Foreign Arbitral Award cannot be refused enforcement in India despite FEMA Violation

Recently, the topic of what public policy in India implies and the enforceability of a foreign arbitral award was answered in the landmark judgment delivered by the Supreme Court in Vijay Karia. v. Prysmian Cavi E Sistemi.

Recently, the topic of what public policy in India implies and the enforceability of a foreign arbitral award was answered in the landmark judgment delivered by the Supreme Court in Vijay Karia. v. Prysmian Cavi E Sistemi. The Supreme Court while shedding light over the question of enforceability of a foreign arbitral award, opined over the question of a foreign award which was apparently in contravention with the public policy of India, on the basis of it being in contravention and violation of the Indian exchange control laws which is basically the Foreign Exchange Management Act, 1999 (FEMA) and its regulations thereunder. Under this case the issue was the transfer of shares from parties resident in India to the parties resident outside India at a discounted price.

The grounds on which an arbitral award is set aside whether in domestic arbitrations or international commercial arbitrations seated in India has been given under section 34 of the Arbitration and Conciliation Act, 1996. As far as foreign awards are considered, i.e. arbitral awards passed in foreign seated arbitrations, even though the same cannot be challenged in India, its enforcement can be very validly challenged in India by the award debtor on grounds that are set out under section 48 of the Act. The grounds for setting aside an arbitral award passed in a domestic arbitration and an international commercial arbitration seated in India under Section 34 of the Act as well as the grounds for the refusal of enforcement of the foreign award in India as per section 48 are somewhat similar. The primary ground which is always brought forward during the setting aside of an arbitral award is the award being in violation of the public policy of the country. It therefore becomes understandably important to define and introspect over what constitutes the public policy and what comes outside the purview of the same with respect to arbitral awards.

In the present case brought under the Supreme Court, the award debtor has sought to avoid the enforcement of the arbitral award passed in the arbitration proceedings which were conducted in London under the London Court of International Arbitration. Moreover, this foreign award directed the transfer of securities by the Appellant, which was an Indian entity to Respondent No. 1 which was a foreign entity at a discount of 10%. The foreign exchange regulations under FEMA state that such a transfer can only be made at the prevailing fair market value and not any other lesser amount. However, the Appellant, while resisting the enforcement of the awards contended that the awards were in contravention of FEMA and thus, against the public policy of India making it unenforceable.

The Supreme Court has come forward to explain the distinction between the present legal regimen under FEMA in comparison to the regimen which existed prior to its implementation and under its predecessor the Foreign Exchange Regulation Act, 1973 (FERA). It has laid emphasis on the fact that while FEMA is based more on the policy of management of foreign exchange, FERA used to lay more emphasis on policing or rather controlling foreign exchange. It also stated that FEMA did not contain any provision which made any transaction void for any violation of its guidelines unlike FERA which expressly voided every transaction which violated any of its guidelines under section 47 of its rules. Furthermore, the Supreme Court further made the distinction by stating that FEMA contained no provision for prosecution and punishment unlike its predecessor, FERA.  It’s been held that in case of any violation of FEMA, it is still possible to acquire the permission of the Reserve Bank of India (RBI) to condone the said violation and seek approval for the same. Therefore, this said breach is a rectifiable one and thus questions the basis of whether it constitutes a part of the public policy of India at all. Thus it was held that neither the arbitral award nor the agreement enforced under these arbitral awards can be held to be ineffective under the current law. Heavy reliance has also been placed on the judgment of the Delhi High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited which in turn had relied on the Supreme Court’s judgment in Life Insurance Corporation of India v. Escorts Limited, stating the same.

It has further been opined by the Court that any violation of the fundamental policy of Indian law amounts to a breach of some legal principle which is so basic to the Indian law that it is not susceptible to being compromised whatsoever. The public policy primarily throws light on the very core principles of Indian law and structure which has been reflected time and again through the various statues passed. Hence, the Supreme Court has held that any breach under FEMA guidelines cannot be held to be in violation of the fundamental public policy of Indian law, making the said arbitral awards enforceable in India.

Implications of the Judgment:

Under the current judgment even though the Supreme Court has held the said opinion in the context of the enforcement of foreign awards, the conclusions of Court Court in Vijay Karia have a direct bearing upon the challenges to arbitral awards passed in Indian-seated international commercial arbitrations raised under Section 34 of the Act. It is clear that Indian-seated international commercial arbitrations always involve non-resident and foreign parties and therefore the arbitral awards passed in these arbitrations usually comprise of directions to one party to pay a certain amount to the other. This ultimately results in influx and outflow of foreign exchange depending upon whether the successful party is a resident or a non-resident party. The various impediments to such awards on the basis that the payment directions violate the current FEMA regulations are routinely made especially when the award directs payments to be made to a non-resident party. Further, for avoiding any such challenging situations in the future, parties now pose their arbitral claim as a claim for damages instead of a direct claim over the contractual sale price, under the case.

Therefore, the Supreme Court has, in the case of Vijay Karia has held that in any international commercial arbitration conducted in India, the ground for challenges to any arbitral award which relates to the “public policy of India” would be the same as the ground of resisting enforcement of a foreign award in India itself. This implies that the meaning of the phrase “public policy of India” as found under sections 48 and 34 of the Act is the same. Hence, since the breach under FEMA has not been treated as a violation of the public policy of India, under similar instances the same will also not be treated as a breach under an Indian-seated international commercial arbitration as well. Hence, courts are more likely to not be inclined towards any cases involving a challenge to an award passed in an Indian-seated international commercial arbitration proceeding if it is being challenged on the basis of violation of public policy due to violation of any FEMA guidelines.

Furthermore according to the amendments introduced in the Act by way of the Arbitration & Conciliation (Amendment) Act, 2015, any party challenging an award passed in an Indian-seated international commercial arbitration is no longer permitted to mount its challenge on the ground of any patent illegality appearing on the face of the award. A challenge to an award passed in an Indian-seated international commercial arbitration which is violative of FEMA regulations was generally based on two grounds, namely
  • patent illegality appearing on the face of the award; and
  • the award contravening the “public policy of India”.
The Amendment completely removes the first ground and an analysis and application of the Vijay Karia judgment would imply that the second ground also does not exist as a result.

This implies that any challenges to arbitral awards in an Indian-seated international commercial arbitration founded on the ground that it violates the guidelines and regulations given under FEMA are not sustainable any longer. This position had previously already been declared by the Delhi High Court in the case of Cruz City and now it has received the assent of the Supreme Court with tis judgment in the Vijay Karia case.

Conclusion:

This judgment passed by the Supreme Court under the Vijay Karia case clarifies two primary aspects for violation under the Indian law. One, throws light on what does and what does not constitute a part of the public policy of India and two, it ascertains that no violation of any regulations under FEMA can amount to unenforceability of an arbitral award passed in an international commercial arbitration whether domestic or international. This is a firm step towards the preservation and sanctity of arbitral awards passed and protects the awards from facing undue challenges in the future. Moreover, it protects foreign parties from being stranded despite holding a favourable award in India. This could even result in higher confidence being shown by foreign parties on arbitrations conducted in consonance with the Indian law.