Enforceability of Foreign Arbitral Awards: Interpreting Public Policy and Recent Judicial Trends in Context of FEMA Violations

By: Arushi Sharma


Section 48 of the Arbitration and Conciliation Act, 1996 lays down conditions for enforcement of foreign arbitral awards. The same is largely based or codified from the Article V (2) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The grounds of the award being in consonance with the notions of public policy is mentioned under Article (V)(2)(b) of the Convention. Quite similarly, Section 48 (2)(b) of the Indian Act also specifies that an award could be set aside on the grounds of it being contrary to the public policy of India.

The statutes clearly agree on the fact that a violation of public policy renders an award non-enforceable in the country in which it is sought to be enforced. However, in the opinion of courts across countries or even international bodies which preside over international arbitration standards there appears to be no hard consensus on the definition of “public policy”. The English courts have rightly described it as a rather “unruly horse” and not just English courts but courts across civil and common law nations have in their decisions tried to narrow down the scope of public policy with the objective of adhering to the basic tenets of arbitration which are expediency and finality of the award.

With no clear definition of public policy emerging there exist several interpretations, views and precedents in this regard. The distinction between domestic and international public policy as well as substantive and procedural aspects of the same have added to the need of a more acceptable definition in order to cater to the growing need of assured enforcement of foreign arbitral awards. The focus here would be to understand the current situation and the views of the courts across the globe in this regard. An Indian perspective and judicial trends have been taken into consideration while attempting to analyse the impact of international interpretations. Also, with the recent emphasis of the government on foreign investments the interpretation of public policy with regard to specific provisions and regulations of the Foreign Exchange Management Act, 1999 Indian courts have attempted to provide clarity on the defence of public policy against enforcement of foreign arbitral awards.


The definition of public policy has never led to any hard consensus in jurisdictions across the globe. The aspect of domestic and international public policy has forever been in contention. With several cross border arbitral contracts between entities resting in civil and common law nations the question still stands. So far the trends in civil law countries is towards interpreting it in the context of “international public policy”. The rules which are applied in so many countries that they gain an international character forms the basic tenet of the same. Principles of natural justice and the principles of equity form the foundation. The question still arises if it is, in fact, possible to gain widespread acceptability of rules so as to give them a character which is readily adopted by countries across borders. Common law countries, however, interpret it narrowly or broadly on a case to case basis. It is still at an evolution stage, more so in countries like India. The trend seems to be leaning towards narrower and restrictive definitions considering the importance of international trade for the countries involved. The Malaysian Courts in Sami Mousawi v.Kerajaan Negeri Sarawak[1] have rightly held that the merits of an award cannot be examined in the garb of public policy. This view even though originating in a common law country underlies the basic principles of arbitration. In the absence of significant or glaring defects of law which are prima facie against the principles of justice and morality, the ground of public policy for setting aside an arbitral award can only defeat the purpose of expediency and finality and give the party at fault an opportunity for prolonging the enforcement. Hence, a narrower and restrictive definition of public policy must be used across common law and civil law jurisdictions. The differences in both the laws may be present but the common view is towards a narrower interpretation which favours enforcement.

Another aspect involved in interpreting public policy is the involvement of procedural and substantive of law relating to arbitration. Setting aside an award on the basis of substantive violations rather than procedural violations is perhaps a more well founded basis. Procedural aspects must compromise the validity and core of the award in order to make an award liable to be set aside.

Substantive aspects of law primarily deal with the subject matter of the awards and its compliance with the fundamental policy, principles of justice and morality of a country. The national interests of the country often take precedence over comity of nations which is involved in enforcement of arbitral awards. Foreign relations which are sometimes compromised due to war or other diplomatic issues often have a bearing on enforcement of arbitral awards between countries parties to the same. Often the views of justice and morality are contrasting across nations. This can be due to the fact that some nations are economically well off with liberal social policies and some have rigid notions of social control. In the case of USA Productions et al v. Women Travel[2] where an arbitral award which included a live band performance was set aside on the account of it being against the national interests of China. This very clearly portrays that notions of morality differ between nations and domestic interests will always take precedence over the enforceability of foreign awards. However, courts have also taken liberal views to the extent of enforcing arbitral awards even in instances when the two countries were at war, as was seen in the case of Dalmia Dairy Industries Limited v. National Bank of Pakistan.[3] With judgements lying at extreme ends the courts are at discretion to provide interpretations in this regard. What is apparent is that no two countries can have a completely overlapping view of justice and morality thereby leading to differences in the ultimate understanding of fundamental public policy. Indian courts in this regard have added another dimension of “patent illegality” in this realm but the applicability of the same remains restricted to domestic arbitral awards.

Procedural defects in arbitral awards include strict grounds of fraud, corruption, res judicata, annulment and not following a due process of arbitration. Procedural violations with respect to public policy must draw a clear nexus in order to render an award liable to be set aside. In cases where procedure adopted does not have any impact on the terms of the final award it is expected that the award be considered in its entirety not just the process adopted to reach it. The question becomes more pertinent as the rules followed during the process of arbitration may be different from the rules adopted in the country of enforcement. However, procedural lapses of a nature as to affect the terms of the award and putting any party in a position of disadvantage or without adequate representation must not be ignored. Awards which are based on fraudulent representation must be liable to be set aside. The extent of including fraud within the ambit of public policy can differ in countries like China and countries like France where the degree of punishment for the same varies.

Due process and policy annulment at the venue of arbitration have been included under Article V (1)(b) and Article VI (1)(e) of the New York Convention. Due process includes proper notice to the parties and a chance to present its own case before the tribunal along with duly following the procedural rules in reaching an arbitral award. Countries have different procedures laid down in their domestic law but the principles of natural justice are constant. Forming specific or strict procedures for international arbitral exercises may not be acceptable across countries keeping in mind the sovereignty of the countries with respect to the laws they choose to enact and follow. Policy annulment at the venue of arbitration brings to the fore the problem that the seat of arbitration maybe different from the country in which the award is sought to be enforced. The US Court of Appeals in Corporacion Mexicana de Mantenimiento Integral S de RL de CV v. Pemex[4] has rightly enforced an award set aside in Mexico on the grounds that it is not in violation of the public policy of USA. This also clears the air around the issue that it is only the public policy of the country of enforcement which must be considered when deciding on the enforceability. Indian courts in this regard have considered procedural lapses to be a part of the public policy of India. An award based on fraud and corruption is rendered unenforceable and principles of natural justice must also be duly adhered to in order to enable enforceability.

The issue in the Indian context is the fact that procedural lapses are sometimes invoked in order to escape liability in awards. The contentions of the nature that the matter before the tribunal being beyond the scope of reference is raised at the stage of enforcement of the award, as was done in the case Cruz City v. Unitech.[5] The intention behind them is to delay enforcement and again decide the case on the basis of merits in hope of a favourable outcome. The court has correctly taken the view that a Tribunal has the power to decide its own jurisdiction and such contentions must be raised before the tribunal and not at the enforcement stage. Adopting of fresh arguments which are opposite to the ones previously resorted to might have merits or provide a fresh perspective to the case but go against the established principles of estoppel and can amount to a procedural violation.  A review of the awards on merits and on the basis of new arguments advanced defeats the purpose of arbitration. The application of the principles of res judicata is the reasoning behind the court setting aside such contentions against the enforcement of arbitral awards.


With the liberalisation of the Indian economy in the 1990’s, there was a natural and substantial growth in the foreign exchange reserves of the country which led to a manifold increase in foreign trade and investment in the stock markets of the country. A need for a more liberal statute for governing foreign trade and ultimately foreign exchange reserves was felt. The Foreign Exchange Management Act (FEMA) was thereby passed in 1999 replacing the Foreign Exchange Regulation Act, 1993 (FERA) which had the primary object of regulating the entry of foreign capital in the country and non-resident interests in them. The FEMA, however, had an object to provide a more permissible and liberal environment with regard to foreign trade transactions in tandem with the changing paradigms of the Indian economy.

According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments India received during April 2016-March 2017 rose 8 per cent year-on-year to US$ 60.08 billion, indicating that government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results.[6] With an increase in FDI, it is an expected outcome that there would be an eventual increase in cross border trade relations. With greater investments in the infrastructure and service sectors which are often the sources of high value trade deals, the trade agreements between the parties more often than not include an “arbitration clause” so as to escape the tedious process of litigation in different countries which may not only result in deals falling through but a significant loss of goodwill and reputation.

Considering the cross border nature of such investments the Arbitration Clauses must be very carefully phrased and drafted in order to reduce chances of confusion which may ultimately lead to defeating the purpose of the process of arbitration. However, in the Indian context, a new trend of invoking the defence of “contravention of public policy” under Section 48 of the Act has emerged which subverts the intention of the process of arbitration. The usual practice is to seek prevention of the enforceability of the award on grounds of “public policy” and contesting the same in Indian Courts. The issue of third-party suits with regard to the same also is a pressing matter in this regard.

The Indian courts keeping in view the government initiatives to bolster foreign exchange reserves and promote flexible FDI norms have taken to liberal attitudes and narrower interpretation of the public policy. This comes as a welcome step in helping India’s image as a country which actively seeks to make the environment more conducive towards ease of commercial transactions. Recent judicial trends and issues in the context of FEMA violations and interpretation public policy with regard to enforcement of foreign arbitral awards are of relevance here.


In the recent case of Cruz City 1 Mauritius Holdings v. Unitech Limited[7] one of the issues in contention was whether violation of specific FEMA Regulations would amount to a violation of public policy of India and make the arbitral award rendered in accordance with the London Court of International Arbitration liable to be set aside on the grounds of the said violations. The High Court of Delhi set up a welcoming precedent in the same.

The judgement has its basis not only in international precedents interpreting public policy but also an interpretation of “fundamental policy of Indian law” which has been given as one of the grounds in setting aside enforcement of a foreign arbitral award in the judgement of Renusagar Power Co. Ltd. v. General Electric Co.[8] The judgement dictates that the term must be interpreted as the legislative policy of a country rather than a provision of any enactment. The Indian law comprises of numerous statutes which may or may not contain provisions which might go against principles of law which are applicable in an international context. Domestic laws are enacted keeping in mind the regulation of domestic markets or immediate concerns of the general population, they no doubt cater towards a functional system but a specific application of such laws to arbitral disputes in which parties may not be based in the same country can defeat the underlying purpose of incorporating arbitration clauses in cross-border contracts. A contravention of legislative policy of a country necessarily includes a contravention of specific provisions of enactment but the opposite cannot be true. The High Court rightly draws from the United States Court of Appeals judgement Parsons and Whittemore Overseas Co. Inc. v. Societe Generale De L’Industrie Du Papier (Rakta)[9] which puts forward the view that using public policy under the veneer of exclusion of wider concerns pertaining to protection of national political interests can undermine the utility of the New York Convention. The Court also accepts that the defense of public policy was meant to be considered in a narrow scope which has rather been used as a loophole to prevent enforcement. The Indian Court has ascribed to a similar view.

The wording of Section 48 use “may” instead of “shall” which according to strict interpretation places a discretionary authority on the Courts to set aside the arbitral award. Even in a case where a violation of public policy is established it is upon the courts whether to enforce the award or not. Here the question is whether the enforcement of the award or the setting aside of the award would bring greater harm to public policy is pertinent. With reliance on the judgement of Official Liquidator v. Dharti Dhan (P) Ltd.[10] the court has taken the view that the if settled principles of law dictate that greater harm would come from non-enforcement than enforcement then the award must be not set aside even if it goes against public policy. Russel on Arbitration, Twenty Third Edition[11] also quotes, “The onus of proving the existence of a ground rests upon the party opposing enforcement, but that may not be the end. The Court also has the discretion to refuse enforcement…..” Thus, there is an outright rejection of the contention that “may” must be interpreted as “shall” for the purpose of this section. The intention of the legislature has been sufficiently made clear owing to the use of the word “may” which confers discretionary powers to the court based on settled principles of law.

Further the reference to the judgements of Life Insurance Corporation of India v. Escorts Ltd. and Ors.[12] and M.G. Wagh v. Jai Engineering Works Ltd.[13] clearly distinguishes between FERA and FEMA and the clear intention of the legislature in enacting FEMA being to provide a liberal foreign trade atmosphere also explicitly stating that “simpliciter violation of any particular provision of FEMA will not amount to violation of fundamental policy of Indian law.” The Court apart from this has struck down that violations of FEMA Regulations majorly on them being not applicable to non-resident Indian entities. The technicalities of the judgement and Agreements between the parties clearly laid the balance in favour of enforceability of the agreement however the position of the court has become clear with regard to the interpretation of the defence of public policy to such agreements. The judgement states that public policy concerns can be addressed without declining recognition of the foreign award then so shall be done. This also lays down a clear precedent that mere violation of statutory provisions cannot be a grounds for setting aside an arbitral award. The judgement provides a significantly narrower interpretation to the same but the view of the Court is made significantly clear only with regard to provisions of FEMA. It is true that the enactment in question was the same but the Court has not provided any umbrella formula to render a general inclusion of exceptions under the defence of the public policy. Further clarity on what can be strictly construed as a violation of public policy so as to render an award unenforceable is perhaps needed. The Court also leaves the doors still open as to a strict definition of “fundamental policy of Indian law”. This judgement caters to further the view of compliance with the New York Convention but it remains to be seen what view the Supreme Court of India takes on the same issue. A clear, unambiguous and straitjacket formula for interpreting public policy would be appreciable but a possible outcome could be a narrower interpretation of the same based on the effects of the arbitral award in the larger context and for the furtherance of commercial interests of both the entities involved.

Another case with more specific issues related to FEMA and third-party objections to enforcement of foreign arbitral awards is NTT Docomo Inc. v. Tata Sons Ltd.[14] The interesting observation in this judgement is the fact that both the parties to the arbitral award eventually agreed to the same and rightly “in the public interest of preserving a fair investment environment in India” arrived at Consent terms which had the effect of withdrawal of objections to the enforcement of the arbitral award in India.  The main objection to the enforcement of the award was from the Reserve Bank of India (RBI). The contention being that the award was against the public policy of India due to violations of the FEMA Regulations. The same violations had resulted on the account of not obtaining prior permission from RBI for transmission of the damages granted to Docomo.

The intention of the parties was clear from the Consent terms and since the award was accepted by them the Court struck down the objections from RBI. The locus standi of RBI was questioned on it not being a “party” to the arbitration agreement as defined in Section 2(h) of the Act. Thus, a challenge under Section 48 was not admissible. The Court in its reasoning relied on Section 394 of the erstwhile Companies Act, 1956 which does not place any statutory obligation that RBI must necessarily be heard when an arbitral award requires remittance of money to an entity outside India. Relying on the same the court denied the locus standi of RBI to challenge the said arbitral award. The court has however accepted this as a gap in the Act and makes it clear that there exists a need for a provision which makes it mandatory to seek RBI approval in such instances.

Further, in the judgement, the Court has drawn a clear distinction on the basis that the arbitral award was in the nature of damages due to non-fulfilment of the initial contract terms by Tata and not in the nature of price of shares thereby rendering FEMA non-applicable on the same. The same was duly accepted by Tata and thus any question of objection dies down with such acceptance.

The court has adopted a liberal view with regard to the interpretation. This is an appreciable trend in providing finality to awards and can have an impact on putting an end to third-party objections to the enforcement of arbitral awards. The same could have invited a flurry of objections on the enforcement of arbitral awards on the wide ground of violation of public policy. Another drawback that this judgement has possibly avoided is a scenario where a party against whom an arbitral award was issued could simply seek the defence that no prior permissions were obtained from the regulators in the country of enforcement. The non-obtaining of such permissions in most cases can amount to a party taking advantage of its own wrong. This could have had a significant impact on foreign arbitral awards enforcements. Such procedural defects can most certainly not be a ground for setting aside enforcement. In cross-border commercial arbitrations, the party which objects to enforcement is aware of the domestic regulatory laws of the country of enforcement and can use such procedural lapses to their own advantage. The exclusion of procedural law adherence from the narrow definition of fundamental public policy is indeed a welcome step by the court keeping in mind the potential and reputation of India as a country which is amenable to the enforcement of foreign arbitral awards. However, in certain cases in order to prevent misuse of such an attitude adopted by the Court the legislature in furtherance of application of FEMA on awards of such nature must enact provisions for prior permission of RBI in such transactions so that foreign exchange interests are not compromised as a result of liberal judicial interpretation.

Both the decisions have attributed to liberal interpretations by the High Court with regard to FEMA violations. While in the decision in Cruz City the court has considered both substantive and procedural defects in the case of the objecting party and went on to interpret public policy in context of Indian legislative policy and international precedents on similar lines, in the Docomo judgement the court has struck down the contentions based on the specific clauses in the arbitration agreement. Here the Court has focussed on the narrow technical aspects and opted for a view which distinguishes between buying of shares at a previously agreed price which was in the nature of damages rather than in the nature of an assured guarantee. Third party objections have also been strictly forbidden in terms of the Act. Although the Court cites lack of legislative provisions for adopting this view. Despite that, in both the judgements the Court has closely ensured that parties adhered to the terms of the Share Holders Agreement and other previously signed agreements. The arbitration clause being a part of the same. A welcoming trend is a fact that the Court has refused to consider the award by the Tribunal on merits and kept in mind the basic tenets of arbitration. Although it remains to be seen what the stand of the Indian Supreme Court will be in the said matters. The same could go a long way in providing a conducive environment for arbitral proceedings and enforcement and India becoming a seat for international commercial arbitration. A definition or rather a clearer interpretation of public policy by the Apex Court is expected so that the same cannot be resorted to as a means of escaping liability under foreign arbitral awards.

[1] Sami Mousawi v Kerajaan Negeri Sarawak [2004] 2 MLJ 414.

[2] USA Productions et al v Women Travel Supreme People’s Court of the P R of China [1997] Jing Ta No 35.

[3] Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyd’s Rep 223.

[4] Corporación Mexicana de Mantenimiento Integral, S de RL de CV v PEMEX-Exploración y Producción 2013 US Dist LEXIS 121951, 2013 WL 4517225 (SDNY Aug 27, 2013).

[5] Cruz City 1 Mauritius Holdings v Unitech Limited EXP132/2014  &  EA(OS)  Nos 316/2015,  1058/2015  &  151/2016& 670/2016.

[6] Indian Brand Equity Foundation, Foreign Direct Investment, (June 2017) <https://www.ibef.org/economy/foreign-direct-investment.aspx&gt; accessed on 27 January 2018.

[7] Cruz City 1 Mauritius Holdings v Unitech Limited EXP132/2014 & EA(OS)  Nos 316/2015,  1058/2015  &  151/2016& 670/2016.

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

[9] Parsons and Whittemore Overseas Co Inc v Societe Generale De L’Industrie Du Papier (Rakta) US Court of Appeals for the Second Circuit – 508 F 2d 969 (2d Cir 1974).

[10] Official Liquidator v Dharti Dhan (P) Ltd 1977 AIR 740.

[11] David St. John Sutton, John Kendall and Judith Gill, Russel on Arbitration (23 edn) 462.

[12] Life Insurance Corporation of India v Escorts Ltd (1986) 1 SCC 264.

[13] MG Wagh v Jai Engineering Works Ltd AIR 1987 SC 670.

[14] NTT Docomo Inc v Tata Sons Ltd OMP (EFA)(COMM) 7/2016 & IAs 14897/2016, 2585/2017.

(Arushi is currently a student at National Law Institute University, Bhopal.)