“The export without permission would have violated the law, thus, enforcement of such award would be violative of the public policy of India”, the SC said.
For a country that wants to be a global arbitration hub, and which wants to raise its ranking on the contract-enforcement index, the news just keeps getting worse. Some weeks ago, the Supreme Court (SC) asked Devas Multimedia if it was willing to consider waiving off the interest component on the money owed to it—it won a $672 million global arbitration award—by the government space agency ISRO’s arm, Antrix Corporation. And, last week, in the case of the government’s canalising agency Nafed versus Swiss firm Alimenta SA, the SC said the global arbitration award was not maintainable because Nafed wasn’t able to deliver on its contract—to export 5,000 tonnes of groundnuts—because it didn’t get government permission to do so, without which, it simply could not export. “The export without permission would have violated the law, thus, enforcement of such award would be violative of the public policy of India”, the SC said. Under Section 32 of the Indian Contract Act—and Clause 14 of the agreement between Nafed and Alimenta—the SC said, the contract was rendered unenforceable and, hence, void.
This may well be the correct interpretation, but keep in mind, the original award was given in 1989! And, if violation of ‘public policy’ is to be used to quash global arbitration awards, how many other awards will become unenforceable? In the Vodafone Plc retrospective tax case that is in front of a global arbitration panel, the retrospective tax was, in every sense, ‘public policy’ since Parliament had approved the budget which brought in the tax. A similar interpretation can also be given to the Antrix Devas case. In that case, Antrix was to build two satellites for Devas, with 70MHz of spectrum thrown in. This raised a furore since reverberations of the 2G scam could still be felt, and the scam-scarred government was naturally wary. Even though the CAG’s report on the deal did not compute a ‘loss’ figure as it had in the 2G case, the government constituted two committees to examine the issue, and they recommended scrapping the deal; that is why Devas went in for arbitration.
In the Tata-Docomo case, the government’s behaviour was odder since it had no financial stake. In this case, when the award went against the Tatas, the government argued that the Tata-Docomo contract itself was illegal as it violated Fema rules, and in that sense, it violated ‘public policy’. Fortunately for the Tatas (who wanted to pay the damages!) and Docomo, the judge said the award would be upheld, and if the Tatas paying Docomo meant the group violating Fema, it could pay the penalty for that as well. If investors are to trust the rule of law in India, it is vital that the government recognise that the law applies to it as well and, by extension, to the PSUs it owns. Going by the SC judgment, if ‘public policy’ is to be allowed as an escape clause, it is unlikely the government will abide by arbitration rulings that go against it.