Delhi High Court sets aside billion dollar ICC award on grounds of "patent illegality and fraud"

The Delhi High Court (the "Court") in a recent decision, has set aside a 2015 arbitral award of the International Chamber of Commerce ("ICC") which had directed Antrix Corporation Limited ("Antrix") to pay damages of over US$ 560 million plus interest to Devas Multimedia Private Limited ("Devas") (the "ICC Award"). This is the latest development in a series of disputes that first arose more than a decade ago, as a result of Antrix's premature termination of a leasing agreement with Devas. In its decision, the Court has held that the ICC Award, now worth in excess of US$ 1 billion with interest, suffered from "patent illegalities and fraud" and was accordingly in conflict with the "public policy of India", such that it was liable to be set aside under India's Arbitration and Conciliation Act, 1996 (the "Act").

Background

In 2005, Antrix, the commercial arm of the Indian Space Research Organisation, a State-owned body, and Devas, signed an agreement for the lease of S-band electromagnetic spectrum capacity provided by two orbiting Indian satellites (the "Contract"). However, in 2011, Antrix annulled the Contract on grounds of force majeure, alleging that India's Cabinet Committee on Security (the "CCS") had decided to deny Andrix orbital slots in S-band spectrum as there had "been an increased demand for allocation of spectrum for national needs", including for "defence, para-military forces, railways and other public utility services". Antrix claimed that this decision amounted to a force majeure event, which allowed Antrix to terminate the Contract.

Devas did not accept the termination and instead, initiated ICC proceedings against Antrix for repudiatory breach. On 14 September 2015, an Indian-seated ICC tribunal ("Tribunal") rendered the ICC Award, which upheld Devas' claims, finding that: (i) the CCS decision did not qualify as a force majeure event as the termination was a result of Antrix's own actions, (ii) Antrix could not rely on a contractual limitation of liability clause and was liable for liquidated damages, and (iii) Antrix had wrongfully repudiated the Contract, and was liable to pay Devas approximately US$ 562.5 million plus interest as damages. In response, Antrix filed to set aside the ICC Award at the seat in Delhi under s34 of the Act.

Decision

Patent illegality

The Court noted that in finding that Antrix could not rely on the limitation of liability clause under the Contract, the Tribunal did not consider the pre-contractual negotiations between the parties. By disregarding pre-contractual negotiations on the basis of the IBA Rules on Taking of Evidence ("IBA Rules"), the Tribunal committed a "patent illegality" as the IBA Rules were only applicable with the consent of both parties, which was absent in this case.

The Court then considered the substance of the pre-contractual negotiations and held that these made clear that the only consequence of the termination of the Contract would be the refund of the upfront capacity reservation fees paid by Devas, and Devas would not be entitled to the larger liquidated damages claim. The Court held that the findings of the Tribunal, which ignored such evidence were a "complete perversity".

Further, the Court noted that the Tribunal committed a "patent illegality" by being "self-contradictory" and finding Antrix liable for wrongful termination of the Contract, despite recognising elsewhere in the ICC Award that the CCS decision to annul the Contract was "an act of governmental authority acting in sovereign capacity" within the scope of the force majeure clause. The Court emphasised that Antrix could not be held liable for any breach of the Contract as it was "prevented from performing its obligations on account of factors beyond its control".

Winding-up of Devas and evidence of fraud in the set aside proceedings

Since the ICC Award was rendered in 2015, Devas has attempted to enforce the ICC Award against Antrix. In parallel, Antrix sought the winding up of Devas before India's National Company Law Tribunal (the "NCLT"), alleging that Devas "was formed for a fraudulent and unlawful purpose and its affairs had been conducted in a fraudulent manner". In May 2021, the NCLT allowed the winding up of Devas, which was also subsequently upheld on appeal by the National Company Law Appellant Tribunal and the Supreme Court of India (the "Winding-up Proceedings").

In the set aside proceedings, Antrix moved to amend its application and incorporate subsequent evidence against Devas from the Winding-up Proceedings. Devas objected, on the ground that the amendment application was inadmissible as it was filed after the expiry of the statutory period for filing objections under s34 of the Act. The Court rejected Devas' objections and held that the Winding-up Proceedings operated as res judicata and "the court [was] bound to take notice of the same", without the need to amend the applications under s34 of the Act.

The Court further affirmed the Supreme Court's view, and held that "if the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas", then "every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards etc., are all infected with the poison of fraud", and "a product of fraud is in conflict with the public policy of any country including India".

Legal threshold for judicial interference with arbitral awards under the Act

In its decision, the Court highlighted the legal standard for setting aside arbitral awards under the Act and noted that there were "limited" grounds for a successful set aside. While awards may be set aside if there is a patent illegality, this should be "illegality which goes to the root of the matter", and an "erroneous application of law" could not give rise to a set aside decision. Likewise, a "contravention of law not linked to public policy or public interest is beyond the scope of the expression "patent illegality"".

The Court affirmed, as other recent decisions from Indian courts have, that it is impermissible for Courts to "reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award". This is because Courts do not sit in appeal against the arbitral award. However, if an arbitrator (i) takes a view which is not even a possible one, (ii) interprets a contractual clause in such a manner which no fair-minded or reasonable person would, (iii) commits an error of jurisdiction by going beyond the scope of the contract and dealing with matters not allotted to them, or (iv) bases their conclusions on no evidence or by ignoring vital evidence, the award so rendered would be "perverse" and liable to be set aside on the ground of patent illegality.

The Court held that the Tribunal in this case had committed a patent illegality as it (i) incorrectly excluded the pre-contractual negotiations between the parties, (ii) rendered contradictory findings on the applicability of the force majeure clause, and (iii) the finding of fraud in the Winding-up Proceedings established that the ICC Award "conflict[s] with the most basic notions of justice", and "thus antithetical to the fundamental policy of Indian law". For all these reasons, the Court allowed the s34 application and set aside the ICC Award.

Comment

This decision provides insight on the interpretation of "patent illegality" as a ground for setting aside an arbitral award under s34 of the Act. It is a reminder that although Indian courts will not sit in appeal against an arbitral award, an award may be set aside if the award itself or the underlying transaction is tainted by fraud or is contrary to the public policy of India.

While the Court's decision is a significant win for Antrix, the Indian State-owned body, this is far from the end of the road in this matter for the Indian State. The cancellation of the Contract gave rise to two bilateral investment treaty ("BIT") arbitrations initiated by Devas' shareholders - CC/Devas v India under the India-Mauritius BIT, and Deutsche Telekom v India under the India-Germany BIT. These disputes were both decided in favour of the investors, with India being directed to pay the claimants substantial damages as compensation (for discussion of these arbitrations and India's failed attempts to set aside these awards at their respective seats, see our blogs here and here).

More recently in February 2022, following the Winding up Proceedings, Devas' shareholders have initiated a third BIT claim against India under the India-Mauritius BIT, alleging that the country has made an "audacious scheme" to prevent payment and enforcement of the ICC Award, including through alleged "manufactured fraud allegations". It remains to be seen how India will respond to this BIT arbitration, and what the ultimate outcome may be.

For more information, please contact Andrew Cannon, Partner, Arushie Marwah, Associate, or your usual Herbert Smith Freehills contact.