THE AUTHOR: Sagar Gupta, Associate Boies Schiller Flexner
Recently the Delhi High Court (the “Court”) set aside an International Chamber of Commerce (ICC) award in a commercial arbitration against Antrix (the “Award”) on the basis that it is patently illegal and conflicts with India’s public policy. The impact of this setting aside decision remains to be seen, especially in the context of the ongoing related investment treaty claim.
The Devas-Antrix saga arose out of the purported wrongful termination of a 2005 contract for the lease of a frequency of electromagnetic spectrum (S-band) on two satellites (the “Contract”) between two Indian companies – Devas Multimedia Private Limited (“Devas”) and the Indian State-owned entity, Antrix Corporation Limited (“Antrix”). Devas intended to use the S-band spectrum to offer mobile multimedia and broadband data services to the Indian market. Following the 2011 Indian Cabinet Committee on Security’s (“CCS”) decision to reserve the relevant orbital slots in S-band for defence and other strategic purposes, Antrix terminated the Contract stating, among other things, that it was unable to obtain the necessary frequency and orbital slot coordination (the “Article 7(c) ground”) and that CCS decision was a force majeure event rendering the performance of the Contract impossible (the “Article 11 ground”).
Pursuant to the terms of the Contract, Devas commenced an ICC arbitration seated in New Delhi claiming damages for wrongful termination. The ICC tribunal rendered the Award on 14 September 2015, ordering Antrix to pay USD 562.5 million in damages plus interest. On 29 August 2022, the Court set aside the Award on the basis that it was patently illegal and in contravention of Indian public policy.
Parallel Investment Treaty Claims
Interestingly, this factual matrix gave rise to two reported investment treaty arbitrations against India by Devas’ shareholders for expropriation of investments and breach of treaty standards. These investment treaty arbitrations resulted in favourable damages awards for the shareholders.
In the backdrop of enforcement proceedings across multiple jurisdictions in relation to the Award and the investment treaty arbitration awards, it is noteworthy that, in January 2022, the Indian Supreme Court upheld Devas’ compulsory winding up on the grounds of fraud (the “Liquidation Judgment”).
A further investment treaty case is pending under the India-Mauritius bilateral investment treaty in which Devas’ shareholders allege that the “retaliatory investigations”, seizure of funds, and raids by Indian authorities on Devas is an “audacious scheme” to avoid payment of the awards.
Relevant Legislative Framework
India adopted its arbitration legislation largely based on the 1985 UNCITRAL Model Law on International Commercial Arbitration in 1996. The Indian Arbitration and Conciliation Act 1996 (the “Act”) has been amended thrice in the past seven years to reflect emerging international practice, including in relation to setting aside arbitral awards.
The Act provides in section 34(2)(b)(ii) that an arbitral award may be set aside by the court if it is “in conflict with the public policy of India”. Explanation 1 to section 34 of the Act clarifies that an arbitral award would conflict with the public policy of India only if:
- the making of the award was induced or affected by fraud or corruption;
- it contravenes the fundamental policy of Indian law; or
- it conflicts with the most basic notions of morality or justice.
Explanation 2 clarifies that in determining any contravention of the fundamental policy of Indian law, the arbitral award will not be reviewed on merits.
Additionally, in the case of a domestic arbitration only, an arbitral award may be set aside if it is found to be “vitiated by patent illegality appearing on the face of the award” under section 34(2A). An arbitral award cannot be set aside on the ground of patent illegality merely because of an erroneous application of the law or by reappreciation of evidence.
Public Policy and Patent Illegality
In line with international practice, Indian courts have repeatedly acknowledged the limited scope of judicial interference with arbitral awards. A few recent cases are instructive on the scope and application of the public policy and patent illegality grounds.
In interpreting the “public policy” ground in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India, the Indian Supreme Court reiterated its dictum in Renusagar Power Co. Ltd. v. General Electric Co. (the “Renusagar case”), where the violation of a statute regulating foreign exchange was held to be in contravention of the fundamental policy of Indian law. Subsequent case law clarifies that the contravention of a statute would fall under the scope of “fundamental policy of Indian law” only if that statute is linked to public policy or public interest.
Curiously, the phrase “patent illegality” is mentioned neither in the UNCITRAL Model Law nor in the Act. In 2003, the Indian Supreme Court read patent illegality as part of the public policy ground to set aside the arbitral award in Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd. (the “ONGC case”). In the ONGC case, the Indian Supreme Court held that an arbitral award is patently illegal if it is “contrary to the substantive provisions of law or the substantive provisions of the Act or against the terms of the contract”. Following the 246th Report of the Indian Law Commission suggesting amendments to the Act, the “patent illegality” ground was included in section 34(2A) in the first round of amendments to the Act in 2015. In recent decisions such as Delhi Airport Metro Express (P) Ltd. v. DMRC and Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd., the Indian Supreme Court confirmed that patent illegality should go to the root of the matter and every error of law by an arbitral tribunal would not fall within that ground.
The Court’s Setting Aside Decision
As Devas has been liquidated, it was represented in the setting aside proceedings by a court-appointed liquidator. Devas’ Mauritius-incorporated shareholder, Devas Employees Mauritius Private Limited, was allowed to intervene in the setting aside application. As the arbitration was between two Indian parties, it was considered to be a domestic arbitration to which Part I of the Act applied.
Applicability of the International Bar Association (IBA) Rules and Pre-contractual Negotiations
In the Award, the tribunal had relied on international practice, including the IBA Rules, to exclude pre-contractual negotiations to interpret the Contract. At the outset, the Court held that the tribunal committed a patent illegality in not appreciating that the IBA Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”) are applicable only in case of international arbitration with the consent of the parties. According to the Court, the IBA Rules cannot be applied in domestic arbitrations. In any case, the Court concluded that the tribunal allegedly misapplied the IBA Rules and excluded pre-contractual negotiations in interpreting the Contract.
The Court examined the relevant pre-contractual negotiations and held that if these were considered by the tribunal in interpreting the limitation of liability clause of the Contract, it would be clear that “the only consequence of termination would be the refund” of certain fees and not damages as awarded by the ICC tribunal.
Contradictions in Tribunal’s Reasoning
The Court held that the tribunal committed a patent illegality as the finding of liability for material breach was contrary to other findings in the Award. In determining Antrix’s liability under the Article 7(c) ground, the tribunal purportedly acknowledged that the CCS decision was “a decision of a governmental authority in exercise of a sovereign function”. On the other hand, the tribunal held the CCS decision was not a force majeure event under the Contract as it was a result of Antrix’s own actions. On this basis, the Court held the reasoning of the tribunal to be self-contradictory and the Award to be patently illegal.
The Court finally relied on the Indian Supreme Court’s findings in the Liquidation Judgment to hold that the Award contravenes the fundamental policy of Indian law as Devas was incorporated with a “fraudulent motive”. According to the Court, the Award was antithetical to the fundamental policy of Indian law as it was contrary to “national economic interest”, having violated the Indian statutes governing foreign investments and anti-money laundering. Even though the evidence of fraud was introduced subsequently, the Court ruled that subsequent evidence of fraud was admissible.
The Way Forward
The Court’s setting aside decision is the latest development in the decade-long Devas-Antrix saga. It is likely that this decision will be used by the claimants in the ongoing investment treaty case alleging governmental retaliation. In fact, it was reported that the claimants’ counsel referred to the setting aside decision as “a mockery of the international arbitration system and a warning to investors that the Indian judiciary is being weaponized against those who assert their legal rights”.
Devas and its shareholders have sought to enforce their arbitral awards in multiple jurisdictions with some success. Whereas enforcement courts are generally reluctant to enforce arbitral awards which have been set aside in the seat courts, whether enforcement courts defer to this setting aside decision remains to be seen.
Following the Renusagar case, Indian courts have continued to grapple with the public policy ground (characterised as an “unruly horse”) to set aside arbitral awards. This setting aside decision will serve as a reminder for arbitrating parties to consider the scope of review of arbitral awards by national courts of the seat of arbitration.
In 2021, the Indian Supreme Court allowed Indian parties to choose a foreign arbitral seat in PASL Wind Solutions Private Ltd. v. G.E. Power Conversion India Private Ltd. It is not inconceivable that Indian companies (especially in those with significant foreign investment) might push for a foreign seat in their arbitration agreements to ensure that the “patent illegality” ground is not available in setting aside proceedings and the narrower grounds under section 48 of the Act apply to any enforcement proceedings before Indian courts.
ABOUT THE AUTHOR:
The opinions expressed in this article are those of the author alone and do not reflect the opinions or views of Boies Schiller Flexner.