would be contrary to public policy if such enforcement would be contrary to:
(1) fundamental policy of Indian law
(2) interests of India
(3) justice or morality.
The amendment made to the definition of public policy in 2015 is stricter and does not include reference to "interests of India", which is vague and capable of interpretational misuse, especially in the context of challenging awards in international commercial arbitration.
SECTION 7 IN THE FOREIGN AWARDS (RECOGNITION AND ENFORCEMENT) ACT, 1961
Conditions for enforcement of foreign awards.
(1) A foreign award may not be enforced under this Act-
(a) if the party against whom it is sought to enforce the award proves to the court dealing with the case that-
(i) the parties to the agreement were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law of the country where the award was made; or
(ii) that party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or
(iii) the award deals with questions not referred or contains decisions on matters beyond the scope of the agreement: Provided that if the decisions on matters submitted to arbitration can be separated from those not submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or
(iv) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
(v) the award has not yet become binding on the parties or has been set aside or suspended by a com- petent authority of the country in which, or under the law of which, that award was made; or
(b) if the court dealing with the case is satisfied that-
(i) the subject- matter of the difference is not cap- able of settlement by arbitration under the law of India; or
(ii) the enforcement of the award will be contrary to public policy.
(2) If the court before which a foreign award is sought to be relied upon is satisfied that an application for the setting aside or suspension of the award has been made to a competent authority referred to in sub- clause (v) of clause (a) of sub- section (1), the court may, if it deems proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to furnish suitable security.
JUDICIAL PRONOUNCEMENTS
The effect of the 2015 amendments to the arbitration act has been well explained by the Supreme Court in its judgment of 31 August 2017 in the case of HRD Corporation (Marcus Oil and Chemical Division) v Gail (India).
According to that judgment both sections 34 and 48 have been brought back to the position of law contained in the Renusagar case, "where 'public policy' will now include only two of the three things set out therein, viz., 'fundamental policy of Indian law' and 'justice or morality'.
The ground relating to 'the interest of India' no longer obtains. 'Fundamental policy of Indian law' is now to be understood as laid down in Renusagar (supra). 'Justice or morality' has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e., such notions as would shock the conscience of the court as understood in Associate Builders v Delhi Development Authority".
CONCLUSION
Foreign Awards involve remittance of foreign exchange from India to other countries and hence govern by provisions of FEMA, 1999. A foreign award will not be enforced in India if it contravenes Fundamental Policy of India Law and it is not drawn on the basis Justice or Morality and no any other basis.
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