Enforcement of a foreign
arbitral award cannot be made in India if it opposes the provisions of FEMA
On 11 April 2017, the
Hon’ble High Court of Delhi (High Court), pronounced its judgment in a case
where the enforcement of a foreign arbitral award was opposed inter alia on the
ground that the enforcement of the said award would be contrary to the public
policy of India as it violated the provisions of the Foreign Exchange
Management Act, 1999 (FEMA).
Factual
Background
In 2008, Mauritius-based Cruz City 1 Mauritius
Holdings (Cruz City) entered into a Shareholders’ Agreement (SHA) dated 6 June
2008 with Cyprus-based Arsanovia Ltd. and Mauritius-based Kerrush Investments
Ltd. (Kerrush) under which Cruz City and Arsanovia Ltd. agreed to invest in
Kerrush, which in turn, agreed to invest in a real estate project captioned as
‘Santacruz Project’ in India. On the same date, Cruz City also entered into a
Keepwell Agreement with India-based Unitech Limited (Unitech) and
Mauritius-based Burley Holdings Ltd.
(Burley), a wholly
owned subsidiary of Unitech. Unitech and Burley, although not parties to the
SHA, signed the SHA for confirmation of certain obligations accepted by them.
Under Clause 3.9.2 of the SHA, Cruz City was entitled to exercise a ‘put
option’ to call upon Arsanovia and Burley, to purchase all equity shares of
Kerrush held by it, at the purchase price that yield a post tax IRR of 15% on
the capital contribution made by Cruz City (Put Option).
Owing to delays in
commencement of the construction of the Santa Cruz Project beyond a specified
period, Cruz City exercised the put option under the SHA. However, the put
option was not honoured and accordingly, Cruz City moved the London Court of
International Tribunal (LCIA) under the SHA as well as Keepwell Agreement.
The LCIA Tribunal
passed an award in favour of Cruz City and inter alia directed Unitech and
Burley to pay Cruz City the purchase price for the shares held by Cruz City in
Kerrush against delivery of all such shares (Award). In view thereof, a
petition for the enforcement of the said Award was filed by Cruz City before
the High Court. Main Submissions on Behalf of Unitech The enforcement of the
Award was opposed by Unitech inter alia on the following grounds: FEMA, being an enactment of exchange control
laws in replacement of the Foreign Exchange Regulation Act, 1973 (FERA), would
form a part of the public policy of India.
Therefore, the
enforcement of the Award would be contrary to the public policy of India in
terms of Section 48(2)(b) of the Arbitration and Conciliation Act, 1996
(Arbitration Act) as it contravened the provisions of FEMA for the following
reasons: The obligation under the Keepwell Agreement was in the nature of a
guarantee issued by Unitech on behalf of Burley, which was not permissible
under the Foreign Exchange Management (Guarantees) Regulations, 2000.
The SHA was structured
to ensure a pre-determined return on equity which was prohibited under FEMA as
it amounted to Foreign Direct Investment (FDI) on an assured return basis.
Reliance was placed on RBI circulars dated 9 January 2014 and 14 July 2014 to
contend that a foreign investor could exit the investment made in India only at
a valuation as on the date of exit. Further, as per the Foreign Exchange
Management (Permissible Capital Account Transactions) Regulations, 2000, the
shares of Kerrush could only be purchased at the fair market value of such
shares. The Award effectively directed Unitech to invest in the shares of
Kerrush, which could not be made without valuation of the shares by a
Category-I Merchant Banker/Investment Banker.
Thus, the Award was in violation of the
Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004. The Award in as much
as it directs Unitech to make payment against the delivery of shares of
Kerrush, in effect, directs Unitech to make an investment in Kerrush, which was
not permissible without the approval of the Reserve Bank of India (RBI). Cruz City had not claimed any relief that
Unitech purchase its shareholding in Kerrush. Consequently, no notice was
issued to Unitech either from Cruz City or the Arbitral Tribunal in respect of
any claim against Unitech.
Therefore, the Award
was beyond the relief claimed by Cruz City and without notice to Unitech and
hence, its recognition and enforcement ought to be declined in terms of
Sections 48(1)(b) and 48(1)(c) of the Arbitration Act. Main Submissions on
Behalf of Cruz City The Award did not
require Unitech to purchase the shares of Kerrush but only to pay the purchase
price in accordance with Unitech’s obligations under the Keepwell Agreement. Violation of FEMA would not amount to a
violation of public policy under Section 48(2)(b) of the Arbitration Act.
In any case, there was no violation of FEMA in
entering into the Keepwell Agreement. Further, the question whether any permissions
from the RBI were required for remitting of the money recovered from Unitech in
the enforcement of the Award, would be a question to be addressed after the
amount awarded had been recovered.
Unitech was precluded from raising any plea to
the effect that the Keepwell Agreement was illegal or that the approval of the
RBI had not been obtained since, under the Keepwell Agreement, Unitech had
expressly represented that the transactions were in compliance with all
applicable laws. Unitech was also
precluded from raising the objection that it was not given an opportunity to
present its case on the principles of res judicata since it was open for
Unitech to raise these issues before the Court in the United Kingdom (UK),
wherein it had challenged the Award or before the Arbitral Tribunal.
Decision
of the High Court, New Delhi
The High Court
rejected the objections raised by Unitech against the enforcement of the Award
and decided the issues as follows: On whether Unitech was required to purchase
the shares of Kerrush The premise that
the Award requires Unitech to purchase the shares of Kerrush is fundamentally
flawed. The Arbitral Tribunal having found that Unitech had breached its
obligations, directed it to pay the purchase price. The Award only seeks to
enforce Unitech’s obligations undertaken under the Keepwell Agreement. There is
no stipulation in the Award that the shares must be delivered only to Unitech.
Although, the Award requires Burley and Unitech to pay the purchase price, it
does not require that the delivery of shares of Kerrush be made to Unitech and
not Burley.
The payment of purchase price for the shares
of Kerrush by Unitech would be on behalf of Burley which is in conformity with
the obligations that were undertaken by Unitech in the Keepwell Agreement. On
violation of FEMA ipso jure being in conflict with Public Policy The objections to enforcement on the ground of
public policy must be such that offend the “core values of a member State's
national policy and which it cannot be expected to compromise”. A simpliciter violation of any particular
provision of FEMA cannot be considered synonymous to offending the fundamental
policy of Indian law.
The expression
“fundamental policy” must mean only the fundamental and substratal legislative
policy and not a provision of any enactment. There has been a material change in the
fundamental policy of exchange control as enacted under FERA and as now
contemplated under FEMA. The objective of FERA was to ensure that the nation
does not lose foreign exchange essential for economic survival of the nation
whereas under FEMA, the focus had shifting from prohibiting transactions to a
more permissible environment.
The enforcement of a foreign award will
invariably involve considerations relating to exchange control or remittance
outside the country for enforcement of foreign award or the initial agreement
pursuant to which award required permission of RBI. However, these concerns can
be addressed by ensuring that no funds are remitted outside India from RBI,
which addresses the issue of public interest and foreign exchange. Thus, the High Court held that the question of
declining enforcement on the ground of a simpliciter violation of any provision
of FEMA cannot be considered synonymous to offending the fundamental policy of
Indian Law but, any remittance of money recovered from Unitech in enforcement
of Award would necessarily require compliance of regulatory provision and/or
permissions.
On whether the Award
violated the provisions of FEMA The
Award does not contravene the Foreign Exchange Management (Guarantees)
Regulations, 2000 since Regulation 5 specifically permits the giving of
guarantees in certain circumstances, including by a company in India for and on
behalf of a wholly owned subsidiary. In the instant case, Burley is a wholly
owned subsidiary incorporated by Unitech in Mauritius and, therefore, it was
entitled to give guarantees for Burley’s business to stand as surety for
obligations undertaken by Burley within the limits prescribed in the Foreign
Exchange Management (Transfer or Issue of any Foreign Security) Regulations,
2004.
Unitech cannot take
the argument that Burley has no business and therefore, Regulation 5 (b) of the
Foreign Exchange Management (Guarantees) Regulations, 2000 would not be
applicable since it is not bonafide, a complete afterthought and runs contrary
to the express representations made by Unitech in the Keepwell Agreement. On
whether the SHA provided an assured return.
The Put Option was not
an open ended assured exit option and could be exercised only within a
specified time and was contingent on the Santa Cruz project not being commenced
within the prescribed period. RBI only
restricts assured return instruments brought in India under the guise of
equity. However, in the present case, Cruz City is only seeking to enforce its
obligations against Burley.
Even if it is accepted
that the Keepwell Agreement was designed to induce Cruz City to make
investments by offering assured returns, Unitech cannot escape its liability as
Cruz City had invested in Kerrush on the assurances held out by Unitech. Hence,
even if Unitech may be liable to be proceeded against for violation of
provisions of FEMA, the enforcement of the Award cannot be declined. On whether
Unitech was precluded from raising the plea that it was unable to present its
case.
The principle of res
judicata is applicable only where the issue/controversy is finally considered
and decided by a ‘court of competent jurisdiction’ and the question whether the
award will be recognised/enforced in India cannot be adjudicated by any other
forum in any country except the courts of India.
The
Learning from the Case
This judgment rendered by the High Court may
have far reaching consequences for other pending disputes on similar issues.
The High Court came down heavily on Unitech and observed that it must ‘bear the
consequences of violating the provisions of law, but cannot be permitted to
escape their liability under the Award’. The message is that parties representing
that the transaction is in compliance with all applicable laws cannot be
permitted to derogate from their obligations under the contract in the garb of
an alleged violation of a provision of law at a later stage. Further, this
again reflects the approach of the courts in India to not interfere in the
arbitral proceedings and awards.
Courtesy : Sanjeev
Kapoor (Partner), Aakash Bajaj (Senior Associate) and Aayush Jain (Associate)
of khaitan & Co
