Ganesh A. Khemka

The court in Venture, failed to appreciate or assess the nature of the mandatory law, or assess impact of its violation

This is the first post in a two part series. Click here to read the second post.

The Supreme Court in the Venture Global case[1] [“Venture – III”] delivered conflicting opinions on an appeal to set aside a foreign award for being in violation of public policy of India under Sec 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 [“ACA”], applicable despite present law by virtue of prospective application of the interpretation in Bharat Aluminium Co. case[2] [“BALCO”].

Public Policy as a ground to resist enforcement or setting aside of arbitral awards, finds genesis under Art V of the New York Convention, as inculcated under Sec 34(2)(b)(ii) and Sec 48(2)(b)(ii) of the ACA. Deliberately left open to interpretation by municipal courts, this principle has been widened in scope through importation of the “patent illegality” doctrine, and initially made applicable even to foreign awards by interpreting omission of term “only” under the section as compared to the UNCITRAL Model Law on International Commercial Arbitration, 1985 [“Model Law”]. Subsequent amendments demonstrate a conflict between legislative intention/policy and a generally interventionist approach taken by Indian courts, reinforcing a reputation of India being ‘arbitration unfriendly’. It is contended that the same is due to a failure to divorce considerations of justice and fairness arising out of our common law system guided by fundamental constitutional principles; with commercial necessities of finality, predictability and expediency.

The result of this conflict came to the forefront in the Venture-III case, where Sapre J. set aside the award upon violation of mandatory FEMA provisions, which necessitate transfer of shares at fair value. The same was held to constitute a patent illegality and in violation of public policy of India. In contrast, Chelameshwar J. used the failure by the resisting party to discharge their burden of proving fraud (through withholding of material facts) and violation of mandatory law, to restore the arbitral award. Despite the apparent divergence in outcome and the omission of logical linkages in Sapre J.’s opinion, there seems to be a commonality in conceptualisation of public policy.

Both judges agree that in case of establishment of a causative linkage between fraud committed and award rendered could be set aside on grounds of public policy. Further, Sapre J.’s opinion of violation of FEMA being “patently illegal”[3] reverses the trend towards gradual restriction of scope of the public policy exception by the Associate Builders, McDermott International, and Centrotrade Minerals courts. These cases signify an evolution that only those violations which strike at the root of the mater, and not mere trivial contraventions, would constitute patent illegality. It is submitted that the Venture – III court has erroneously appreciated the doctrine of patent illegality, in disregard of international treatment, precedential trends and legislative intention

Interpreted along with the Bhatia case[4], this doctrine was applied judicially to domestic as well as foreign awards, under both Part I and Part II of the ACA. The BALCO decision restricted applicability of recourse in case of foreign awards to Part II, hence removing ability of seeking setting aside of award under Sec 34 from remedies available to award-debtor. By virtue of similar wordings of Sec 34(2)(b)(ii) and 48(2)(b)(ii), this principle was initially extended by Phulchand Exports case, both for prohibiting enforcement of foreign awards, as well as setting aside of domestic awards. However, the Renusagar Power Co. Ltd.[5] [“Renusagar”] case held that public policy in case of enforcement of foreign awards must be interpreted narrower than in Sec 34, in line with international interpretation and adoption of the UNCITRAL Model Law.

This conflict was resolved in favour of the larger bench decision in Renusagar in Shri Lal Mahal Ltd.[6], to oust applicability of the patent illegality doctrine and restrict scope of public policy to contraventions of fundamental policy of Indian Law, interests of India, and justice or Morality. Observed along with amendments to the ACA in 2016, this marks a continuous trend towards pro-arbitration and pro-enforcement for foreign awards, but creates a stark contrast in case arbitration is seated domestically.

Sapre J. as part of the Venture-III court seems to have derogated from this trend by erroneously concluding both a violation of FEMA provisions restricting international transfer of securities, and its effect on public policy.

Correctness of view in Venture – III

The court in Venture, failed to appreciate or assess the nature of the mandatory law, or assess impact of its violation. In similar cases abroad, violations of securities regulations, export control rules[7] , as well as foreign exchange controls like the FEMA, have been deemed to not be contrary to public policy. In the case of European Grain & Shipping Ltd.[8], the Bombay High Court rejected resistance of enforcement on grounds of award-debtor’s export permit having been cancelled and held it an impermissible public policy defence. Adoption of methods for computation of awards different from that specified in law too has not been held unenforceable.[9]

It is contended that the Venture – III court should have attempted a similar determination. However, as pointed out by Chelameshwar J., Sapre J. fails to assess provisions of FEMA, and establishes no link how fair value provisions would be violated by having a book value method of computation, hence prima facie rendering the opinion non-speaking and in violation of principles of natural justice. Even if the same were to be established, and the gravity of the same were to be disregarded, it is submitted that the court should have attempted to severe the non-enforceable part of the award. Alternatively, given the lack of clarity in whether the same was raised before the arbitrator, the court could have interpreted the award impliedly subject to FEMA, similar to importation of the “dumplum” rule in another jurisdiction.[10]

A bare reading of the Preamble of the FEMA Act shows that it was formulated for “facilitating external trade and payments” with the aim of “promoting the orderly development and maintenance of foreign exchange market in India”. This is markedly different than under the Foreign Exchange Regulation Act which aims at “conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest of the economic development of the country” as was utilised upon whilst refusing enforcement in an earlier instance. Hence, given difference in objects of Act and the lack of substantial criminal sanctions for violation of impugned provisions, violation of mandatory law is but a weak ground in Venture-III to refuse enforceability.

Further, the judgement by Sapre J., highlights a shift in burden of proof from the resisting party, and a weakening of standard to preponderance. Neither was any fraud proven judicially, nor had violation of FEMA been proved by the resisting party. Instead, the judge set about to inquisitorially establish violations of municipal laws. It is contended that mere difference in Chapeau of Sec. 34(1) and 34(2) should not be grounds for shifting of burden or alteration of standard, as evidenced through adoption of Model Law in other jurisdictions.[11]

Ganesh A. Khemka is a 5th Year B.A., LL.B (Hons.) student at the National Law School of India University, Bengaluru.

[1] Venture Global Engineering LLC v. Tech Mahindra Ltd., (2018) 1 SCC 656.

[2] Bharat Aluminium Co. v. Kaiser Technical Services, Civil Appeal No. 7019 of 2005, Supreme Court of India.

[3] ONGC v. Saw Pipes case.

[4] Bhatia International v. Bulk Trading SA, Appeal (Civil) 6521 of 2001, Supreme Court of India.

[5] Renusagar Power Co. Ltd. v. General Electric Co. 1994 AIR 860.

[6] Shri Lal Mahal Ltd., v. Progetto Grano Spa, Civil Appeal No. 5085 of 2013, Supreme Court of India.

[7] Ministry of Defense of the Islamic Repub. of Iran v. Gould, Inc., 1990 U.S. Dist. LEXIS 21018, at *2 (C.D. Cal.);

[8] European Grain & Shipping Ltd v. Seth Oil Mills Ltd, IX Y.B. Comm. Arb. 411, 412 (Bombay High Ct. 1983) (1984)

[9] Arcata Graphics Buffalo Ltd. v. Movie (Magazine) Corp., Ontario Court, General Division, Canada, 12 March 1993.

[10] Harare High Court, Zimbabwe, Conforce (Pvt.) Limited v. The City of Harare, 1 March and 5 April 2000.

[11] Oberlandesgericht München, Germany, 34 Sch 18/06, 22 January 2007, Robert E. Schreter v. Gasmac Inc., Ontario Court, General Division, Canada, 13 February 1992], [1992] O.J. No. 257.

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