Supreme Court Upholds Enforceability of Foreign Arbitral Awards in Commercial Disputes: Vijay Karia vs. Prysmian Cavi E Sistemi SRL (2020) INSC 123 (13 February 2020)

Date of the Judgment: 13 February 2020

Citation: (2020) INSC 123

Judges: R.F. Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J.

Can Indian courts refuse to enforce a foreign arbitral award based on a challenge to the merits of the case? The Supreme Court in this case clarified that Indian courts have limited power to interfere with foreign arbitral awards. The Court emphasized that the grounds for refusing enforcement are very narrow, as defined under Section 48 of the Arbitration and Conciliation Act, 1996. The judgment was delivered by a three-judge bench consisting of Justice R.F. Nariman, Justice Aniruddha Bose, and Justice V. Ramasubramanian.

Case Background

The case involves a dispute between Shri Vijay Karia and other individual shareholders of Ravin Cables Limited (Appellants), and Prysmian Cavi E Sistemi SRL (Respondent No. 1), an Italian company. On 19 January 2010, the Appellants and Ravin entered into a Joint Venture Agreement (JVA) with Respondent No. 1, by which Respondent No. 1 acquired a 51% majority stake in Ravin. Key clauses of the JVA included provisions for the management of the company, a non-compete clause, and a dispute resolution mechanism through arbitration in London under the London Court of International Arbitration (LCIA) Rules.

The JVA stipulated that Mr. Karia would be the Chairman and Managing Director for seven years or until the existing shareholders held less than 10% of the share capital. It also outlined the responsibilities of the Managing Director and the CEO, with the CEO being responsible for day-to-day management after an ‘integration period’. The JVA also included a clause that restricted the parties from investing or participating in the cable business in India, except through the company.

Disputes arose between the parties, with Respondent No. 1 alleging material breaches of the JVA by the Appellants. These breaches included interference with the functioning of the CEO, denial of access to HR and payroll data, and inciting a strike by employees. The Appellants also alleged that the Respondent had breached the JVA through direct sales in India, acquisition of a competing company, and attempts to oust the Appellants from the company.

Timeline

Legal Framework

The case is governed primarily by the Joint Venture Agreement (JVA) entered into between the parties and the Arbitration and Conciliation Act, 1996. Key clauses of the JVA include:

• Clause 8: Outlines the purpose and objectives of the company.
• Clause 12.6: Details the appointment and responsibilities of the Chairman and Managing Director.
• Clause 12.7: Details the appointment and responsibilities of the Chief Executive Officer.
• Clause 17: Specifies the procedure for fair market valuation of shares.
• Clause 20: Includes mutual covenants and undertakings.
• Clause 21: Restricts business activities in India outside the joint venture.
• Clause 23: Defines events of default and remedies.
• Clause 27: Provides for arbitration under the LCIA Rules in London and states that Part I of the Indian Arbitration and Conciliation Act, 1996 shall have no application to the arbitration agreement.

The Arbitration and Conciliation Act, 1996, particularly Section 48, which deals with conditions for enforcement of foreign awards, is also crucial. Section 48(1)(b) states that enforcement may be refused if the party against whom the award is invoked was not given proper notice or was unable to present his case. Section 48(2)(b) allows refusal if enforcement would be contrary to the public policy of India, which includes contravention of the fundamental policy of Indian law or conflict with the most basic notions of morality or justice.

Arguments

Appellants’ Arguments

The Appellants, led by Dr. Abhishek Manu Singhvi, argued that the arbitral tribunal failed to address key counterclaims and acted contrary to the fundamental policy of Indian law. Their main submissions included:

• The tribunal failed to address the Appellants’ counterclaim regarding the incorporation of Jaguar Communication Consultancy Services Private Limited, which allegedly violated the non-compete provisions of the JVA.
• The tribunal did not determine the Appellants’ counterclaim that Respondent No. 1’s efforts to oust the Appellants from Ravin amounted to a breach of the JVA.
• The tribunal did not address the Appellants’ counterclaim that Respondent No. 1 made a surreptitious attempt to register the Ravin trademark in its own name.
• The tribunal ignored the admissions of expert witnesses that ACPL (a company acquired by Respondent No. 1’s parent) was in competition with Ravin.
• The tribunal’s interpretation of clause 21.1 of the JVA was perverse, adding a condition that it only prohibited long-term arrangements.
• The tribunal ignored material evidence and admissions of Respondent No. 1 regarding direct sales in India.
• The tribunal’s analysis of the contemporaneous conduct of the parties was selective and perverse.
• The tribunal appointed a conflicted valuer (Deloitte).
• The valuer adopted a course for valuation that is contrary to both parties’ position, in that, Ravin’s 49% shareholding in Power Plus was completely ignored.
• The tribunal acted contrary to the parties’ submissions in arriving at the valuation date.
• The rulings in the First and Second Partial Final Awards regarding the interpretation of clause 21 of the JVA were inconsistent and irreconcilable.
• A private communication had been made of the outcome of the arbitration by the tribunal two months prior to the award.
• The award is in contravention of the Foreign Exchange Management Act, 1999 (FEMA) by directing the sale of shares at a 10% discount.

Shri Nakul Dewan, also representing the Appellants, argued that an award failing to deal with a party’s claim should be set aside for breaching the principle of audi alteram partem and for shocking the conscience of the court. He also contended that the award was perverse as it was contrary to admitted facts and that the tribunal failed to draw an adverse inference from the Respondent’s failure to produce key documents.

Respondents’ Arguments

The Respondents, represented by Shri Kapil Sibal, argued that the arbitral tribunal had thoroughly considered all aspects of the matter, and that the Appellants’ objections were merely attempts to re-argue the merits of the case. They stressed that no challenge was made to the awards in English courts, and that the arbitrator adopted a balanced approach despite provocation from Shri Vijay Karia. Their main submissions included:

• The arbitrator had considered all claims and counterclaims.
• The central issue was who materially breached the JVA. Once it was decided that the Appellants breached the JVA by not allowing the CEO to take charge, the rest followed.
• The arbitrator’s interpretation of clause 21.1 of the JVA was fair and correct.
• The arbitrator had considered all the material evidence and had dismissed the counter-claims regarding direct sales.
• Deloitte was appointed by consent, and the valuation was conducted strictly as per the JVA.
• The Appellants were estopped from taking the plea that the award contravened FEMA because they had entered into a solemn agreement with the Respondent.

Shri K.V. Viswanathan, also representing the Respondents, supported Shri Sibal’s submissions and emphasized that Section 48 of the Arbitration Act provides very narrow parameters for resisting enforcement of foreign awards. He also argued that public policy must be understood in the narrow sense, as expounded in Renusagar Power Plant Co. Ltd. v. General Electric Co. and later decisions of the Supreme Court.

Submissions of the Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but considered the following points:

1. Whether the arbitral tribunal failed to deal with the Appellants’ counterclaims.
2. Whether the tribunal’s interpretation of the JVA was perverse.
3. Whether the tribunal ignored critical evidence.
4. Whether the tribunal acted contrary to admitted facts.
5. Whether the tribunal adopted disparate thresholds for determining material breach.
6. Whether the tribunal appointed a conflicted valuer.
7. Whether the valuation was done correctly.
8. Whether the tribunal’s ruling was inconsistent.
9. Whether the award was in contravention of FEMA.
10. Whether the arbitrator was biased.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases

• Renusagar Power Plant Co. Ltd. v. General Electric Co. (1994) Supp (1) SCC 644 – Supreme Court of India: Interpreted the scope of “public policy” under the Foreign Awards Act, 1961, emphasizing a narrow construction.
• Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) Civil Appeal No. 4779 of 2019 – Supreme Court of India: Reaffirmed the principles laid down in Renusagar (supra) regarding the limited scope of judicial review in foreign awards.
• Shri Lal Mahal Ltd. v. Progetto Grano SPA (2014) 2 SCC 433 – Supreme Court of India: Held that the Renusagar position applies to Section 48(2)(b) of the Arbitration Act, overruling Phulchand Exports Ltd. v. O.O.O Patriot.
• LMJ International Ltd. v. Sleepwell Industries (2019) 5 SCC 302 – Supreme Court of India: Applied the doctrine of constructive res judicata to reject objections that could have been raised earlier.
• Sui Southern Gas Co. Ltd. v. Habibullah Coastal Power Co. (2010) SGHC 62 – Singapore High Court: Emphasized a narrow view of the “public policy” exception.
• Parsons & Whittemore Overseas Co. v. Societe Generale De L’Industrie Du Papier 508 F.2d 969 (1974) – U.S Court of Appeals, Second Circuit: Highlighted the pro-enforcement bias of the New York Convention.
• Compagnie des Bauxites de Guinee v. Hammermills Inc. (1992) WL 122712 – US District Court, District of Colombia: Followed Parsons (supra) in narrowly construing the grounds for refusing to recognize arbitral awards.
• Certain Underwriters at Lloyd’s London v. BCS Ins. Co. 239 F.Supp.2d 812 (2003) – US District Court, N.D Illinois: Stated that the review of a panel decision is “grudgingly narrow”.
• Karaha Bodas Co., L.L.C v. Perusahaan Pertambagan Minyak 364 F.3d 274 (2004) – United States Court of Appeals for the 5th Circuit: Analyzed the New York Convention and the limited authority of secondary-jurisdiction courts.
• Admart AG v. Stephen and Mary Birch Foundation Inc. 457 F.3d 302 (2006) – U.S Court of Appeals, 3rd Circuit: Stressed that courts have strictly applied the Article V defenses and generally view them narrowly.
• Dallah Real Estate and Tourism Holding Co. v. The Ministry of Religious Affairs, Government of Pakistan (2010) UKSC 46 – U.K. Supreme Court: Discussed the discretion of a court to enforce a foreign award.
• Cruz City 1 Mauritius Holdings v. Unitech Limited (2017) 239 DLT 649 – Delhi High Court: Addressed the issue of discretion to enforce a foreign award and the limited scope of public policy.
• Sohan Lal Gupta v. Asha Devi Gupta (2003) 7 SCC 492 – Supreme Court of India: Laid down the ingredients of a fair hearing.
• Glencore International AG v. Dalmia Cement (Bharat) Limited 2017 SCC OnLine Del 8932 – Delhi High Court: Distinguished between the inability to present a case and the rejection of a party’s case.
• Minmetals Germany GmbH v. Ferco Steel Ltd. (1999) C.L.C. 647 – English Court: Defined the scope of “unable to present a case”.
• Ajay Kanoria v. Tony Guinness (2006) EWCA Civ 222 – English Court of Appeal: Approved the reasoning in Minmetals (supra).
• Jorf Lasfar Energy Co. v. AMCI Export Corp. 2008 WL 1228930 – U.S District Court, W.D. Pennsylvania: Held that a party must suffer the consequences of failing to obey procedural orders.
• Dongwoo Mann+Hummel Co. Ltd. v. Mann+Hummel GmbH (2008) SGHC 275 – Singapore High Court: Held that a deliberate refusal to comply with a discovery order is not a contravention of public policy.
• Gbangbola v. Smith and Sheriff 1998 3 All ER 730 – English Court: Held that a tribunal does not act fairly if it does not give a party an opportunity to deal with arguments not advanced by either party.
• Bahman Irvani v. Ali Irvani 1999 WL 1142456 – English Court: Held that questions must be answered before the award, not in the award.
• Van Der Giessen-De-Noord Shipbuilding Division B.V. v. Imtech Marine & Offshore B.V. (2008) EWHC 2904 (Comm) – UK Court: Held that a tribunal breaches fairness by ignoring the agreed position of the parties.
• Malicorp Limited v. Government of Arab Republic of Egypt (2015) EWHC 361 (Comm) – UK Court: Held that a party must be warned of the manner in which the award is made.
• Soh Beng Tee & Co. v. Fairmount Development Pte Ltd. (2007) SGCA 28 – Singapore Court of Appeal: Fleshed out what was meant by “fair hearing”.
• JVL Agro Industries Ltd v. Agritrade International Pte Ltd. (2016) SGHC 126 – Singapore High Court: Held that natural justice is breached when new points are taken up by the arbitrator.
• G.D. Midea Air Conditioning Equipment Co. v. Tornado Consumer Goods Ltd. (2017) SGHC 193 – Singapore High Court: Held that the breach of natural justice must be connected to the making of the award.
• Hebei Import & Export Corporation v. Polytek Engineering Company Ltd. (1992) 2 HKC 205 – Hong Kong Court: Held that a party must be given an opportunity to present its case after an inspection.
• Ascot Commodities NV v. Olam International Ltd. 2001 WL 1560709 – English Court: Held that an award should deal with all essential issues.
• Zebra Industries v. Wah Tong Paper Products Group Ltd. (2012) HKCU 1308 – Hong Kong Court: Held that an arbitrator was wrong in law in failing to take into account certain clauses.
• A v. B (2015) 3 HKLRD 586 – Hong Kong Court: Held that it is a serious irregularity if an important issue is not addressed.
• Front Row Investment Holdings v. Daimler South East Asia (2010) SGHC 80 – Singapore High Court: Held that failure to consider material arguments is a breach of natural justice.
• TMM Division Maritime SA v. Pacific Richfield Marine Pte Ltd. (2013) SGHC 186 – Singapore High Court: Held that the court should not nit-pick at the award.
• AKN & Anr. v. ALC & Ors. (2015) SGCA 18 – Singapore High Court: Held that to fail to consider an important pleaded issue is a breach of natural justice.
• BAZ v. BBA & Ors. (2018) SGHC 275 – Singapore High Court: Outlined the elements required to succeed in a claim under s 24(b) of the IAA.
• Campos Brothers Farms v. Matru Bhumi Supply Chain Pvt. Ltd. (2019) 261 DLT 201 – Delhi High Court: Held that ignoring submissions of a party is a violation of natural justice.
• Dropti Devi v. Union of India (2012) 7 SCC 499 – Supreme Court of India: Discussed the importance of foreign exchange regulations.
• Life Insurance Corporation of India v. Escorts Ltd. – Supreme Court of India: Discussed the object of FERA.

Books

• Gary Born, International Commercial Arbitration, Vol. II (2009)
• Redfern and Hunter, International Arbitration, 6th Edn. (2015)
• Albert Jan van den Berg, The New York Arbitration Convention of 1958 (1981)
• Russel on Arbitration, Sweet & Maxwell (24th Edn., 2015)
• New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – Commentary, edited by Dr. Reinmar Wolff (C.H. Beck, Hart, Nomos Publishing, 2012)
• Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, 1999)

Legal Provisions

• Section 48 of the Arbitration and Conciliation Act, 1996: Conditions for enforcement of foreign awards.
• Foreign Exchange Management Act, 1999 (FEMA): Framework for managing foreign exchange in India.
• Foreign Exchange Management (Non-Debt Instrument) Rules, 2019: Rules governing non-debt instrument investments.

Authorities Considered by the Court

Decision

The Supreme Court dismissed the appeal, upholding the enforceability of the foreign arbitral award. The Court held that the Appellants’ objections were essentially an attempt to re-argue the merits of the case, which is not permissible under Section 48 of the Arbitration and Conciliation Act, 1996. The Court emphasized that the grounds for refusing enforcement of a foreign arbitral award are very narrow and must be interpreted strictly. The Court found no violation of the fundamental policy of Indian law or any contravention of the most basic notions of morality or justice.

The Court also stressed that the threshold for challenging a foreign award is extremely high, and the courts should not interfere with the arbitrator’s decision unless there is a clear violation of the principles of natural justice or public policy. The Court reiterated that the scope of judicial review under Section 48 is limited to procedural irregularities and does not extend to a review of the merits of the case.

Implications

This judgment reinforces India’s commitment to enforcing foreign arbitral awards and provides clarity on the limited scope of judicial intervention in such matters. It sends a strong message to the international business community that India is a pro-arbitration jurisdiction. The judgment has several implications:

• Limited Judicial Interference: Indian courts will not interfere with foreign arbitral awards unless there is a clear violation of public policy or natural justice, as defined under Section 48 of the Arbitration Act.
• Pro-Enforcement Stance: The judgment underscores India’s pro-enforcement stance towards foreign arbitral awards, aligning with international norms and the New York Convention.
• Certainty and Predictability: Parties engaged in international commercial transactions can have greater confidence that arbitral awards will be enforced in India, providing certainty and predictability in cross-border disputes.
• Narrow Interpretation of Public Policy: The judgment reiterates that the public policy exception under Section 48 must be interpreted narrowly, focusing on fundamental principles and not on a review of the merits of the award.
• Importance of Procedural Fairness: The judgment highlights the importance of procedural fairness and the need for tribunals to address all material claims and counterclaims, but also emphasizes that mere disagreements with the arbitrator’s findings do not justify non-enforcement.

Enforcement of Foreign Arbitral Awards in India