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An Enforcement Petition, for enforcing  a Foreign Arbitral Award dated 19.06.2020 passed in ICC Arbitration between EIG (Mauritius) (Petitioner) and McNally Bharat Engineering Company Limited (Respondent), was filed before the Single Bench of Calcutta High Court under section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (1996 Act). The Enforcement Petition was opposed by the Respondent on the grounds that enforcement would be contrary to the fundamental policy of Indian law.

The dispute arose out of a Shareholders Agreement and an Agreement (executed on 09.10.2009) that gave the Petitioner right to acquire shares in the wholly owned subsidiary (WOS) of the Respondent – McNally Sayaji Engineering Limited (MSEL) and also gave Put Right to Petitioner along with providing for a series of exit mechanisms. The Shareholder Agreement also provided for specific obligations on the Respondent and MSEL including requiring the Respondent and MSEL to list the shares of MSEL on the Bombay Stock Exchange or the National Stock Exchange or to make a public offer of MSEL’s shares on these exchanges by 30.06.2012 failing which the Petitioner could exercise its Put Right. Further, the Agreement required the Respondent, if legally able or otherwise, to arrange for a third party to purchase, at the option of Petitioner, a portion of the shares held by it at the “Put Price”. The “Put Price” was the total amount invested by Petitioner for the Put Shares plus an amount equal to 22% compounded annual rate of return on the invested amount. The valuation was to be done for the Put Shares and if the petitioner’s Put Right was not acted upon, the Petitioner had the right to require the respondent to transfer the Put Shares to another party. The parties in the agreements further represented that performance under the Shareholder’s Agreement would not be in conflict with any applicable law.

As the condition of listing the shares of MSEL was not fulfilled and the re-negotiation of the terms on exit option also failed, the Petitioner gave the Put Notice in 2017 to the Respondent. The Respondent, however, informed the Petitioner that it would not recognize the Put Notice as it was contrary to Indian law. The same contention was also taken by the Respondent before the Arbitral Tribunal.

The majority in the Arbitral Tribunal comprising of three arbitrators decided in favour of the Petitioner and directed the Respondent to make payment of amount equivalent to the Put Price and on payment of the said amount transfer of shares held by the Petitioner in favour of the Respondent. The Tribunal reasoned that the Put Option required the Respondent to arrange a non-resident third party to purchase the shares if it was legally unable to do so itself by reason of which Foreign Exchange Management Act, 1999 (FEMA) did not apply to the said transaction. Interestingly, as per the minority, the Put Option ran contrary to the FEMA and also the Securities Contracts (Regulation) Act, 1956  (SCRA) and was therefore not enforceable.

The Calcutta High Court therefore framed two issues for its determination –

(i)                  What is the extent of inquiry permitted under Section 48(2)(b) of The Arbitration and Conciliation Act, 1996:

(ii)                Whether the Award violates SCRA and FEMA?

The Court deliberated on provisions under Sections 46 and 47 of the 1996 Act which mandate that a Foreign Award shall be treated as binding for all purposes and further under section 48 of the 1996 Act in which the language clearly indicates that the grounds to refuse enforcement of arbitral award are limited only to those stated in 48(1). The only additional ground is provided under Section 48(2)(b) where the enforcement of the award may be refused when such enforcement would be contrary to the ‘public policy of India’, the term having been explained in narrow terms in the Explanation under Section 48(2)(b). The Court further compared the grounds provided under section 34 with that of section 48 of the 1996 Act and stated that the fact that ‘patent illegality’ as a ground of challenge is absent in Section 48, it goes on to show that “the momentum towards enforcement and a deemed decree of a court is contemplated without speed-breakers unless a party furnishes proof of existence of the conditions under 48(1) or the court finds the enforcement failing the tests under 48(2)”.

The Court analysed the principle laid down by the Supreme Court in Renusagar Power Co. Ltd. vs. General Electric Co. 1994 Supp (1) SCC 644 which was reiterated in Cruz City 1 Mauritius Holdings vs. Unitech Limited; 2017 SCC Online Del 7810 by the Delhi High Court in which it was held that any contravention of a provision of an enactment is not synonymous with contravention of the fundamental policy of Indian law. The judgment in Cruz City 1 was approved by the Supreme Court in Vijay Karia vs. PrysmianCavi E Sistemi SRL; (2020) 11 SCC 1. The Calcutta High Court therefore concluded that, “the threshold for breach of the fundamental policy of Indian law must be a breach of the most basic principles of Indian law which forms the substratum of the laws of the country.” The Court further held that Section 48 does not permit review on merits of the dispute and stated that “The mandate of Section 48(2)(b) makes it clear that the statutory intent is to curtail the inquiry on the violation of the fundamental policy of Indian law within the periphery of the obvious without delving into the merits of the dispute.”

To determine the second issue, the Court analysed the findings of the Arbitral Tribunal and observed that the conclusions of the Arbitral Tribunal on issues regarding SCRA and FEMA was based on a reasonable and commercial interpretation of the Shareholder’s Agreement upon considering the commercial intentions of the parties and deliberating on the relevant case law on the subject. The Court was of the opinion that, “For an Arbitral Award as complete and comprehensive as the one under consideration, any further inquiry into the transaction documents or the construction of the relevant clauses therein or the events culminating in the dispute or even the provisions of the SCRA or the FEMA would amount to an exercise which has precisely been taken out of the present statutory framework.”

The court decided not to interfere with the interpretation of the Arbitral Tribunal on the ground of public policy while deciding on the enforcement of the Award. The Court, while relying on the decision of Supreme Court in VinayKaria and Bombay High Court in Cruz City which was further relied upon by the Bombay High Court in Banyan Tree Growth Capital LLC vs. Axiom Cordages Limited.; (2020) SCC Online Bom 781, further held that in any case, FEMA does not constitute the fundamental policy of Indian law and “a violation of FEMA, even if assumed to be correct, would not render the Award unenforceable.” The Court also went on to hold an alternative that since the Award, instead of enforcing the Put Option, simply awards damages to the petitioner for the breach of the obligation by the respondent and its WOS to procure a third party non-resident purchaser of shares, the award can be simply seen as ‘a money Award simpliciter without having any bearing on the public policy of India in the context of either SCRA or FEMA.’ Since Respondent requested to be  permitted to oppose the reliefs sought in the execution of the Award in a separate hearing, the Court framed another question for its consideration as to whether there should be simultaneous enforcement and execution of a Foreign Award and answered it in affirmative while relying on section 49 and decisions of the Supreme Court in Fuerst Day Lawson Ltd. vs. Jindal Exports Ltd. (2001) 6 SCC 356 and LMJ International Limited. vs. Sleepwell Industries Company Limited (2019) 5 SCC 302, wherein it was held that the enforcing court is expected to simultaneously consider the aspect of enforceability and execution at the threshold.

For the reasons stated, the Court allowed the enforcement and execution of the Arbitral Award.