Striking the right chords to reinforce India’s pro-enforcement stance: Supreme Court rejects challenge to the enforcement of a foreign award

Circa 1981, Journey released its album titled ‘Escape’, which incidentally resonates with the tribulations of award holders attempting to enforce awards in India.

Recently, in Avitel Post, the award debtors sought to resist enforcement of a foreign award on the ground that the independence of the presiding arbitrator was compromised. This was an attempt to thwart the award at the enforcement stage, in an effort “to roll the dice, just one more time”.

In this backdrop, the Supreme Court addressed whether independence and impartiality of the arbitral tribunal can be included under the realm of “public policy” under section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (“the Act”); and if this ground can be raised at the enforcement stage.

Background

Pursuant to a Share Subscription Agreement between Avitel Post Studioz Limited (“Appellant No.1”) and HSBC PI Holdings (Mauritius) Limited (“Respondent”), the Respondent invested in Appellant No.1 who misrepresented that the investment was necessary to service a contract with the British Broadcasting Corporation. Pursuant to an arbitration commenced by the Respondent, the three-member tribunal issued its Final Award dated 27 September 2014, directing payment of USD 60 million as damages to the Respondent (“Final Award”). Subsequently, the proceedings that ensued underscore the reality encapsulated in the lyrics of a featured song in Escape, “Whoa, the movie never ends; It goes on and on and on and on”.

• The Final Award was challenged under Section 34 of the Act, before the High Court, which was held to be not maintainable; and the subsequent appeal met the same fate.
• The Respondent’s succeeded in its application under Section 9 of Act, before the High Court, to secure the award amount. In the resulting appeal, the Supreme Court confirmed the High Court’s decision to secure the award amount.
• As Appellant No.1, along with its three directors (collectively, the “Appellants”) did not deposit the award amount, contempt proceedings were initiated and eventually, Appellant Nos. 2 to 4 were sentenced by the Supreme Court.
• The Appellants also resisted enforcement of the Final Award. By the impugned order dated 25 April 2023 (“Order”), the High Court rejected the challenge to the enforcement of the Final Award. Thus, the Appellants preferred a special leave petition before the Supreme Court.

Key Findings of the Supreme Court

Missing the beat: Appellants failed to challenge the arbitral award before the appropriate forum.

Impressing that bonafide challenges to arbitral appointments must be made in a timely fashion, the Supreme Court held that the Appellants should have applied for setting aside of the Final Award on this ground, before the Singaporean courts, within the applicable limitation period.

Prelude: The allegations of bias were unfounded.

Citing General Standard 3 of the IBA Guidelines on Conflict of Interest (IBA Guidelines) along with the red, orange, and green lists, the Appellants contended that the presiding arbitrator’s independence was compromised because he was a non-executive director in an affiliate of the Respondent.

The Supreme Court held that (i) there was insufficient evidence that the company, in which the presiding arbitrator was a non-executive director, was an affiliate of the Respondent; (ii) conflict of interest was not evident pursuant to Articles 4.5 and 4.5.3 of the green list; and (iv) applying the ‘the reasonable third person test’, it was not proved that an impartial observer would doubt the arbitrator’s impartiality. The Supreme Court concluded that there was nothing that would violate the most basic notions of morality or justice or shock its conscience.

Fine tuning “Public Policy”

In addressing whether independence and impartiality of the arbitral tribunal could be considered as a subset of “public policy” under section 48(2)(b) of the Act, the Supreme Court laid down that:

• In furtherance to Shri Lal Mahal Ltd., resisting enforcement of a foreign award is limited to narrow grounds. The ground of public policy to resist enforcement of foreign awards must be construed from an international lens and therefore, differently from when it is invoked as a ground to challenge domestic awards.
• ‘Bias of the arbitral tribunal’ could contravene the basic notions of morality or justice under the realm of ‘public policy’. However, courts must adhere to international standards rather than domestic ones and refuse enforcement “only in exceptional circumstances”.

ELP’s Notes

The Supreme Court has discouraged resisting enforcement of foreign awards on the grounds of arbitral bias, unless it is demonstrable with concrete evidence that there is a clear violation of justice and morality and where non-adherence of international standards is demonstrable. This is laudable considering India’s obligations under various conventions and its aspirations to become an arbitration friendly jurisdiction. Therefore, in future cases, applying an international lens, allegations of bias may be tested based on the IBA Guidelines. We are yet to see whether the Indian courts would exercise their inherent discretion to allow enforcement even in circumstances where one or more grounds for resisting enforcement are made out. In Vijay Karia, the Supreme Court held that when it particularly comes to the ‘public policy of India’ ground, “there would be no discretion in enforcing an award”, when such award is in conflict with the most basic notions of morality or justice. In the present case, having expressed that public policy in the context of foreign awards has to be construed as per international standards, perhaps, the Supreme Court missed a trick in enhancing its pro-enforcement stance. As Jonathan Cain was on the brink of giving up his aspirations in the music industry, the words of his father, which later became the title of his record-breaking song in the Escape album, proved invaluable (or rather, worth millions). Similarly, by emphasizing the need for early enforcement of the foreign award and setting a strict threshold to reject enforcement, the Supreme Court has effectively reassured award recipients that, despite the arduous Journey, “Don’t stop believin’ ”.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com or write to our authors:

Alok Jain, Partner, Email – alokjain@elp-in.com

Ria Dalwani, Principal Associate – Email – riadalwani@elp-in.com

Kareena Tahilramani, Associate – Email –kareenatahilramani@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.