This article has been authored by Surya Prakash, 2ndYear B.A. LL.B. (Hons.) Student at National Law University Odisha and Prabhas Kumar, 1stYear B.A.LL.B. (Hons.) Student at Gujarat National Law University.
Introduction
The extent to which Indian Courts may examine the merits of a foreign award to deny enforcement remains a contested area in Indian arbitration jurisprudence. This issue has assumed renewed urgency following the Madras High Court’s (“Court”) ruling in Olam International Ltd. v. Manickavel Edible Oils (P) Ltd (“Olam International”), wherein the Court refused enforcement of two foreign arbitral awards, noting the absence of a concluded contract and valid arbitration agreement between the parties. To reach this end, however, the Court scrutinised the email and WhatsApp messages exchanged between the parties, effectively replacing the foreign tribunal’s finding on these questions of fact.
The Court further expanded the purview of Public Policy under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”). It held that upholding agreements based on mere surmises or incomplete negotiations would offend fundamental principles of Indian law.
The article undertakes a doctrinal analysis of the grounds to challenge foreign awards in India. It argues that the enforcement court cannot deny the existence of a valid arbitration agreement by taking a different interpretation of the terms of the contract. Lastly, it cautions that a wider interpretation of the Public Policy exception stands in affront to India’s pro-enforcement bias.
Facts of the Case
Between 2017 and 2019, Olam International Limited (“Olam”) and Manickavel Edible Oils (P) Ltd. (“Manickavel”) had successfully concluded approximately 89 transactions for the sale of Crude Palm Oil (“CPO”) and Refined Bleached Deodorised (“RBD”) Palm Olein.
The present dispute arose from shipments scheduled in March 2020. Before the COVID-19 Pandemic caused global supply chain volatility, on 7th January 2020, Manickavel via WhatsApp initiated negotiations for 8000 Metric Tonnes (“MT”) of CPO. Olam confirmed availability. WhatsApp messages suggest both parties agreed to operate in two tranches of 4000 MT each. One at USD 779 per MT, another at USD 755 per MT.
On 20th January 2020, Olam supplied frame contracts incorporating the FOSFA 81 standard terms that included the arbitration clause to Manickavel. However, unlike the past 89 arrangements, where the contracts were duly signed, these drafts remained unsigned.
In a crucial communication on 5th March 2020, Manickavel informed Olam that the Letter of Credit (“LC”) would be opened based on a price of USD 725.83 per MT. This price was significantly lower than what was allegedly agreed upon in the earlier WhatsApp messages. Olam, in reply, requested the LC copy to facilitate shipment, but did not explicitly confirm or reject the lower price of USD 725.83/MT in that specific email.
When Manickavel failed to open the LC, Olam terminated the contract and invoked arbitration under the FOSFA rules. Manickavel did not participate in the proceedings. The Federation appointed arbitrators. The Tribunal, proceeding ex parte, examined the evidence and concluded that binding contracts had been formed and thus arbitration agreements incorporated via the FOSFA 81 terms were valid.
Olam approached the Court to enforce the award, but it was refused on two grounds. Firstly, after examining the WhatsApp messages exchanged between the parties, the Court concluded that the frame contracts remained unsigned and the price was never finalised. It held that the parties had never actually reached a common consensus and were still in the negotiation stage. The absence of a concluded contract meant there was no valid agreement to arbitrate, attracting refusal under Section 48(1) of the 1996 Act.
Secondly, to justify its deep dive into the merits of the case, the Court expanded the scope of the public policy exception in Section 48(2). It held that enforcing a contract without consensus ad idem would violate the fundamental policy of Indian law.
The Statutory Conspectus
Enforcement of foreign awards in India was previously governed under the Foreign Awards (Recognition & Enforcement) Act, 1961(“the FARE Act”). Section 7(1)(a) of the FARE Act, which corresponds with Section 48(1) of the current 1996 Act, outlined the procedural grounds for setting aside a foreign award. Neither the 1996 Act nor the subsequent amendments have tinkered with these grounds.
These include the legal incapacity of a party, or an arbitration agreement that is invalid under the applicable law or, failing that, under the law of the seat. Refusal may also follow if a party was unaware of the arbitrator’s appointment or the arbitral proceedings, or was unable to present its case. An award may be denied enforcement if it decides matters beyond the scope of submission. In the same tune, defects in the tribunal’s composition or procedure, where inconsistent with party agreement or the law of the seat, may justify refusal. Lastly, an award that is not binding under the relevant legal framework may also be denied enforcement.
Section 48(2) of the 1996 Act is a reflection of Section 7(1)(b) of the FARE Act. These lay down the substantive grounds for refusing the enforcement. An award rendered by a foreign court or tribunal remains unenforceable if the dispute itself is not arbitrable under Indian law, or if its enforcement would go against India’s public policy.
An Unfriendly Interpretation
Arbitration agreements contained in exchanges of telecommunications are deemed enforceable by Section 7(4)(b) of the 1996 Act. In Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., the Supreme Court held an arbitration agreement needs to be in writing but does not need to be signed.
In the instant case, however, the Court took a different stance. It placed dispositive weight on the history of 89 prior transactions between the parties, all of which involved signed contracts. The court held that this practice between the parties created a lex mercatoria. Any binding contract now needed a formally signed document.
This conclusion stands alienated from the commercial reality. FOSFA provides standard contracts, which are the lifeblood of the global edible oil trade. Traders conclude deals via email recaps or instant messaging with formally attested contracts following later. In this area, a confirmation on essential terms like product, quantity, price, and shipment period constitutes a binding contract. FOSFA tribunals are made up of people from the trade. They know how these deals actually happen. For them, a short confirmation or recap is enough. If the key terms are settled, the deal is treated as done, even if some details are left for later.
The Court’s ruling also roughly clashes against the SC ratio in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., where it was held that enforcement courts cannot refuse a foreign award merely because they would interpret the contract differently. Herein, the Court has not only replaced the tribunal’s finding on the existence of an invokable arbitration clause but justified this overreach by misconstructing the quadrails around the fundamental policy of Indian Law.
It thus becomes imperative that we understand the history around the public policy exception before analysing the Court’s verdict on it.
The History of the Public Policy Exception
The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,1958 (“Convention”), to which India is a signatory, allows the setting aside of foreign arbitral awards only in exceptional circumstances. Nonetheless, the most controversial aspect of the Convention is the exception to the enforcement of arbitral awards on the ground of ‘public policy’. Since the term public policy is subject to national interpretations that are expected to vary widely, there were early apprehensions that this might frustrate the very purpose of the Convention.
In India, a delicate balance between this broadly worded provision and the legislative intent of minimal judicial intervention was mediated by the Supreme Court in Renusagar Power Electric Co. Ltd. v. General Electric Co. (“Renusagar”) in 1993. The SC, when confronted with defining the expression of “public policy” under Section 7(1)(b) of the FARE Act, adopted a narrow interpretation of the term and held that a foreign award would not be refused enforcement only because it violates an aspect of Indian public policy.
The 1996 Act consolidated all the codes governing the practice of Arbitration in India. Public Policy, as a ground for setting aside domestic and foreign awards, was retained in Section 34(2)(b)(ii) of Part I and Section 48(2)(b)(ii) of Part II of the Act, respectively. The precedential weight of Renusagar was left in doubt, awaiting judicial affirmation under the new regime.
In 2003, the SC delivered its infamous judgment in ONGC vs Saw Pipes Ltd. (“Saw Pipes”). In Saw Pipes, the Court allowed itself effectively a merits-based review of a domestic award if the same was patently illegal, as that would violate the Public Policy of India under Section 34 of the 1996 Act. This eclipsedthe ruling in Renusagar.
The situation was further problematized in Phulchand Exports Ltd. v. O.O.O. Patriot, when the SC departed from the narrow view of public policy under Section 48 and applied the broader Saw Pipes standard, moving away from global pro-enforcement norms.
BALCO was the first step towards remedying this overreach. It limited the application of Part I to India-seated arbitrations, preventing the broader public policy test under Section 34 from spilling to Section 48. BALCO paved the way for Shri Lal Mahal Ltd. v. Progetto Grano Spa to realign the law with Renusagar, holding that foreign awards cannot be denied enforcement on the ground of “patent illegality.”
The 246th Law Commission took note of the inconsistent and often schizophrenic judicial rulings surrounding the usage of the public policy exception. To address this, and to bring Indian law in line with international best practices, the Commission recommended clarifying the scope of public policy under Section 48. These recommendations formed the basis of the 2015 Amendment to the 1996 Act.
Post 2015, Section 48(2) was reinforced with explanations to guide courts on how to interpret “public policy” and “fundamental policy of Indian law.”
Under the first explanation, enforcement may be refused only if the award was induced by fraud or corruption, violates the fundamental policy of Indian law, or offends basic notions of morality and justice.
The second explanation clarified that a violation of fundamental policy does not permit a review of the award on its merits.
Since this amendment, Courts have limited themselves to narrow grounds while considering challenges to the enforcement of foreign arbitral awards, until a very recent derailment.
A Case of Conflicting Precedents
In Olam International, the Court heavily relied on the SC ruling in National Agricultural Cooperative Marketing Federation of India v Alimentia SA. (“NAFED”). SC refused enforcement of a foreign award on public policy grounds under the FARE Act. In doing so, the SC extensively dealt with the merits of the dispute to establish the public policy violation.
The ruling in NAFED was delivered on a narrow and unusual fact setting. Performance of the contract had become illegal due to a government prohibition on sailing imposed after a cyclone. The arbitral tribunal rendered compliance with the government order as a breach of the Contract. When the award was later brought for enforcement in India, the Court refused enforcement by excavating the factual matrix of the dispute.
In Olam International, the Court justified its intervention with the finding of the tribunal on facts by stating that the absence of a valid contract would violate the foundational principles of the Indian Contract Act, 1872. This unadherence to a national statute was deemed perverse to the fundamental policy of India.
This reliance on NAFED is in contrast to the current jurisprudence. One reason for it must be that NAFED was already reserved for judgment when Vijay Karia v. Prysmian Cavi E Sistemi Srl (“Karia”) was pronounced. Karia established that Section 48 crystallizes the Convention’s pro-enforcement bias. The setting aside of a foreign award cannot be done by jumping into the arbitrator’s shoes.
The Convention aims to ensure that foreign awards are enforced even if they do not fully match domestic law. Public policy objections are meant to be rare. They apply only when an award violates a state’s core and non-negotiable values. “Fundamental policy of law” refers to these basic principles, not to every breach of a statute.
Conclusion
Even if the Madras High Court’s approach finds some support in international decisions such as Dallah Real Estate and Tourism Holding Co. v. Ministry of Religious Affairs, Government of Pakistan and China Coal Solutions (Singapore) Pte Ltd v. Avra Commodities Pte Ltd, where courts undertook a de novo review to assess the existence of a valid contract, importing that approach into our regime is problematic.
It cuts sharply against India’s clear pro-enforcement framework. Explanation 2 to Section 48(2) expressly bars a merits review under the guise of “fundamental policy of Indian law.” If India seeks to position itself as a serious hub for international commercial arbitration, it must show strongly that enforcement is the norm and refusal is the exception.