Public Policy: The Double Edged Sword in Enforcement Proceedings
This article was originally published in the 22nd June 2018 edition of
The District Court of Columbia in recent proceedings between Hardy Exploration & Production (India) Inc. (“HEPI”) v. Government of India (Ministry of Petroleum and Natural Gas),1 have witnessed fervent debates on enforcement of arbitral award and its far-reaching impact across jurisdictions.
Contractual relationship between the parties, HEPI and Union of India (“UOI”) was governed through a production sharing contract (“PSC”) entered in November, 1996 for the extraction, development and production of hydrocarbons in a geographic block in India (“Block”).
Disputes arose between the parties, which were subsequently referred to arbitration pursuant to the clauses in PSC. The arbitration clause in the PSC recorded the venue of arbitration as Kuala Lumpur, unless otherwise agreed.2 The arbitral tribunal rendered its final award in favour of HEPI, signed and delivered in Kuala Lumpur in February 2013 (“Award”), upholding that:
Court Proceedings in India
A. Proceedings before the High Court of Delhi3
UOI filed an application for setting aside of the Award and HEPI filed application for enforcement before the Delhi High Court (“Delhi HC”) in 2013. HEPI opposed the setting aside proceedings on two grounds:
The Delhi HC held:
B. Proceedings before the Supreme Court of India6
Proceedings before the United States District Court of Columbia
During the pendency of proceedings in India, HEPI approached the District of Columbia (“US Court”) in January 2016 seeking confirmation of the arbitral award under the Federal Arbitration Act.
Based on objections raised by UOI, the issues before US Court were:
A. Stay on Enforcement Proceedings in the US:
UOI sought a stay on the proceedings in the US, pending the challenge to the Award before Indian courts. UOI relied upon Article V and VI of the New York Convention7 and the doctrine of forum non conveniens and international comity.
HEPI argued that conditions under Article VI of the New York Convention were not met as the Award was not challenged before the competent authority (Malaysian court).
It is well settled that a district court has the inherent authority to issue a stay but such authority should be used judiciously.8 Even in circumstances where the Indian courts do have the jurisdiction to set aside the award, the US Court noted that a stay on confirmation should not be lightly granted, defeating the purpose of arbitration.
The US Court relied on the six criteria set out in Europcar Italia, S.p.A v. Maiellano Tours, Inc.9 to ascertain if a stay should be granted.10 Considering the factors laid down in Europcar, the US Court acknowledged that the proceedings before Indian courts have suffered inordinate delays. The US Court held that there is no clarity on timelines for completion of the setting aside and enforcement proceedings, considering it has been pending for more than five years. Therefore, the first two criteria laid down in Europcar do not favour a stay.
With respect to the third factor, UOI submitted that the Award will be subjected to higher scrutiny in India due to the existence of a broader scope of ‘public policy’ as compared to the US. The US Court ruled that this factor favored a stay, as Indian courts can evaluate if an arbitral award complies with Indian law even during enforcement proceedings, a power that US courts do not possess.
In the US, public policy is defined narrowly and the only ground for refusal for enforcement of arbitral awards is under Article V(2)(b) of the New York Convention. In the US, the defense is available when the arbitral award clearly tends to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property,11 whereas in India, public policy has a much wider umbrella.12
Further, considering UOI had contributed to the delays in the proceedings, the US Court noted that the fourth criterion did not favour a stay. The US Court keeping in mind the fifth and sixth criterion with respect to balancing hardship amongst parties, held that HEPI had already suffered severe hardships given the fact that the contract was breached nine years ago and the Award was rendered five years back. Any further delay would burden HEPI. Based on the above findings, the US Court concluded that a stay on the proceedings was not warranted.
B. Public Policy Concerns:
HEPI urged that two portions of the arbitral award should be confirmed, i.e., specific performance allowing HEPI to re-enter the Block for a period of three years and UOI’s payment of interest on HEPI’s original investment.
UOI argued that an order of specific performance should not be granted:
The US Court discussed the concepts of sovereignty, independence, and dignity of each foreign State13 which includes respect for territorial integrity. Despite the Foreign Sovereign Immunities Act, 1976 (“FSIA”) not granting immunity to states from US courts in case of confirmation of foreign arbitral awards,14 nothing in the statute suggests that US Court’s jurisdiction extends to awarding extra-territorial specific performance against a foreign State.
HEPI relied on Chabad v. Russian Federation15 and NML Capital v. Argentina,16 where US courts had granted specific performance against sovereign nations, though outside the scope of international arbitration. The US Court differentiated both cases and held that an order for enforcement in the present case had far more serious implications and would deprive a foreign nation of the ability to decide who will be able to extract and utilize its natural resources. Confirmation of the Award would encroach upon the territorial integrity of India, which is against the US public policy. The US Court held:
C. Awarding Interest:
UOI submitted that awarding interests would be both coercive and punitive in nature and against the public policy of US. HEPI argued that interest was compensatory in nature. The US Court held that since the primary component of the award is not being enforced, i.e, return of the Block to HEPI, allowing payment of interests would in effect coerce a foreign state into complying with an order the US Court cannot issue. The payment of interest is inextricably linked to the specific performance of the Award, thus confirmation of the interest portion of the Award would also violate the US public policy. India may ultimately need to pay HEPI millions once the award attains finality, but only when a competent authority permits specific performance of the award.
This judgment has dealt with certain critical concepts in the realm of international commercial arbitration. It raises a larger issue on the sanctity of arbitral awards and eventual enforcement in disputes involving States. The New York Convention, as well as Model Law17, are silent on whether the defense of sovereign immunity can be raised by States during enforcement proceedings.
However, there is a school of thought which believes that the since sovereign immunity has not been listed as a specific ground of defense to recognition and enforcement, States have implicitly consented to not raising such a defense in international commercial arbitration.18
The United Nations Convention on Jurisdictional Immunities of States and their Property19 draws the distinction with respect to commercial and non-commercial transactions entered by states. Therefore, if a State enters an arbitration agreement pursuant to a commercial transaction, immunity cannot be invoked at the stage of confirmation or setting aside of the award.20
The US Supreme Court has interpreted the phrase “commercial” in the context of S. 1611 of the FSIA (which discusses the commercial activity exception to sovereign immunity). Commercial functions rendered by the State are deemed to be non-sovereign. There is no provision on sovereign immunity under Indian arbitration regime and follows the distinction laid down by US.
It is interesting to note that the US Court did not even delve into whether the nature of the relationship between the parties or the ultimate specific performance was commercial or non-commercial in nature. The US Court held that the mere fact that granting specific performance would impact the natural resources of the country was sufficient to invoke the public policy defence and refuse confirmation of the Award.
While the ruling of the US Court is beneficial for UOI at this stage, given the delays in court processes in the Indian legal system, it is possible that UOI will be mandated to pay enormous sums to HEPI as interest at the colossal rate of 18% in the event of failure of challenge to the execution of arbitral award.
With this recent ruling, it remains to be seen how concepts of sovereignty, read into the defence of public policy, will be interpreted and impact it would have for future cases of enforcement of arbitral awards against States. Undoubtedly, interest of States will need to be balanced with commercial rights that accrue to private enterprises. It is hoped that with the passage of time, a balance will be struck between these two competing interests.
– Bhavana Sunder, Payel Chatterjee & Vyapak Desai
You can direct your queries or comments to the authors
1 United States District for the District of Columbia, Civil Action No. 16-140 (RC)
2 The UNCITRAL Model Law on International Commercial Arbitration, 1985.
“33.12. The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur and shall be conducted in English language. Insofar as practicable the parties shall continue to implement the terms of this contract notwithstanding the initiation of arbitration proceedings and any pending claim or dispute.”
3 Union of India v. Hardy Exploration & Production (India) Inc. FAO (OS) 59/2016 and CM Nos. 7062-63/2016 and 7066/2016
4 Article 31. Form and contents of award
(3) The award shall state its date and the place of arbitration as determined in accordance with article 20(1). The award shall be deemed to have been made at that place.
5 Union of India v. Reliance Industries Limited, 2015 (10) SCC 213.
6 Union of India v. Hardy Exploration and Production (India) Inc. Civil Appeal No. 4628 of 2018
7 Article VI of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (“New York Convention”) states “if an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V(1)(e), the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award.” Article V(1)(e) of the New York Convention states that a competent authority is one “of the country in which, or under the law of which, that award was made.”
8 Cf. Four Seasons Hotels & Resorts B.V. v. Consorcio Barr S.A. 377 F.3d 1164 and Hewlett-Packard Co. v. Berg 61 F. 3d 101, 106
9 156 F.3d 310, 317 (2d Cir. 1998).
10 (1) the general objectives of arbitration—the expeditious resolution of disputes and the avoidance of protracted and expensive litigation; (2) the status of the foreign proceedings and the estimated time for those proceedings to be resolved; (3) whether the award sought to be enforced will receive greater scrutiny in the foreign proceedings under a less deferential standard of review; (4) the characteristics of the foreign proceedings including (i) whether they were brought to enforce an award (which would tend to weigh in favor of a stay) or to set the award aside (which would tend to weigh in favor of enforcement); (ii) whether they were initiated before the underlying enforcement proceeding so as to raise concerns of international comity; (iii) whether they were initiated by the party now seeking to enforce the award in federal court; and (iv) whether they were initiated under circumstances indicating an intent to hinder or delay resolution of the dispute; (5) A balance of possible hardships to the parties. .. and (6) Any other circumstance that could tend to shift the balance in favor of or against adjournment.
11 Enron Nigeria Power Holding, Ltd. v. Fed. Republic of Nigeria, 844 F.3d 281, 289 (D.C. Cir. 2016).
12 Section 48(2), Arbitration and Conciliation Act, 1996.In India, the enforcement of an arbitral award can be refused:
1. If the arbitral award is induced or affected by fraud or corruption or is in violation of the clauses on confidentiality and admissibility of evidence in other proceedings; ii. The arbitral award is in contravention of the fundamental policy of India; or (iii) is in conflict with the most basic notions of morality or justice. Further to be in confirmation with public policy in India, the criteria of compliance with Indian statutes and judicial precedents, reasonableness, adherence to judicial approach and compliance with natural justice needs to be met.
13 Bolivarian Republic of Venezuela v. Helmerich & Payne Intern. Drilling Co., 137 S. Ct. 1312, 1319 (2017).
14 Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(6).
15 915 F. Supp. 2d 148, 150–52 (D.D.C. 2013).
16 699 F.3d 246, 261–65 (2d Cir. 2012).
17 The UNCITRAL Model Law on International Commercial Arbitration, 1985.
18 Rajesh Sharma, Enforcement of Arbitral Awards and Defence of Sovereignty: The Crouching Tiger and the Hidden Dragon, Lapland Law Review, Vol. 1, No. 1, pp. 252-264.
19 United Nations Convention on Jurisdictional Immunities of States and Their Property, 2004.
20 Article 17, United Nations Convention on Jurisdictional Immunities of States and Their Property, 2004. While India has signed this Convention, it has not ratified it yet. The United States is not a signatory to this Convention.