Shri Lal Mahal Ltd v Progetto Grano Spa: Supreme Court of India overrules Phulchand and reduces court interference in enforcement of foreign awards

In a previous e-bulletin, we had reported about the case of Phulchand Export Ltd v OOO Patriot¹ where the Supreme Court of India had set a worrying precedent by allowing parties to challenge enforcement of a foreign arbitral award on grounds of patent illegality. In Phulchand the court applied the controversial previous decision in ONGC v Saw Pipes² and held that a patently illegal award violates the public policy of India and therefore entitled the Indian courts to, in appropriate cases, re-look at the merits of the case even in enforcement proceedings.

The Supreme Court, in its recent decision in Shri Lal Mahal Ltd v Progetto Grano Spa³ expressly overruled Phulchand and declined to consider the merits of a foreign arbitral award in an enforcement proceeding. The decision in Shri Lal Mahal represents another significant pro-arbitration step taken by the Indian Supreme Court in recent times.

Facts of the Case

The case of Shri Lal Mahal concerned a dispute between an Indian supplier and an Italian buyer in a contract for the supply of wheat. The seller relied on a certificate of quality provided by a certifying agency at the port of loading in India to argue that the wheat supplied was of the requisite quality. The buyer questioned the reliability of the quality certificate at the port of loading and on the basis of numerous other reports argued that the quality of wheat was below that which was contractually agreed.

The dispute was heard by an arbitral tribunal constituted under the aegis of the Grain and Feed Trade Association (GAFTA) which was seated in London. The arbitral tribunal found in favour of the buyer and awarded damages against the seller. The award of the tribunal was unsuccessfully appealed by the seller before the Board of Appeal of the GAFTA – as provided for under the GAFTA Arbitration Rules. An application by the seller before the High Court of Justice in London to set aside the award under section 68 of the English Arbitration Act 1996 was also rejected.

Enforcement Proceedings

The buyer sought to enforce the award before the Delhi High Court. The seller opposed enforcement, contending that the arbitral tribunal had placed greater reliance on quality certificates prepared by non-contractual agencies than on the quality certificate prepared by the agency nominated under the contract. The seller argued that the arbitral award delivered on this basis was contrary to the express provision in the contract and enforcing such an award would be contrary to the public policy of India.

The High Court refused to interfere with the award on the basis that it was not expected to re-determine questions of fact in enforcement proceedings.

The seller appealed against this decision to the Supreme Court of India. The seller relied on Phulchand and argued that the court had the power to consider the merits of a case where there was a patent illegality in the award, even in enforcement proceedings.

On the other hand, the buyer relied on the decision of the Supreme Court in Renusagar Power Co Ltd. v General Electric Company⁴ – which predated the decision in Phulchand but was delivered by a larger bench than Phulchand – and argued that patent illegality cannot be a ground to challenge an award in enforcement proceedings especially in the context of foreign awards where, as laid down in Renusagar, the relevance of Indian law is more limited.

Decision of the Court

A three judge bench of the Supreme Court speaking through Justice RM Lodha (who was interestingly also the author of the decision in Phulchand), overruled Phulchand and accepted the contentions of the buyer.

The court held that during setting aside proceedings, the arbitral award is not yet final and executable and this is in contradistinction to a challenge during enforcement where the award is final and binding. On this basis the court refused to apply the definition of the term 'public policy' as applied in the context of setting aside proceedings and as laid down in ONGC v Saw Pipes in the context of a challenge during an enforcement action. The court followed the decision in Renusagar and held that enforcement can only be opposed on grounds of public policy where it is contrary to:

• Fundamental policy of Indian law;
• The interests of India; or
• Justice and morality.

In particular, the court expressly declined to allow a challenge on the grounds of 'patent illegality'.

Since the challenge raised by the seller required reconsideration of the merits of the case and re-looking at the facts, the court declined to entertain the challenge and allowed enforcement.

Analysis

The decision of the Supreme Court in Shri Lal Mahal is a welcome development, especially for those seeking to enforce foreign seated arbitral awards in India. The overruling of Phulchand significantly reduces the ability of Indian courts to accept invitations to interfere with foreign awards and prevents a re-opening of the case in enforcement proceedings. This more restrictive approach to the public policy grounds for resisting enforcement is more consistent with an emerging international consensus.

However, in the context of attempts to set aside an award on public policy grounds, uneasiness remains following the decisions in ONGC v Saw Pipes and Venture Global Engineering v Satyam Computer Services Ltd. This is especially so given the distinction drawn by the court in Shri Lal Mahal between setting aside proceedings and enforcement proceedings.  In this regard, the court missed an opportunity to reconsider ONGC v Saw Pipes and revisit the position as it relates to the grounds for setting aside of arbitral awards. 

The decision in ONGC v Saw Pipes is of course only relevant to pre-BALCO arbitrations, seated outside India. As highlighted in our earlier post on this issue, arbitrations seated outside India initiated pursuant to arbitration agreements executed after 6 September 2012 cannot be set aside by the Indian courts and therefore the ruling in ONGC v Saw Pipes will not apply to them.

For more information, please contact Nicholas Peacock, Partner or Vikas Mahendra, Associate, or your usual Herbert Smith Freehills contact.