The JSBF Report
Enforcement of Foreign Awards in India: Special Emphasis on FEMA Awards
- By Ahan Gadkari
In India, the enforcement of foreign awards is governed by the Arbitration and Conciliation Act, 1996 (the Act). The New York Convention (the Convention) is applicable in India by Part II of the Act named as 'Enforcement of Certain Foreign Awards'. The Act is primarily based on UNCITRAL Model Law and India's reservations under the NYC, may be found in Part II of the Act at Section 44. There is no need for separate actions to determine the enforceability and execution.i Foreign judgments are treated as court orders. In addition, a judgement debtor cannot contest a foreign award until the judgement creditor has sought its execution. Section 48 of the 1996 Act (reflecting Article V of the Convention) specifies the only grounds for disputing enforcement. Under section 48, one of the reasons accessible to the judgement creditor is that the award is detrimental to "Indian public interest."
In India, award enforcement has been a long and difficult issue. Foreign exchange restrictions and their standing as a matter of public policy have been at the forefront of various issues involving enforcement. A three-judge bench of the Supreme Court of India ruled in Vijay Karia & Ors v Prysmian Cavi E Sistemi Srl & Ors (Vijay Karia)ii that a breach of the Foreign Exchange Management Act, 1999 (FEMA) would not be a violation of public policy.
2. Foreign Currency Management and Public Policy
In Cruz City 1 Mauritius Holdings v Unitech Ltd (Cruz City),iii the Delhi High Court, while examining the interplay between public policy under section 48 of the 1996 Act and India's foreign exchange regulations, held that a violation of a provision of law such as the Foreign Exchange Management Act 1999 (FEMA) would not be sufficient to invoke the public policy defence, as violation of an enactment is not synonymous with violation of Indian public policy.
Cruz City was regarding a joint venture real estate development. In 2012, Cruz City won three arbitral awards against Unitech. Cruz City then petitioned the Delhi High Court to enforce a judgement. Unitech disputed the implementation of this judgement on three grounds, including the fact that it was averse to Indian public policy and breached FEMA regulations. The disagreement stemmed from a shareholders' agreement (SHA) including a put option in favour of Cruz City, wherein Unitech would purchase Cruz City's stake in a Mauritius-based firm via its wholly-owned subsidiary.
After exercising the put option, Unitech declined to acquire the shares, and Cruz City initiated arbitration proceedings. The court ruled in favour of Cruz City and ordered Unitech to pay $298 million in exchange for the shares. Cruz City requested a payment equivalent to the value of the put option as compensation for breach of contract as one of the reliefs it sought from the tribunal. While rejecting the put option-related argument, the Delhi High Court remarked that Unitech's claim that the SHA offered the judgement creditor with guaranteed returns at a predetermined rate in contravention of FEMA was without validity. The court noted that (1) the put option was not an open-ended assured exit option but, based on Unitech's representations, was a time-bound option; and (2) the Reserve Bank of India (RBI) circulars on option clauses were inapplicable as the award did not specifically enforce performance of the put option, but rather awarded damages to the investor for Unitech's breach of the SHA.
While observing that FEMA had not been breached, the Delhi High Court stressed that violation of any FEMA clause per se would not "violate India's public policy." It was determined that there had been a fundamental shift between the exchange control policy adopted under FERA and the present policy administered under FEMA. The Court noted that FERA was enacted at a time when India had a closed economy to prevent the loss of valuable foreign exchange, that FERA expressly prohibited dealings in foreign exchange unless undertaken by a permitted party or with RBI permission, that it provided for severe penalties or prosecution for violations, and that it was part of the Ninth Schedule of the Indian Constitution. On the other hand, the Court noted that FEMA was enacted in a liberalised India and endorsed a strategy oriented at managing rather than restricting the flow of foreign currency. The Court noted that, in sharp contrast to FERA, parties under the FEMA system might compound their violations and seek post-hoc approvals from the RBI. The Court next analysed public policy and emphasised that Section 48 of the 1996 Act was based on the New York Convention. It said that the Convention's primary purpose was to secure the execution of judgments regardless of their compatibility with national legislation. Thus, to justify rejection of enforcement on public policy grounds, it was necessary to demonstrate that the uncompromising basic principles of a Contracting State's national policy or sub-strategic legislative policy would be violated.
1. Addressing the RBI
The above opinion was reinforced by the Delhi High Court in NTT Docomo Inc v Tata Sons Ltd (Docomo),iv however this judgment did not acknowledge the Cruz City judgement by the same court. The court upheld the settlement reached between the parties in the Docomo dispute. A SHA between Docomo and Tata gave rise to the disagreement. If certain performance goals were not met, the SHA ordered Tata to find a buyer for Docomo's interests in their joint venture. Due to the failure to meet these objectives, Docomo issued a notice of sale to Tata. An arbitral panel ruled in favour of Docomo, saying that Tata had violated the SHA by failing to locate a buyer for Docomo's shares, and that the SHA did not violate FEMA. Docomo was granted $1.17 billion upon tendering the shares to Tata. Despite early opposition from Tata, the parties reached a settlement.
In the Docomo case, a new question emerged about the RBI's participation under Section 48 of the 1996 Act. The RBI challenged the award's implementation on the grounds that it contradicted FEMA and, by extension, Indian public policy. One of the RBI's claims was that the fair market value (FMV) of the shares was less than the selling price, and that under FEMA, Docomo could not have sold the shares to an Indian resident business (i.e., Tata) for more than FMV. The court rejected all of the RBI's arguments regarding FEMA and noted that the RBI lacked standing to intervene because (1) the settlement was in accordance with Indian law, (2) Docomo was awarded damages for Tata's breach of the SHA and not the sale price, and (3) only a party to the arbitration could have opposed enforcement. Regarding public policy and foreign currency rules, the Court has also ruled:
"The issue of an Indian entity honouring its commitment under a contract with a foreign entity … will have a bearing on its goodwill and reputation in the international arena. It will indubitably have an impact on the foreign direct investment inflows …These too are factors that have to be kept in view when examining whether the enforcement of the Award would be consistent with the public policy of India."v
2. Vijay Karia Dispute
In the case of Vijay Karia, the Supreme Court expounded on the concerns of the extent of review available under section 48 of the 1996 Act and the link between public policy and the infringement of FEMA regulations, and maybe laid them to rest.vi In this case, the awards were rendered in the context of a dispute between Vijay Karia and other shareholders (collectively Vijay Karia) and the Italian business Prysmian. Prysmian started arbitration proceedings against Vijay Karia for significantly breaking several clauses of their joint venture agreement (JVA) and for losing effective control over Ravin, the joint venture business. Vijay Karia filed counterclaims in response to these charges, claiming, among other things, that Prysmian had breached its non-competition requirements by purchasing a competitive firm in India and had interfered with the administration of Ravin. The parties agreed that, upon adjudication of the claimed significant breaches in this arbitration, the prevailing party would be able to acquire the other's shares at a 10 percent premium/discount, as stipulated in the JVA.
The court decided in favour of Prysmian. The Bombay High Court administered the judgement. This was challenged in an appeal to the Supreme Court by Vijay Karia. The appellants argued, among other things, that the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 would be breached by the implementation of the award, since shares were now being acquired at a discount. The Supreme Court noted that section 48 of the 1996 Act provided for a limited scope of review based on "fundamental policy of Indian law," and that this award did not offend Indian public policy. The Court traced the evolution of India's foreign currency rules from "policing to management" and affirmed the Delhi High Court's Cruz City decision. The court observed that Section 47 of FERA, which stipulated those transactions in violation were invalid, had not been mirrored in FEMA and ruled that a rectifiable violation under FEMA could not constitute a violation of the basic policy of Indian law.
With its affirmation of Cruz City and its judgement in Vijay Karia, the Supreme Court has offered much-needed clarification about the meaning of "public policy" as a basis for refusing to pursue purported FEMA breaches.
The Supreme Court's approach has been bolstered by its other observations in Vijay Karia, which demonstrate that an enforcing court (1) has very limited review powers under section 48 of the 1996 Act, (2) has a pro-enforcement stance under the New York Convention as a result of the enactment of section 48, and (iii) in considering the enforcement of a foreign award under the Convention, may not review the award on its merits.
While the ambiguity regarding the interpretation of public policy and violation of FEMA may have been resolved, the Supreme Court's decision in National Agricultural Cooperative Marketing Federation of India v Alimenta SA (NAFED)vii has reignited concerns that judicial interference may continue to impede the enforcement of foreign judgments in India. In determining to withhold implementation of an award under section 48 of the 1996 Act for breaching India's public policy, the court in the NAFED case appeared to have assessed the judgement on its merits. The Court examined the parties' contract provisions. Other Indian enforcing courts have regularly rejected the practise of undertaking a review on the merits in § 48 challenges to enforcement. It is likely that the NAFED ruling is an outlier, but only time will tell whether this is the case.
While it is simple for foreign investors to check in (invest), it is sometimes difficult for them to check out (with their earnings). It may be some time before international investors gain confidence in India's enforcement system. Nonetheless, investors may find solace in the Supreme Court's decision in Vijay Karia when negotiating commercial agreements that fall within a grey area in relation to FEMA, as such agreements are less likely to in the future create an obstacle to the enforcement of foreign arbitral awards in India.