"Public policy of India" - not an easy excuse any more

Akshay Kishore, Associate, Singapore

Speedread

In Shri Lal Mahal Ltd. -v- Progeto Grano Spa⁽¹⁾, the Supreme Court of India ruled that the broad interpretation of "public policy" used for setting aside a domestic arbitration award cannot be applied to enforcement of an international arbitration award in India. This judgment will be welcomed by parties that wish to enforce international arbitration awards in India. There is less likelihood that such awards will now be tested on merits before enforcement. However, the application of Shri Lal Mahal by the lower courts in India remains to be tested.

Background: the old regime

Under the New York Convention (NYC), the enforcement of an international arbitration award may be refused if the award is contrary to the public policy of the country where enforcement is sought. However, the term "public policy" is not defined.

This ground for refusing enforcement of international arbitration awards was adopted by the Indian legislature in the Arbitration Act, 1996 (Section 48). Following the NYC, the Indian legislature also failed to define the term "public policy".

The courts in India historically interpreted this term liberally, to the detriment of enforcing parties. In the case of Oil & National Gas Corporation Ltd -v- Saw Pipes,⁽²⁾ the Indian Supreme Court ruled that a domestic arbitration award would not be enforced where it was against the public policy of India or the interests of India, including where a tribunal has made an error in applying Indian laws.

Following Saw Pipes, in the case of Phulchand Exports Ltd -v- OOO Patriot⁽³⁾, the Supreme Court applied the broad principles of "public policy" to refuse enforcement of an international arbitration award, on the basis of review of merits and the patent illegality of the award. This effectively led to a situation where Indian courts started to review international arbitration awards on merits, before their enforcement in India.

Change of position: Shri Lal Mahal

The broad and all-encompassing application of the public policy ground in India prompted much international criticism. To rectify this, in Shri Lal Mahal Ltd. -v- Progeto Grano Spa, the Supreme Court of India ruled that the broad interpretation of "public policy" used for setting aside a domestic arbitration award cannot be applied to enforcement of an international arbitration award in India. In reaching this decision the Supreme Court made a distinction between enforcement of an international arbitration award, which follows the issuing of a final and binding award, and the procedure for setting aside a domestic award, where the award has not attained a final and binding status.

Therefore, the Supreme Court refused to apply the broad definition "public policy" as stated in Saw Pipes. Enforcement of an international arbitration award can only be opposed on grounds of "public policy" when the award is contrary to:

• the fundamental policy of Indian law;
• the interests of India; or
• justice and morality.

Comment

This judgment is welcome as it limits the circumstances in which the public policy argument can be raised as a means of challenging the enforcement of international arbitration awards. There is less likelihood that such awards will now be tested on merits, before enforcement. However, it remains to be seen how the lower courts in India will apply the decision in Shri Lal Mahal.

Please click on the links below for the other articles in the November 2013 Arbflash:

• Arbitration in Australia and ACICA
• Anyone for baseball? The rise of "baseball arbitration" in FRAND patent disputes
• English High Court decision highlights the need for caution when drafting for expert determination
• Australian Federal Court enforces LMAA award
• South Korea: Two arbitral awards refused enforcement this year
• International news

_{^(1). Civil Appeal No. 5085 of 2013.
^(2). (2003) 5 SCC 705.
^(3). 2012(2) ALD 133 (SC).}