The Ghost of the “Public Policy” Exception: Saving Cross Border Insolvency from the Fate of Foreign Arbitral Award Enforcement in India
Keywords: public policy, cross border insolvency, enforcement, foreign awards
The Economic Survey 2021-2022, tabled in the Parliament on 31st January, 2022 ahead of the Budget Session 2022, features issues relating to cross-border insolvency raised by the Insolvency Law Committee (“ILC”) in its report in October 2018. It notes the absence of a standardized framework for cross border insolvency and highlights the need to incorporate these draft provisions as suggested by the ILC. Further, the Finance Minister, while discussing the Union Budget 2022-2023, stressed on the need to enable cross border insolvency resolution in India.
Additionally, the Ministry of Corporate Affairs in November, 2021 had invited public comments on the draft provisions of cross border insolvency sought to be introduced in the Insolvency & Bankruptcy Code, 2016 (“IBC”).
The draft provisions, which are based on UNCITRAL Model Law on Cross Border Insolvency, 1997 (“Model Law”), were recommended by a report of the ILC submitted to the government, citing increasing foreign investment as a prime reason to have an efficient cross border insolvency mechanism. The existing provisions under Sections 234 and 235 of the IBC not being comprehensive enough had also been recognised as one of the reasons.
The Model Law is the most widely accepted legal framework dealing with cross border insolvency issues and has been adopted by 49 States including the US, UK and Singapore. The purpose of adopting the Model Law is to ensure that the IBC is brought in line with international best practices. Further, this legal framework is suitable in the Indian context given the inherent flexibility of the Model Law.
A key element for the success of any cross border insolvency framework is the ease in enforcement of the foreign insolvency-related judgements. Without a robust enforcement mechanism, the Model Law would be reduced to a toothless tiger as seen in the decision of the UK Supreme Court in Rubin v. Eurofinance SA. Thus, the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgements, 2018 (“Model Law on Enforcement”) goes hand-in-hand with the Model Law. The next prudent legislative step would be the adoption of the Model Law on Enforcement with modifications suitable to the Indian landscape.
Pertinently, both the Model Law and Model Law on Enforcement contain a “public policy” exception i.e., foreign judgements against “public policy” of the enabling State shall not be enforced. The Parliament needs to be wary of this provision considering that the issue of enforcement of foreign judgements has been a tumultuous one in India. This is illustrated by the jurisprudence on the defence of “public policy” in the context of enforcement of foreign arbitral awards. Such impediments, in turn, can have far-reaching ramifications on foreign investment and investor perception of doing business in India.
The Public Policy Exception under the Model Laws
Article 6 of the Model Law contains the “public policy” exception which confers upon the State “the right to refuse to take any action, including denial of recognition or relief, if such action would be manifestly contrary to the public policy of the country that receives the application for recognition”
Similarly, apart from the elaborate grounds to refuse recognition and enforcement of an insolvency-related judgement under Article 14, the Model Law on Enforcement also contains the “public policy” exception under Article 7 which states that “Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy, including the fundamental principles of procedural fairness, of this State.”
The “public policy” exception under the draft provisions recommended by the ILC largely mirrors the Model Law provisions and hence carries the same effect.
The intent of an enabling provision like this one is to provide flexibility to individual States to formulate their own domestic thresholds of what constitutes “public policy”. As is evident, the only qualification to the “public policy” exception under the abovementioned provisions is that the action has to be “manifestly” contrary to the public policy. The definition and/or ambit of the word “manifestly” is conspicuous by its absence which can attract overbroad judicial interpretations.
The UNCITRAL Guide to Enactment underscores the need for narrow interpretation of the “public policy” exception to meet the objective of providing relief to a variety of foreign proceedings. It is with this objective that the provisions state that the relevant action must be “manifestly” contrary to public policy for a court to deny enforcement or relief under these provisions.
Notably in this context, UNCITRAL Model Law on Cross – Border Insolvency: Judicial Perspective explains “manifestly contrary” as follows:
“51. The purpose of the expression “manifestly contrary”, used in many international legal texts to qualify the expression “public policy”, is to emphasize that public policy exceptions should be interpreted restrictively and that the exception is intended to be invoked only under exceptional circumstances involving matters of fundamental importance to the enacting State.”
The Ghost of “Public Policy”: Lessons Learnt from Arbitration & Conciliation Act, 1996
An overbroad provision with no qualifications or streamlined ambit makes the provision under the Model Law or Model Law on Enforcement prone to the same vulnerabilities associated with judicial interpretation of the “public policy” defence against enforcement of foreign arbitral awards under the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).
Historically, the problematic interpretation of the “public policy” exception has been the biggest roadblock to enforcing foreign arbitral awards in India.
The Supreme Court in its decisions such as ONGC Ltd. v. Western Geco International Ltd. (2014) and Associate Builders v. Delhi Development Authority (2014) enlarged the scope of “public policy” thereby making enforcement of foreign awards susceptible to unnecessary judicial intervention. Even as recently as in 2020, in NAFED v Alimenta SA, the Supreme Court erroneously reviewed the merits of the award at the enforcement stage and refused to enforce a foreign arbitral award on the ground of it being contrary to the export policy and thus contrary to “public policy”.
For a proper and effective cross border insolvency enforcement framework, it is imperative that errors highlighted by the abovementioned decisions by excessively broad interpretations of the “public policy” exception are not repeated.
In this regard, it may be helpful to define the scope of the “public policy” exception in line with changes to Section 48 of the Arbitration Act (which pertains to conditions for enforcement of foreign awards) brought in through the 2015 Amendment Act. These changes reflect the pro-enforcement bias of the New York Convention. The amended provision has streamlined and narrowed the scope of “public policy” in the context of enforcement of foreign arbitral awards. It stipulates that an award would be contrary to public policy of India only if (a) the making of the award was induced or affected by fraud or corruption; or (b) the award was in contravention with the fundamental policy of Indian law; or (c) if the award is in conflict with the most basic notions of morality or justice.
Narrowing down the contours of the “public policy” exception is a step in the right direction in making the arbitration legislation with respect to enforcement of foreign awards more reliable and efficient from a global perspective. Such an approach must be adopted for enforcement of cross border insolvency judgements as well.
Cues can also be taken from the recent decision in Vijay Karia v Prysmian Cavi E Sistemi SRL (2020), where the Supreme Court rightly narrowed the scope of interference under Section 48 of the Arbitration Act. It held that violation of the fundamental policy of Indian law (a subset of the public policy ground) must amount to a breach of some legal principle or legislation inherent to Indian law and thus cannot be compromised. These would be the core values of India’s public policy as a nation, not only limited to statutory provisions but also time-honoured principles followed by courts. Accordingly, the Supreme Court held that a breach under FEMA cannot be held to be a violation of the fundamental policy of Indian law. The Delhi High Court made similar observations in Cruz City 1 Mauritius Holdings v. Unitech Limited where it was held that “the width of the public policy defense to resist enforcement of a foreign award, is extremely narrow” and that “a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award.”
For cross border insolvency, the ILC report recommends Indian courts to consider international jurisprudence for interpreting the “public policy” exception. It refers to how US considers following examples as exceptions to “public policy” viz. abuse of automatic stay order by foreign insolvency proceedings; violation of criminal and privacy laws and compromising technological innovation by disregarding licensing agreements. Such examples share the design and intent of amendments made in 2015 to Section 48 of Arbitration Act, i.e., to make the ambit of “public policy” precise.
Conclusion
In as early as 2000, the report of the Justice Eradi Committee on insolvency laws noted that globalisation of trade and opening up of Indian economy has made issues of cross border insolvency increasingly important. It recommended adoption of Model Law within Companies Act, 1956, well over sixteen years prior to the enactment of IBC. The converse relation must also be respected; an efficient cross border regime will ensure better global trade relations and attract foreign investment. Notably, 2020-21 was the year of highest foreign investment of USD 81.7 billion in India.
The biggest impediment to enforcement of foreign awards (and possibly for foreign court orders) has been unfavourable and inconsistent jurisprudence of the “public policy” exception discussed above. Decisions of the Supreme Court in Western Geco, Associate Builders and NAFED are rightly criticized for interfering with foreign arbitral awards at the enforcement stage. Such decisions have adversely affected India’s image as a global commercial hub.
India’s cross border insolvency regime could be robust, efficient, and business friendly as long as it avoids the fate of foreign arbitral awards as highlighted. The 2015 amendment to Section 48 of Arbitration Act coupled with judicial precedents such as Vijay Karia and Cruz City have ushered in a business-friendly trend which can be furthered by adopting a suitable cross border insolvency framework. This encouraging trend must be promoted for the sake of development of jurisprudence on the “public policy” exception for ease of enforcement of cross border insolvency judgements.
As cross border insolvency is intrinsically linked with global trade relations, foreign investment and business environment, the enforcement of foreign judgements, which is inherently tied with the “public policy” exception, must be dealt with prudently.
This has been written by Ameya Vikram Mishra & Shatakratu Sahu, graduates of the West Bengal National University of Juridical Sciences, Kolkata, India (Batch of 2017).
Ameya works as an Associate in the office of Justice A.K. Sikri, former Judge of the Supreme Court of India and International Judge, Singapore International Commercial Court. He has also served as a Research Member in the Cross Border Insolvency Rules/Regulations Committee-II, under the aegis of the Ministry of Corporate Affairs.
Shatakratu is an Advocate practicing in New Delhi. Previously, he worked with the Dispute Resolution team of J. Sagar Associates.
