Phulchand Exports v. OOO Patriot Overruled: Public Policy of India in Section 48(2)(b) Gets a Narrow Interpretation

In the recent decision of Shri Lal Mahal Ltd. v. Progetto Grano Spa, the Supreme Court of India has overruled Phulchand Exports v. OOO Patriot and has held that the Renusagar test (narrow interpretation) for public policy and not the Saw Pipes (broad interpretation) test would apply. The Renusagar test did not provide for "patent illegality" a sub-genus of violation of public policy while Saw Pipes did include patent illegality in the context of Section 34(2)(b)(ii). Phulchand Exports held that the Saw Pipes test would equally apply to the case of enforcement of foreign awards as well. This has been overruled in Shri Lal Mahal case. The relevant portions of the judgement are quoted below:

 

"25.       In our  view,  what  has  been  stated  by  this  Court  in Renusagar3 with reference to Section 7(1)(b)(ii) of the Foreign  Awards  Act must equally apply to the ambit and scope of Section 48(2)(b)  of  the  1996 Act. In Renusagar3 it has  been  expressly  exposited  that  the  expression “public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act  refers  to the public policy of India. The expression “public policy” used  in  Section 7(1)(b)(ii) was held to mean “public policy of India”. A distinction in  the rule of public policy between a matter governed by the domestic  law  and  a matter involving conflict of laws has been noticed in  Renusagar3.  For  all this there is no reason why Renusagar3  should  not  apply  as  regards  the scope of inquiry under Section 48(2)(b).  Following   Renusagar3,  we  think that for the purposes of Section 48(2)(b), the expression “public policy  of India” must be given narrow meaning and the  enforcement  of  foreign  award would be refused on the ground that it  is  contrary  to  public  policy  of India if it is  covered  by  one  of  the  three  categories  enumerated  in Renusagar3.   Although the same expression ‘public policy of India’ is  used both in Section 34(2(b)(ii)  and  Section  48(2)(b)  and  the  concept  of ‘public policy in India’ is same in nature in both the Sections but, in  our view, its application differs in degree insofar as these  two  Sections  are concerned. The application of ‘public policy  of  India’  doctrine  for  the purposes of Section 48(2)(b) is more limited than  the  application  of  the same expression in respect of the domestic arbitral award.
26.           We  are  not   persuaded   to   accept   the   submission   of     Mr. Rohinton F. Nariman that the expression “public policy of India”  in Section 48(2)(b) is an expression of wider import than the  “public  policy” in Section 7(1)(b)(ii) of the Foreign Awards Act. We have no  hesitation  in holding that Renusagar3 must apply for the purposes of Section  48(2)(b)  of the 1996 Act.  Insofar as the proceeding for setting aside an   award  under Section 34 is concerned, the  principles  laid  down  in  Saw  Pipes1  would govern the scope of such proceedings.
27.         We accordingly hold that enforcement  of  foreign   award  would be refused  under  Section  48(2)(b)  only  if  such  enforcement  would  be contrary to (i) fundamental policy of Indian law; or (2)  the  interests  of India;  or  (3)  justice  or  morality.  The  wider  meaning  given  to  the expression “public policy of India” occurring  in  Section  34(2)(b)(ii)  in Saw Pipes1 is not applicable where objection is raised  to  the  enforcement of the foreign award under Section 48(2)(b).

28.         It is true that  in Phulchand Exports2 , a  two-Judge  Bench  of this Court speaking through  one  of  us  (R.M.  Lodha,  J.)   accepted  the submission made on behalf of the appellant therein that  the  meaning  given to the expression “public policy of India”  in  Section  34  in  Saw  Pipes1 must be applied to the same expression occurring in Section 48(2)(b) of  the 1996 Act.  However,  in what we have discussed above it must  be  held  that the statement in paragraph 16 of the  Report  that  the  expression  “public policy of India used in Section 48(2)(b) has to be  given  a  wider  meaning and the award could be set aside, if it is patently illegal” does not lay down correct law and is overruled."

On the scope of the enquiry under Section 48(2)(b(ii), the court stated:

"Moreover,  Section  48  of  the  1996  Act  does  not  give  an opportunity to have a ‘second look’ at the foreign  award  in  the  award  - enforcement stage. The scope of inquiry under  Section 48  does  not  permit review of the foreign award on merits. Procedural defects (like taking  into consideration  inadmissible  evidence  or  ignoring/rejecting  the  evidence which may be of binding nature) in the course of foreign arbitration do  not lead necessarily to excuse an  award  from  enforcement  on  the  ground  of public policy."

The Shri Lal Mahal case can be accessed from here. Thanks to Ms. Roshni Rajiv for bringing this case to our attention.