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Public Policy in Russia and India – Which State is More Arbitration-Friendly?

The highest judicial authorities of India and Russia recently considered two cases involving the enforcement of foreign arbitral awards where they had to deal with the concept of ordre public. Both states are perceived as arbitration-hostile jurisdictions, however, their approaches in analysing the identical issue were quite different.

In Phulchand Exports Ltd. v OOO Patriot (2011) the Supreme Court of India enforced an arbitral award issued in Russia. In 1999, an arbitral tribunal acting under the Chamber of Commerce and Industry of the Russian Federation rendered an award in a case involving a dispute out of the international sale of goods between a Russian company (“Buyer”) and an Indian company (“Seller”).
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 The tribunal split the amount of losses between the parties in equal parts and ordered the Seller to pay ca. US$140,000 to the Buyer. It is noteworthy that the dispute was decided by the tribunal on the basis of Russian law and the Vienna Convention on the International Sale of Goods.

In 2005, the Seller appealed against the lower courts judgements enforcing the award to the Supreme Court of India. Relying on Section 48(2)(b) of the Arbitration and Conciliation Act (“Arbitration Act”) the Seller raised a defence that the award was “contrary to the public policy of India.” He referred the Supreme Court to its earlier decision in ONGC v Saw Pipes Ltd (2003) in which a wider meaning was given to the “public policy of India” provided in Section 34 of the Arbitration Act relating to setting aside domestic arbitral awards.

He further stated that that meaning was applied by the Supreme Court to the same expression given in Section 48(2)(b) applicable to foreign arbitral awards. In the Saw Pipes Ltd. case the Supreme Court observed that to the narrow meaning of public policy given in its preceding judgement an additional annulment ground was to be added, namely if an award “is patently illegal.” On that basis, in this instance the Supreme Court accepted the contention that “the public policy of India” referred to in Section 48(2)(b) should be accordingly considered on the same premise.

However, in deciding the case the Supreme Court went through a rather tortuous route but in the end dismissed the appeal and enforced the award. The major flaw in this decision is that the Supreme Court did not consider how the public policy of India could have been affected if the award was to be enforced in India. Instead, what the Supreme Court did was reconsidering the case on the merits by applying substantive provisions of Indian law, ie disregarding the parties’ choice of the governing law. The analysis conducted by the Supreme Court in ascertaining whether the public policy was involved did not even accord with its own determinations given in the judgement, namely if there was any “patent illegality.”

It is interesting to note that in Mcdermott International Inc. v Burns Standard Co. Ltd. (2006) the Supreme Court observed that the power of courts to review arbitral awards could be exercised “only to ensure fairness.” It further stated that:

Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court [emphasized].

Fair to say that in the present case the Supreme Court had to reconcile somehow its earlier decision but could only note:

We are not unmindful that the decision of this Court in [ONGC v Saw Pipes] had invited considerable adverse comments [emphasized] but the correctness or otherwise of the said decision is not in question before us. It is only for a larger Bench to consider the correctness or otherwise of the said decision.
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The said decision is binding on us. The said decision has been followed in a large number of cases.
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In this instance, it would have been probably more appropriate to consider the findings made by the lower instances which found that the award “was purely based on findings of facts and no public policy was involved.” However, the Supreme Court did not refer to these decisions at all. By citing its earlier decision in the Saw Pipes Ltd. case it stated that

[i]llegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy.

If it is so then the question arises whether the approach of the Indian highest judicial authority to reconsider the case on the merits was correct. Assuming it was not necessary to embark on the examination of the substance of the case then the court’s reasoning at least created a confusion on what was actually relevant for it to decide the case, at most it completely undermined the parties’ choice of the governing law.

In a recent decision of the Russian Supreme Commercial Court in Stena RoRo AB v JSC Baltisky Zavod (2011) the issue of public policy was considered as well. In that case the applicant, a Swedish company, tried to enforce an arbitral award made by a tribunal constituted under the Arbitration Institute of the Stockholm Chamber of Commerce.

The tribunal awarded substantial damages and interest thereon according to the shipbuilding contracts and option agreement which were subject to Swedish law. The defendant, a Russian shipyard, attempted to challenge the award in Swedish courts but failed. Its further natural step was to resist the enforcement of the award in Russia by invoking the public policy claiming that the liquidated damages awarded by the tribunal are not known to Russian law. In contrast to Russian law such damages do not require their proof and are of punitive nature.

The Supreme Commercial Court observed that pursuant to Russian law, namely Section 243(4) of the Arbitrazh Procedural Code of Russia, a commercial court may not reconsider a foreign arbitral award on the merits. As such the lower instances did not have legal grounds to reconsider the facts determined by the tribunal and assess them by applying Russian law. It further stated:

By entering into contracts which are subject to the substantive provisions of Swedish law the [defendant] accepted the risks relating to the fact that a relevant public order may encounter rules differing from Russian law regulating similar relations.

Based on this, the Supreme Commercial Court vacated the judgements of the lower courts and enforced the award. It nevertheless provided a justification that remedies, such as penalty and damages, are provided for in  civil law and they are a part of the Russian legal system. Considering the Court’s latter observation this justification, strictly speaking, was not necessary.

In light of these decisions the following should be reiterated. The notion of public policy in international arbitration is one of the most debatable and controversial topics. It is usually the case that public policy “is never argued at all but where other points fail.”  However, public policy is not an “amorphous exception”, nor merely it is a last resort to challenge or resist the enforcement of an arbitral award. Rather its purpose is to safeguard that an arbitral award if enforced would not encroach upon the internationally accepted “basic notions of morality and justice.”

It is then for this reason a state would likely to be perceived as an arbitration-hostile jurisdiction if its local court, faced with a matter relating to the enforcement of an international arbitral award, would interpret public order in broad terms or solely in light of domestic interests of that state.

In contrast, courts of arbitration-friendly states are inclined to give narrow meaning to the public policy, generally limiting its violations to issues such as biased arbitrators, serious irregularity, corruption or fraud, award of punitive damages. There seems to be an overall agreement in international arbitration community that public policy in the context of the enforcement of arbitral awards must be given a restrictive interpretation. This approach has been in fact accepted by state courts of a number of jurisdictions.

To conclude, in both cases discussed above the foreign arbitral awards were enforced in the arbitration-unfriendly states. The only difference between them was that the Indian enforcement proceedings amounted to the adjudication of the case on the merits and hence under a substantive law alien to the law of the contract. In contrast, the Russian proceedings resulted in a more restrictive approach to the public policy matter. For this, at least in this instance Russia seems to have won a point against India in becoming a pro-arbitration jurisdiction.

Dmitry Vlasov

Russian Lawyer, LLM

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