‘Public Policy’ – Whether a twinkling defence against enforcement of a foreign arbitral award?

Pareekshit Bishnoi, Advocate, High Court of Delhi

The Arbitral tribunal & Courts are the two engines of any arbitral proceedings. They, depending on the stage, pull the arbitral process until an arbitral award is enforced. The role of the courts in this process is restricted to mere supervision and not intervention. However, what is supervision and what is an intervention of a court has had different latitudes across the jurisdictions.

Amongst other issues in the arbitral process, this issue of supervision vs. intervention gains special significanceat the stage of enforcement of an arbitral award. At this stage, if the Courts of enforcing State assume unguided and arbitrary power to intervene and disallow the enforcement of an arbitral award, all the efforts employed by the parties in the arbitral process may fail particularly when the award-debtor is a government of the State of the enforcing court. To contain exercise of any whimsical power against enforcement of an award and bring uniformity and certainty in the grounds of objection, Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1961 (Convention) suggested several exhaustive grounds. These grounds have now been adopted by the national legislation of nearly all countries either by the virtue of they being a signatory to the Convention or by the virtue of the adoption of theUNCITRAL Model Law on International Commercial Arbitration (1985) (Model Law).

The present article is, however, circumscribed only to the ground that an arbitral award may be refused enforcement if it violates ‘public policy’ of the enforcing State. Interestingly, Justice Burroughs back in 1824 in the case of Richardson v Mellish metaphorically observed that “public policy is a very unruly horse, and when once you get astride it you never know where it will carry you…… It is never argued at all but when other points fail”. It is for this inherent undefinable nature of the term ‘public policy’, the author herein attempts to briefly examine whether this ground of refusal has gained any common understanding across selected five jurisdictions namely, USA, UK, France, Singapore, and India or it still constitutes an undefinedterritory and a twinkling ground of defence against enforcement of an arbitral award.

USA

Talking first of the United States, the Courts here have shown a strong pro-enforcement approach towards the arbitral awards for long.Notably, Article V (1) of the Convention and Article 36 of the Model Law opens with “recognition and enforcement of the award may be refused”. However, section 207 of the Federal Arbitration Act goes beyondArticle V of the Convention and states that the Courts “shall confirm the award unless it finds one of the grounds for refusal”.This affirmative obligation has led to a narrow understanding of the term ‘public policy’ and consequently minimalist intervention approach. This may be noted from the decision of the Second Circuit in Parsons & Whittemore Overseas Co., Inc vs. SociétéGénérale de l’Industrie du papier (Parsons) back in 1974 wherein the Court observed that an award would be contrary to ‘public policy’ of the US “where enforcement would violate the forum state’s most basic notions of morality and justice”. These words are even today a ‘grundnorm’ not only in the US but across many other jurisdictions. More recently, the District Court of New Jersey in KG Schifffahrtsgesellschaft MS Pacific Winter MBH & CO. vs. Safesea Transport, Inc. [2019] rejected the challenge to enforcement on the ground of the award violating US ‘public policy’. The Court observed that Article V has to be narrowly construed and “the Convention does not sanction second-guessing of an arbitrator’s interpretation”.

France

Likewise,France has also shown a strong inclination towards the enforcement of arbitral awards and an affirmative obligation on the Courts to enforce arbitral awards. Article 1514 of the Code of Civil Procedureprovides that “an arbitral award shall berecognized or enforced in France ………. if such recognition or enforcement is not manifestly contrary to international public policy”.

Though in pre 2000’s, the Courts did often intervene with arbitral awards, in Verhoeft v. Moreau, [2000], the Court of Cassation held that for an award to be in breach of the ‘international public policy’, it must be “flagrant, actual and concrete”. This standardhas been reiterated in many decisions, and interestingly it appears to be a stricter approach than the US. This is because Article 1514 like above-noted section 207, casts a positive duty on the Courts and additionally conditions that a violation must be ‘manifest’. This approach instead has been critiqued by some as no review at all of the arbitral awards. More recently, the Paris Court of Appeal in SAS Man Diesel & Turbo France (“Man Diesel”) v.Sté Al Maimana General Trading Company Ltd [2014] refused to entertain that the contract was tainted with corruption and in violation of the ‘international public policy’. However, interestingly, the Court omitted the word ‘flagrant’ from the above-said trio i.e.,“flagrant, actual and concrete”thus relaxing the standard to some extent at least in the text if not in practice. The author says so because inMK Group v. Onix [2018] the Paris Court of Appeal reiterated the trio test while setting aside an ICC arbitral award which provided legal protection to fraudulent investment. In a nutshell, France follows a pro-enforcement approach and admission of the defence of ‘public policy’ is limited only to exceptional circumstances.

Singapore

Moving forward, Singapore has also shown a pro-enforcement approach and a narrow definition of the term ‘public policy’. Like Article V of the Convention but unlike USA and France, Section 31 of the Singapore International Arbitration Act, 1995 states that “the enforcement in any of the cases mentioned in subsections (2) and (4) may be refused but not otherwise”.

Pertinently back in 2006, the Singapore Court of Appeal in the case ofPT AsuransiJasa Indonesia (Persero) v Dexia Bank SA noted a streak of authorities including Parsonsfrom the US and observed that ‘public policy’must mean a violation which “shocks the conscience” or is “clearly injurious to the public good or … wholly offensive to the ordinary reasonable and fully informed member of the public”. The Court went on to quote from preparatory materials of the Model Law wherein it has been noted that “the term ‘public policy’, it was understood that it was not equivalent to the political stance or international policies of a State but comprised the fundamental notions and principles of justice”. This decision has been recently authoritatively referred in 2015 by the Singapore High Court in Coal & Oil Co LLC v. GHCL Ltd. Interestingly, like Justice Burroughs, Justice Steven Chong in this case observed that the ground of ‘public policy’ “appears to be the last refuge of the desperate”.

United Kingdom

Like the US, section 103(1) of the English Arbitration Act, 1996, opens with a positive duty on the Courts and states that “recognition or enforcement of a New York Convention award shall not be refused except in the following cases…….

While interpreting the term ‘public policy, the English High Court back in Tongyuan (USA) Int’l Trading Group v. Uni-Clan Ltd. Justice Moore-Bick [2001] noted that “there is a very strong public policy consideration in favour of enforcing awards……and it would require a very strong and unusual case to render the enforcement of an award in circumstances of this kind contrary to the public policy”. More recently, the English Court of Appeal in RBRG Trading (UK) Ltd v Sinocore International Co Ltd[2018] observed that though the “considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution”. Thus, in the United Kingdom, the Courts have observed that enforcement of an arbitral award is itself a ‘public policy’.

India

The statutory stance of India is akin to the jurisdiction of Singapore and the Convention. Section 48(1) of the Arbitration and Conciliation Act, 1996 (amended in 2015 & 2019) states that “enforcement of a foreign award may be refused”.

However, contrary to these above-noted jurisdictions, the graph of refusal to enforce a foreign award on the ground of ‘public policy’ in India has been erratic until late. Vis-à-vis other jurisdictions, the Indian Courts have often traveled on the merits of the case and then refused to enforce arbitral awards. This picture is posted more so when the position before the amendment in the year 2015 is examined. In the seminal case of Renusagar Power Plant Co. Ltd. vs. General Electric Co.[1993] (Renusagar), the Supreme Court of India referred to Parsons and held that the ground of ‘public policy’ has to be narrowly construed. The Court prescribed violation of ‘public policy’ as an award which is contrary to “(i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality”. However, the scope of the term was subsequently further widened in the decision of ONGC vs. Saw Pipes Ltd. [2003] when the Court added ‘patent illegality’ or contravention of domestic law as another ground for violation of ‘public policy’under section 34 of the Act. Given the then-prevailing understanding that Part I of the Arbitration Act is also applicable to the foreign arbitral awards, the defence of ‘patent illegality’ transgressed in Part II of the Act and was successfully raised against the foreign awards too in addition to the defenses already laid in the Convention. This led to the intervention of the courts and refusal of awards on even the minutest contravention of the domestic law instead of the contraventions of only the mandatory or fundamental law of India.

In Shri Lal Mahal Ltd. vs. ProgettoGrano SPA, however, the Supreme Court again limited the scope of ‘public policy’ to as defined in Renusagar. Finally, in the year 2015, section 48 of the Indian Arbitration Act was amended. Given the wide amplitude of the phrase “the interest of India”, the amendment omitted it from the above-said scope of the term ‘public policy’. The amendment also statutorily defined the applicability of Part I and Part II and also restricted the ground of ‘patent illegality’ as adefense only against the domestic awards. Moreover, the amendment categorically disallowed Courts to review arbitral awards on the merits.

The zenith of the pro-enforcement approach in India may be marked by the recent decision in Vijay Karia&Ors. vs. PrysmianCavi E Sistemi SRL &Ors. [March 2020] wherein the Supreme Court imposed a fine of Rs. 50 Lakh for bringing a meritless appeal on the ground of award violating the ‘public policy’ of India. While dismissing the appeal, the Court also observed that “appellants are indulging 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”.

However, shortly after, another co-ordinate bench of the Supreme Court in National Agricultural Cooperative Marketing Federation of India vs. Alimenta S.A. [April 2020] went extensively on the merits of the award and refused to enforce same for it being in contravention of the “fundamental policy of Indian law” which as above-noted is a sub-set of the ‘public policy’. Interestingly, on September 16, 2020, the Hon’ble Supreme Court has again reiterated the words of Parsons in Government of India vs. Vedanta Limited and held that the award was not against the “most basic canons of justice and morality of India”.

Conclusion

From this discussion, it may beinferred that in the first four jurisdictions i.e. USA, France, UK, Singapore, an arbitral award is considered against the ‘public policy’ of a country only when it violates the most fundamental notions of justice. The words of Parsons has notably been torch-bearer in all these and many other jurisdictions. However, in so far as India is concerned, the defence of ‘public policy’ though not in text yet in its application appears to be a twinkling defence vis-à-vis other discussed countries. Notably, the jurisdiction appears to speedily evolve towards putting the principle of minimal intervention and pro-enforcement biasin ironed practice like the above-discussed jurisdictions.Thus, though the term ‘public policy’ even today remains precisely undefined since 1824 yet it cannot be deemed as ‘twinkling defence’ i.e. completely unpredictable. The Courts have allowed this defence only in exceptional circumstances.There is now a strong inclination towards limiting the scope of defence of ‘public policy’ across jurisdictions.In closing, the author opines that if minimalist intervention approach is duly observed,a straightjacket definition of a term of such a wide amplitude i.e. ‘public policy’is nearly undesirable whose precise definition is even otherwise also unfeasible.

Leave a Reply

Your email address will not be published. Required fields are marked *