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THE PUBLIC POLICY PARADOX: A RUSSIAN, INDIAN AND CHINESE PERSPECTIVE

Author’s Biographical Information: I am Somdatta Ghosh, a 5th Year Law Student at St. Xavier’s University, Kolkata. I love penning down my thoughts on contemporary legal issues and am actively involved in moot courts and debate competitions. 
 
Key Words: Public Policy Paradox, Non-Enforcement of Arbitral Awards, International Commercial Arbitration.

SYNOPSIS

 

As enshrined in Article V(2)(b) of the United Nations Convention on Enforcement of Foreign Arbitral Awards, 1958, and Article 34(2) of the UNCITRAL Model Law on International Commercial Arbitration, 1985, public policy is a valid ground for refusing the enforcement of a foreign arbitral award. As the contours of this exception are not defined, the interpretation of public policy is bound to vary across various jurisdictions. The primary aim of this article is to examine the interpretation of public policy across three jurisdictions- India, China, and Russia. Through this, an inference can be drawn as to how three different countries resort to different approaches when it comes to determining what can fall within the ambit of the public policy exception. 

 

The article will also look at some cases from other jurisdictions to demonstrate how the lack of exhaustive guidelines as to what can amount to a public policy violation, widens the ambit of the exception magnanimously, thereby being prejudicial to the interest of the claimant. The article finally concludes with a recommendation to define the scope of public policy exceptions to refrain the courts from arbitrarily or discriminately using this exception as an instrument to refuse the enforcement of foreign awards. 

 

1. THE PROBLEM WITH THE PUBLIC POLICY GROUND

 

The public policy ground enshrined under Article V(2)(b) of the Convention on Enforcement of Foreign Arbitral Awards, 1958, and Article 34(2) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 remains one of the most controversial grounds for the refusal of enforcement of any foreign award. Since the ambit of the public policy exception is not defined, the courts lack guidance upon what can fall under the exception and what cannot. In this process, some courts may even expand the ambit of this exception to the extent that anything can amount to a public policy violation, and hence, the award shall be deemed unenforceable. 

 

If the public policy exception is applied arbitrarily or discriminately to refuse enforcement of a foreign award, then the foreign award rendered by any international arbitral tribunal loses its binding nature. If the claimant cannot get the award enforced, then the purpose of International Commercial Arbitration, which is to resolve commercial disputes and provide adequate remedy, gets frustrated. 

 

2. INTERPRETATION OF PUBLIC POLICY ACROSS JURISDICTIONS 

 

The interpretation of public policy largely varies across various jurisdictions. In this part, we will be looking at how public policy has been interpreted in India, Russia, and China. 

 

2.1: Interpretation of public policy in India 

 

Section 48(2)(b) of the Arbitration and Conciliation Act,1996 (‘Act’) states that a foreign award may be denied enforcement on the grounds of public policy violation. Explanation 1 of this section further explains that an award shall be deemed to be contrary to the public policy of India if the same is induced/affected by fraud, violative of section 75 or section 81, is against the fundamental policy of India or is in contravention with the most basic notions of morality and justice. 

 

In the landmark Renusagar Case, the Supreme Court held that ‘public policy’ should be construed narrowly, and a mere violation of any Indian Law cannot amount to a violation of public policy. Later in 2011, the Supreme Court in Phulchand Exports Ltd vs Ooo Patriotadopted a protectionist attitude and widened the scope of public policy encompassing patent illegality as a violation of public policy. This decision was met with a lot of criticism and was remedied in Shri Lal Mahal Ltd vs Progetto Grano Spa when the Supreme Court held that the term public policy must be given a narrow interpretation and that patent illegality cannot amount to the violation of public policy. The Act was amended in 2015 upon the recommendations of the 246th Law Commission report, and presently the review on merits is not permissible. 

 

There have been cases recently where the award was set aside on the basis of public policyviolations. In the Aapico Hitech Case, the respondent had taken a lump sum amount as a loanfrom Kotak Mahindra Bank, and the bank had instructed that any change in the directorship/shareholding shall require a prior sanction from the bank. The claimant, being the majority shareholder, did not comply with the same. Hence, when the award was brought for enforcement by the claimant, the Supreme Court held that the loan amount involved public money, the bank had given such instruction to ensure that public money is cautiously dealt with and non-compliance with such instruction amounted to a violation of public policy. 

 

In the NAFED Case, the award was rendered unenforceable by the Supreme Court since violation of the provision which required prior permission from the government to export certain commodities as specified, was in contravention to the fundamental policy of India and hence, amounted to a public policy violation. 

 

In the Vijay Kharia case, the Court held that since the violation of a mandatory provision of the Foreign Exchange Management Act,1999 could be condoned by the Reserve Bank of India, the violation of any such mandatory provision does not amount to public policy violation unless then same is against the fundamental policy of India.

 

Hence, from the above cases, it can be inferred that foreign arbitral awards are refused enforcement on the grounds of public policy only when the enforcement of the award will be highly prejudicial to public interest or violation of the fundamental policy of India. Violation of a mandatory provision will not amount to public policy violation if the violation can be condoned or is not prejudicial to the fundamental policy of India and the Interest of India. 

 

 

 

2.2: Interpretation of public policy in China 

 

In China, the most commonly used term is ‘socio-public interest’ and not public policy. Article 150 of the General Principles of the Civil Law of the People's Republic of China elucidates the concept of ‘socio-public interests.’ Article 5 of the Act of the People’s Republic of China on Application of Law for Foreign-Related Civil Relations,2010 uses the term ‘socio-public interests” to define public policy. Now, the term ‘socio-public’ interest is extremely vague and open-ended. 

 

Violation of mandatory Chinese laws shall not amount to a public policy violation. Also, to distinguish the concepts of sovereignty and security from various other aspects of public policy, Chinese Lawmakers have specifically emphasized defining sovereignty and security in the Civil Procedure Law. Neither violation of due process nor irregular arbitral proceedings form a part of the public policy in China however principles of res judicata, corruption, or bribery may be deemed as a violation of China’s public policy.

 

Foreign arbitral awards were refused to be enforced on the grounds of public policy twice in China since 2000, that is, once in 2008 and the second time in 2018. In both cases, first, the claimants, who were foreign entities approached the Courts of China where the Courts held that the arbitration clauses were invalid. The claimants sought remedy at the international arbitral tribunals and got an award in their favour. When they came to enforce the awards in China, it was held that enforcing an award where the Chinese courts had previously declared the arbitration clause as invalid, would be against the judicial sovereignty of China. Hence, these awards were not enforced in China on the grounds of violation of public policy. 

 

2.3: Interpretation of Public Policy in Russia

 

Article 34(2) of the Law of the Russian Federation, 1993 says that an award may be set aside if it is found to be violative of the public policy of the Russian Federation. There have been decisions in and after 2020 where foreign awards have been refused enforcement on the grounds of public policy violation. 

 

In one such case, as the claimant company was a majority shareholder in the respondent company, most of the key decisions of the respondent company were taken by the claimant, and hence, the claimant was controlling the respondent company. If the relationship between the parties to the dispute is intra-corporate, that is, if one party controls the other, the same can be considered a violation of public policy and the award can be refused to be enforced. If we look at a similar case in India, we will observe that the claimant was a majority shareholder in the respondent company, However, this did not amount to a public policy violation in India. 

 

In another case, it was held that any action that was violative of the fundamental principles of equality of the creditors of insolvent debtors, in turn, amounted to a public policy violation. In another notable case, it was held that an arbitral award may also be refused enforcement on the grounds of public policy if the same involves the seizure of any property or funds which belonged to any entity of government participation. In another case, the Russian Court considered a lack of proper investigation into the matter as a violation of public policy and did not mention any other reason. 

 

Upon examining the preceding cases, it can be concluded that there is no definite legislation that can guide the courts regarding how the public policy clause shall be applied. The inconsistencies in the judicial decisions not only deter the international commercial arbitration regime significantly but also question the enforceability and binding nature of the arbitral awards. 

 

3. THE NEED FOR DEFINING THE AMBIT OF PUBLIC POLICY 

 

The British Court of Appeal has held that an award shall not be enforced if the same is violative of the mandatory rules in England and illegal under English law.  However, as seen in India and China, it has been held repeatedly that violation of mandatory provisions does not necessarily constitute a violation of public policy. 

 

In the case of République arabe d'Egypte v. Société Chromalloy Aero Services, the French Court vehemently upheld that the judge had no legal authority to review the award based on its merits. However, a contrary view has been observed in New Zealand, where the Court of New Zealand held that any award having a serious or fundamental error of law or fact could be contrary to public policy and even result in a serious miscarriage of justice when such a fact is not substantiated by logical probative evidence. There have also been instances where Courts had set aside the award since the award was given based on completely erroneous facts. Just because the alleged violation is based on the error of fact made by the tribunal, the Courts cannot afford to turn their backs and close their eyes since the general rule does permit to render an award unenforceable on the basis of factual errors. Generally, the courts shall not be considering the award on merit or finding errors in fact except for in exceptional circumstances where the concerned party has shown upholding the award containing an error of fact can result in a breach of public policy.

 

There are also other circumstances amounting to public policy violation. Punitive damage, which is an award given to ensure punishment as well as the deterrence of the defendants apart from providing compensation to the claimant, is one of those circumstances. This may be awarded in particular cases of negligence where the negligence is of a flagrant nature. The New York Court of Appeal once discarded the punitive damage award rendered by the American Court as any award bearing the punishment of the wrongdoer that exceeded the compensatory damages is a violation of the American Public Policy. The Swiss Supreme Court has held that if compensation is demanded with an excessive rate of interest, the same amounts to a violation of public policy as it contravenes the principle of proportionality. In Islamic states like Saudi Arabia, the courts tend to set aside foreign arbitral awards as they often perceive foreign awards as tools to protect the economic interest of the Western corporation and hence, as a threat to their national sovereignty. Scholars argue that procedural violations like appointment of arbitrators, improper composition of arbitral tribunals also amount to the violation of procedural public policy. 

 

4. CONCLUSION 

 

As seen above in three jurisdictions (India, Russia, and China) and also considering cases from other jurisdictions as well, it can be easily inferred that what exactly constitutes the grounds of public policy violation varies across jurisdictions and there is no such uniform definition having some binding nature, that the state can rely upon to determine what can amount to a violation while refusing enforcement of a foreign arbitral award. This tends to give the states leeway to bring anything under the umbrella of ‘public policy exception’ and refuse to enforce a foreign arbitral award. States are often found in a situation of conflicting interest (also known as the ‘public policy paradox’) where it has the international obligation to enforce foreign arbitral awards but at the same time, is bound to invoke the exception of public policy if the enforcement of such foreign award is prejudicial to the public policy of the State. This paradoxical situation is worsened by the lack of a unanimous definition of public policy. 

 

This situation can be resolved to a certain extent by having an exhaustive list of what can amount to a public policy violation, as then the application of the public policy exception is only limited to specific grounds. One of the effective ways to define the contours of the ‘public policy exception’ is to justify the non-enforcement of foreign awards on the grounds of violation of public policy only when the same results in the violation of the absolute universal values and convictions of the host state. These absolute universal values, to which international public policy shall confine itself, are the fundamental international standards widely accepted by most nations. 

 

In the Larsen case, it was observed that the balance between the enforcement of arbitral awards and the enforcement of public policy is difficult to achieve but achieving such a balance is necessary. In the Energy Town Football case,  Lord Denning said, “Although public policy is an unruly horse, but with a good man on the saddle, such an unruly horse can be tamed as well.” Hence, the need of the hour is an exhaustive list stating what can amount to a public policy violation that has to be enacted in either the New York Convention,1958 or the UNCITRAL Model Law,1985, or any binding instrument or convention that is signed and ratified by majority member states. 

 

 

 

 

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