Vijay Karia & Ors. v. Prysmian Cavi e Sistemi SRL & Ors., 2020 SCC OnLine SC 177 (Decided on 13 February 2020)

Relevant Facts:

The disputes arose between Appellants and Respondents under the Joint Venture Agreement (JVA). Clause 21 of JVA provides for London seated arbitration by Sole Arbitrator under LCIA Rules.  Respondents initiated arbitration alleging ‘material breach’ by Appellants which also had counterclaims.  Mr. David Joseph QC was appointed by LCIA as sole arbitrator. The Arbitrator passed four arbitral awards under:  

First Partial Final Award dated 15 February 2013:  Questions relating to the construction of various clauses of the JVA and jurisdictional issues were raised by Respondent No.1.

Second Partial Final Award dated 19 December 2013: It dealt with the issue of material breaches of the terms and conditions of JVA. The Arbitrator held that the Appellants had committed several breaches of the JVA and dismissed their counterclaims.

Third Partial Final Award dated 14 January 2015: The Arbitrator explained how he was not ‘functus officio’ with respect to the relief sought and declared respondents as defaulting party under JVA.

Final Award dated 11 April 2017: Finally, in terms of the Awards passed by the Arbitrator and on the basis of material breaches of JVA, the Appellants were directed to sell their shareholding to the Respondents at a discounted price.

The Award was not challenged at the seat, i.e. London. Once the Award was brought to India for recognition and enforcement under Section 48 of the Arbitration and Conciliation Act, 1996 (‘Act’) before the Bombay High Court, the objections were raised by the Appellants.

The Single Judge of the High Court dismissed the objections and held that the Award must be recognised and enforced under Section 48 of the Act. Given that no appeal against the said order could be filed under Section 50 of the Act, the Appellants approached the Supreme Court under Article 136 of the Constitution of India.

Judgement:

□ Recognition and enforcement of Foreign Award:

The Supreme Court set out the context of the case before it dealt with the contentions of the Parties. The Court observed that, unlike Section 37 of Part I of the Act, which provides an appeal against either setting aside or refusing to set aside a domestic award, Section 50 of Part II of the Act provides an appeal only against a judgment refusing to enforce a foreign award. It does not provide an appeal against an order enforcing an award especially after rejecting the objections raised for such enforcement.

The Court noted that the legislative policy so far as Recognition and Enforcement of Foreign Awards is concerned, states that the parties can only challenge the enforcement at the time of putting forward their objections under Section 48 of the Act and the jurisdiction of the Supreme Court’s under Article 136 should not be used to circumvent the legislative policy. It was further noted that the Court would only in exceptional circumstances interfere with a Judgment which recognises and enforces a foreign award.

□ Pro-enforcement bias:

Under the New York Convention, the country in which or under the law of which an award is made is said to have primary jurisdiction over the arbitral award. All other Signatory States are said to have secondary jurisdiction. Only the Court of a country with primary jurisdiction over an arbitral award may annul that award. Courts in countries having secondary jurisdiction are required to limit themselves to deciding whether the award may be enforced in that country.

The Supreme Court observed that, given the “pro-enforcement bias” of the New York Convention, which has also been adopted in Section 48 of the Act, the burden of proof, which was earlier on parties seeking enforcement, has now been shifted to parties resisting enforcement. This is because the challenge procedure at the seat of arbitration gives far more leeway to Courts to interfere with an award, as compared to the narrow restrictive grounds contained in the New York Convention when a foreign awards enforcement is resisted.

American Courts have also  held that defences to enforcement under the New York Convention are to be construed narrowly in order to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and the arbitral awards rendered thereunder.

□ Discretion of the Court to enforce Foreign Awards:

The Supreme Court held that, it is clear from Section 48 of the Act that enforcement of a foreign award ‘may’ be refused only if the grounds stated there has been made out to resist enforcement. The Court emphasised on the word ‘may’ which indicates that a residual discretion remains with the Court to enforce a foreign award, despite grounds stated for challenging its enforcement.

The Court classified the grounds for resisting enforcement of a foreign award, under Section 48 of the Act, into three groups:

(i) grounds which affect the jurisdiction of the arbitration proceedings;

(ii) grounds which affect party interest alone; and

(iii) grounds which go to the public policy of India.

The Court held that it does not have discretion if grounds affecting jurisdiction of the Tribunal is questioned such as invalid arbitration agreement or where the subject matter of dispute is not capable of settlement by arbitration under the law of India, as this would render the Award null. However, where grounds taken to resist enforcement can be said to be linked to party interest alone, for example, that a party has been unable to present its case before the arbitrator, the Court held that, it will have Jurisdiction to enforce such awards even if such grounds were made out. In principle, the Court held that the word ‘may’ in Section 48 of the Act can be considered to mean ‘shall’ depending upon the context mentioned above.

□ The ground of ‘Natural Justice’ under Section 48

The Court held that the expression ‘unable to present his case would be a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties. Thus, reading along with the first part of Section 48(1)(b), the Court held that the objection of being unable to present one’s case would be limited to the hearing stage and not after the award has been delivered. However, where no opportunity is given to deal with an argument which goes to the root of the case or findings based on evidence which go behind the back of the party would, on the facts of a given case, render a foreign award liable to be set aside on the ground that a party has been unable to present his case.

In sum, the Court held that a failure to consider a material issue would not fall within the contours of Section 48(1)(b). However, if a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counter-claim in its entirety, the award may shock the conscience of the Court and may be set aside on the ground of violation of the public policy of India.

The Court further clarified that the foreign award must be read as a whole. If the Tribunal considers a particular case essential and answers it, it would by implication mean that the other issue or issues raised have been implicitly rejected.

□ Violation of Foreign Exchange Management Act, 1999 (‘FEMA’):

The Appellants argued that a foreign award, by which shares have to be purchased at a discounted value, would violate FEMA Rules and therefore, would amount to a violation of the fundamental policy of Indian law.

The Supreme Court rejected this argument by referring extensively to the Delhi High Courts Judgement in Cruz City Mauritius Holdings v Unitech Limited, (2017) 239 DLT 649. In Cruz City, the High Court held that, contravention of any provision of any enactment would not be synonymous with contravention of “fundamental policy” of Indian law. The High Court further had held that a foreign award may be based on a foreign law, which may be inconsistent with the laws of the country in which enforcement was sought. If the Courts of the enforcing country refused enforcement of the award on the ground of it being in contravention with the local laws, the object and purpose of the Convention would be defeated. The Supreme Court while referring to Cruz City held that a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian law. The Court categorically holds that a foreign award may be enforced even if it inconsistent with the provisions of FEMA.

□ Challenge to enforcement of Foreign Awards on facts:

Apart from the above grounds, the Appellants have raised fourteen other grounds of challenge to the Award on the facts of the case. However, the Supreme Court rejected all the grounds stating that none of these objections were even remotely sustainable after perusing the case records.

The Court finally held that the Arbitrator has exhaustively discussed the evidence and has arrived at detailed findings for each of the issues, claims and counter claims. Therefore, the Court dismissed the appeals.

Comments:

The Judgement extensively deal with jurisprudence evolved around enforcement of foreign award across the world. The Court had to deal with each ground and averment made in objection to resist the foreign awards. Having done so, the Court could not resist but to observe that Appellants indulged “in a speculative litigation with the fond hope that by flinging mud on a foreign arbitral award, some of the mud so flung would stick”. The repercussion was made vivid in the conclusion that Court’s time was unnecessarily taken by a case which has already been dealt with by four exhaustive awards on merits and also by the impugned judgment of the Bombay High Court, therefore, the Court dismissed appeals with costs of Rs. 50 lacs in favour of Respondent.

In recent years, the pro-enforcement perspective of Indian Courts with respect to foreign awards has become increasingly prominent. The Supreme Court’s decision in this case reaffirms this position and discourages parties from unnecessarily resisting enforcement of foreign awards at least with unfeasible grounds. Therefore, challenging the enforcement of foreign awards before the Indian Courts must be made exercising due caution regarding scope and ambit.