Tariq khan and Aastha Agarwalla
The Indian arbitration law regime has seen many developments since the last decade; predominantly the alignment of ‘enforcement of foreign awards’ framework with the principles of United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention). Despite the calibrated efforts, India is still perceived as a hostile jurisdiction to enforce foreign awards, precisely due to the repulsive recourse adopted by the Indian courts. In particular, the Supreme Court of India (SC) and the High Courts, in its decisional practice by various judgments, inter-alia, NAFED vs. Alimenta S.A. (NAFED Judgment), Venture Global Engineering LLC vs. Tech Mahindra, is testament to this fact.
However, recently, the SC in the case of Government of India vs. Vedanta Limited (Vedanta Judgment) took a positive step forward by exhibiting that India is on its way to being recognized as one of the arbitration-friendly nations of the world. The SC, upholding the decision of the Delhi High Court, unequivocally enforced the foreign award passed by the Malaysian Tribunal in the favour of the Vedanta to recover $499 million claim from the government, and hence lend much-needed comfort to the foreign award stakeholders. In this article, it is argued how the pro- arbitration stance adopted by the SC in the Vedanta Judgment will go a long way to provide a fertile ground to make India a preferred destination of foreign investments.
Contours of the Vedanta Judgment
The dispute emanates from the production-sharing contract entered between the government and Cairn India Ltd. (later acquired by Vedanta) to extract oil and gas from an offshore field. The contract stipulated that Vedanta should carry out the specified works including drilling 21 wells at a maximum cost of $188.98 million plus 5%, called the base development cost (cost expected to be incurred by the contractor). However, the government alleged that Vedanta unilaterally recovered $499 million, thus constituting a wrongful loss to the public exchequer.
Thereafter, the dispute went into international arbitration, which ended with the Malaysian Tribunal, ruling in favour of Vedanta in 2011. After a series of appeals, the matter reached the stage of enforcement, in 2018, before the High Court of Delhi and finally, the SC. After much deliberation, the SC upheld the foreign award in favour of Vedanta because the government was not successful to establish how the arbitral award violates the public policy of India. The SC, narrowing the scope of public policy, sternly noted that “enforcement may be refused only if it violates the State’s most basic notions of morality and justice, which has been interpreted to mean that, there should be great hesitation in refusing enforcement, unless it is obtained through corruption or fraud, or undue means”. By the way of this judgment, the Apex Court has astutely reiterated that the courts should be hesitant to refuse the enforcement of foreign awards and limit their judicial intervention.
Even more importantly, the SC adjudicated upon an unwanted quandary pertaining to the limitation period for enforcement of foreign awards, in the present regime. One may effortlessly recognize how the High Courts have been grappling to clearly determine the limitation period applicable on the enforcement of foreign awards, by pronouncing divergent opinions in the cases, including, Imax Corporation vs. E-City Entertainment, Thyssen Stahlunion GMBH vs. Steel Authority of India, and Cairn India vs. Government of India. However, the SC felt imperative to settle the law on this issue once and for all. The SC held that Article 136 of the Limitation Act would not be applicable for the enforcement of foreign awards, since it is not a decree of a civil court, rather it would be covered by the residuary provision i.e. Article 137 of the Limitation Act. In pursuance of the same, henceforth, the limitation period for enforcement of foreign awards will be three years from when the right to apply accrues.
Simply put, Vedanta Judgment takes a step forward for smooth enforcement of the foreign awards, by ushering in uniformity with regards to the limitation period for enforcement. Moreover, it marks a step closer to the pro-enforcement bias approach with a strict adherence to the principle of non-interference with foreign awards.
Concept of Pro-enforcement bias
The New York Convention in Article V advocates ‘pro-enforcement bias’ policy in dealing with applications of recognition and enforcement of international arbitral awards. It sets forth the general principle that each contracting state shall recognize arbitral awards as binding and enforce them. As a result, foreign awards are entitled to a prima facie right to enforcement in the contracting states. Essentially, it means the pro-enforcement attitude of the national courts enforcing foreign award. Enunciating the same, the Court of Appeal of England and Wales in the case of Yukos Oil vs. Dardana, held that, “pursuant to pro-enforcement bias principle, foreign arbitral awards are entitled to a prima facie right to recognition and enforcement.”
As India is also a signatory of the New York Convention, the Indian arbitration framework should be in line with the principle of pro-enforcement bias. The Indian legislature, furthering the same, introduced amendment to Section 48 of the Arbitration and Conciliation Act 1996 in 2016. By the amendment, the discretion of courts to interfere in enforcement of foreign awards was substantially curtailed in two ways, viz. (i) giving a narrow construction to the ‘public policy’ ground, and (ii) dropping the ‘interests of India’ clause as a ground of refusal of enforcement. There is no gainsaying in the fact that the amendment was premised on the objective to reduce supervisory jurisdiction of the courts, and streamline prompt enforcement of foreign awards.
Recalling the judicial pronouncements
The objective of pro-enforcement arbitration regime was set in motion by the SC, in 2011, in the seminal judgment of BALCO vs. Kesar Aluminim Techial and subsequently, significant rulings like Vijay Karia & Ors. vs. Prysmian Cavi E Sistemi, Renusagar Power Ltd. vs. General Electric solidified the intent of the Indian judiciary to narrow scope of interference in foreign awards.
However, despite the collaborative efforts of the legislature and judiciary, judgments like NAFED put brakes to all the pro-enforcement steps taken. Herein, the SC denied enforcement of foreign award on the ground that it violates public policy. The NAFED Judgment by making departure from decision like Vijay Karia v. Prysmian Cavi E Sistemi (without stipulating any specific reason) becomes worrisome on two fronts – firstly, the court delved upon the merits of the case, despite insertion of Explanation 2 to the Section 48(2) which prohibits appreciation of merits of the case at enforcement stage and secondly, it broadens the scope for interpreting what constitutes public policy. As a result, it is also problematic in terms of its precedential value as it will open flood gates to review the case on merits at the stage of enforcement. But, one may argue that considering the facts of NAFED arose when the government had rigid export-import policy restrictions; courts should restrict its applicability.
Despite that, it will undoubtedly have ripple effects by discouraging potential foreign investments, and detriment for the India’s dream to be the preferred arbitration destination. It is pertinent to understand that the judgments like these have negative ramifications on the investments being contemplated to be invested in India. As a prudent practice, every foreign investor before investing huge funds will analyze the alternate dispute mechanism framework at the host/investee country; whether it is robust, business-friendly, judicial response to enforce awards, and so on. Hence, it becomes extremely crucial to send across a right message, time and again, that India adopts a consistent and non-interference approach to enforce foreign arbitral awards. In short, it’s about setting a right tone, consistently. Nevertheless, adding to the plight, NAFED Judgment was pronounced at the time when the business sentiments are low due to the outbreak of the coronavirus pandemic. Rather, it is time to encourage foreign investments to tide over the economic slowdown by pushing India as a hub of international arbitration.
But fortunately, Vedanta Judgment has set the ball rolling by reaffirming how the Indian courts step in to prevent enforcement only on limited grounds and in exceptional cases. Vedanta Judgments’ pro-enforcement bias approach will be a good lesson for the Indian judiciary system in relation to the enforcement and recognition of foreign awards in the future.
Breaking the glass ceiling through pro-enforcement bias
One may truly understand the importance of Vedanta Judgment by adverting to the consequential impact on the India, as a whole. The most significant impact will be on the reputation of India being an enforcement friendly nation. This correspondingly, will encourage and instill confidence in the foreign investors to invest in India because of the expected stability in the judicial response to uphold the enforcement. Without this stability in the judicial responses, parties will be reluctant to enter into cross-border commercial transactions or make international investments in India, rather prefer sophisticated jurisdictions with limited interference in enforcement of awards. Also, the impending quagmire revolving around the limitation period for the enforcement before the Vedanta Judgment, gave a negative notion to the investors of expected delay in the enforcement of foreign awards. Thereby, the foreign investors circumvented to invest in India because they worried that the investment amount can be stuck for a long period, despite positive outcome in the court of arbitration.
As we say, ‘securing a favorable award is only half the battle won; success in arbitration lies in being able to recover the award.’ The assurance that judicial climate of India is fostering arbitration will go a long way to establish India as a viable hub for foreign investments and alternate dispute resolution. Imbibing this sentiment, the Delhi High court in the case of NTT Docomo vs. Tata Sons, proved the fact that India respects finality of foreign awards and is a foreign investment friendly nation.
Appreciating this principal of finality, it also incumbent upon the stakeholders of the dispute resolution, like legal practitioners, counsels, to be mindful of the fact that one of the main reasons why parties choose arbitration is the principle of finality. In good faith, before challenging every foreign award, the lawyers should question whether the appeal is warranted or not and whether it conforms to the spirit of arbitration. This progressive and mindful step towards expeditious enforcement of awards by lawyers, thus, will be a reminder of nuanced approach in the Indian arbitration regime.
At this juncture, it is also imperative to highlight that this case is not an isolated instance wherein courts are attempting to establish India’s standing for pro-investment regime. The SC and subsequently, the International Court of Justice, in the Vodafone arbitration battle, ruled ‘against’ the Indian government for retrospectively amending tax laws. Such judicial pronouncements boost the investor sentiments and send a bold message to the international investor community to assure India’s credibility as an investment destination. The Vodafone award, in tandem with the Vedanta Judgment, indubitably, presents India with an exclusive opportunity, to enhance its credibility and repute, an opportunity which must not be missed. Also, with a surge in the business opportunities and entrepreneurship in India and post pandemic recovery, it is only proper to anticipate enforcement of foreign awards with minimal judicial interference, to attract huge investments.
The pro-enforcement stance taken by the judiciary in the Vedanta Judgment is unarguably a welcome move to make India an arbitration-friendly jurisdiction and facilitate pro-foreign investment environment. However, on a suggestive note, the Indian courts should attempt to shorten the timelines for the enforcement proceedings of foreign awards as it will offer an expedite and cost-effective resolution mechanism of disputes, in true sense. It is very important to understand for all the stakeholders of the dispute resolution i.e. lawyers, courts, that cost and time of proceedings are perennial issues in international arbitration, as they are in litigation. More importantly, if India wants to fulfill its dream of becoming the hub of international arbitration and attract significant amount of foreign investments, it needs to adopt a friendly arbitration mechanism. As we know, foreign investors are interested to invest in the jurisdictions where the courts adopt a friendly and expedite procedure for the enforcement of arbitral award. This pro-enforcement bias provides an additional measure of commercial security for parties entering into cross-border transactions and thus motivates foreign investors invest in India which will accelerate growth in the economy and expand industries/businesses.
Hence, the Indian courts should respect the pro-enforcement bias spirit by consistently following the minimal judicial intervention approach as a norm when ruling on objections to the enforcement of a foreign award, and refuse the enforcement as an exception.