4/26/2019 Phulchand Exports Ltd

v OOO Patriot
Civil Appeal 3343/2005 - 12 October 2011

Ancy Varghese
926, X SEMESTER, NUALS
INTRODUCTION
In the past, Indian courts have been widely criticised for failing to enforce or recognise arbitral
awards. The recent introduction of "patent illegality" as a basis for the non-enforcement of
foreign arbitral awards, gives rise to a concern that this could lead to expanded judicial review
of foreign arbitral awards in India.

In the case of Phulchand Exports Ltd v OOO Patriot1 Supreme Court of India recently
examined "public policy" and the scope and meaning of that phrase in section 48(2) of the
Arbitration and Conciliation Act 1996 in relation to setting aside a foreign arbitral award. The
court decided that a foreign award can be set aside if it is found to be patently illegal.

FACTS OF THE CASE

The case involved a dispute between the appellant, an Indian company, and a Russian company.
Under a contract made privately between them, the appellant had agreed to supply the
respondent with a certain quantity of polished rice on a cost, insurance and cargo basis. The
respondent paid the appellant for the rice but never received it.

As a result, the respondent lodged a claim against the appellant before a Russian arbitral
tribunal and asked for recovery of the amount set out by the contract. The appellant raised a
defence, but ultimately the tribunal was not convinced by its arguments.

The respondent then filed an arbitration petition before the Bombay High Court. It asked for
enforcement of the award under the Act.

Under section48(2) of the Act2, "[e]nforcement of an arbitral award may be refused if the Court
finds that – (a) the subject-matter of the difference is not capable of settlement by arbitration
under the law of India; or (b) the enforcement of the award would be contrary to the public
policy of India".

The appellant challenged the petition, claiming enforcement of the award was against public
policy and therefore that the award should be set aside. The Bombay High Court rejected this
and resolved that the award could be enforced as a decree of the Court.

The appellant then appealed to the division bench of the Bombay High Court but again the
appeal was dismissed.

1
Civil Appeal 3343/2005 - 12 October 2011
2
Arbitration and Conciliation Act 1996
The appellant then appealed to the Indian Supreme Court. It argued that the meaning of "public
policy" credited by the Supreme Court in the Oil and Natural Gas Corporation Ltd v Saw Pipes
Ltd3, in the context of setting aside a domestic award, should also be applied to the definition
of the same expression.

DECISION

The Supreme Court accepted the wider meaning of "public policy" that was set out in the Saw
Pipes Case over the constricted range of meaning set out in Renusagar Power Co Ltd v General
Electric Co4. The Supreme Court decided that a foreign award can be set aside under section
48(2) of the Act if it is considered to be patently illegal. Specifically, Justice R M Lodha
approved the following statement of the Supreme Court in the Saw Pipes Case:

"In our view, the phrase "public policy of India"...is required to be given a wider meaning. It
can be stated that the concept of public policy connotes some matter which concerns public
good and the public interest. What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied from time to time. However,
the award which is, on the face of it, patently in violation of statutory provisions cannot be said
to be in public interest. Such award/judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view in addition to narrower meaning given to the term
"public policy" in Renusagar case it is required to be held that the award could be set aside if
it is patently illegal. The result would be – award could be set aside if it is contrary to:

(a) Fundamental policy of Indian law; or

(b) The interest of India; or

(c) Justice or morality, or

(d) In addition, if it is patently illegal.

Illegality 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. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the court. Such award is opposed to public policy
and is required to be adjudged void."

3
(2003) 5 SCC 705
4
AIR 1994 SC 860
The court then examined the arbitral award in this case on the basis of patent illegality, but did
not find it to be patently illegal. Accordingly, the court dismissed the appellant's appeal.

ANALYSIS

Although in this case the award in question was not found to be patently illegal, the decision is
still concerning.

The Supreme Court defined the scope of the term "public policy" such that an award could be
set aside if it is against the public policy of India, that is to say, if it is contrary to the
fundamental policy of Indian law, the interest of India, justice or mortality or if it is patently
illegal. The move towards widening the possibilities for rejecting claims for enforcement of
foreign arbitral awards means that there is less certainty for those who contract with India
companies.

CONCLUSION

In Phulchand Exports Limited v. O.O.O. Patriot (“Phulchand”), the Supreme Court expanded
the meaning of the expression ‘public policy’ under section 48 of the Act, and held that the
scope and purport of the expression under section 34 and 48 are the same. Thus, even in a
scenario where the award attains finality, upon an action for enforcement of the foreign award
being instituted, the parties by virtue of the decision in Phulchand could apply the extremely
broad standard of ‘public policy’ in ONGC and almost re-open the entire matter.