Two recent judgments from the Delhi High Court affirm the court's pro-enforcement stance on foreign arbitral awards and offer welcome guidance on the exit rights of foreign investors in Indian companies, an important subject for many companies looking to invest in India. In the dispute between Tata Sons and Tata Teleservices ("Tata") and NTT Docomo Inc ("Docomo"), the court ruled that the Reserve Bank of India did not have standing to prevent enforcement of a foreign award between two private parties on grounds of Indian public policy. In a similar case (Cruz City 1 Mauritius Holdings v Unitech Limited), the court dismissed a challenge to enforcement by an award debtor arguing that a foreign award was contrary to Indian foreign exchange regulations.
Cruz City – background and judgment
In July 2012, Cruz City, an entity incorporated in Mauritius, obtained an LCIA arbitral award in its favour worth approximately USD 350 million (including interest) against Unitech, an Indian entity, and its wholly owned subsidiary, Burley Holdings Ltd ("Burley"), incorporated in Mauritius (the "Award").
The arbitration concerned an agreement Cruz City had entered into with Unitech and Burley in June 2008 which contained provisions relating to a separate Shareholders' Agreement under which Cruz City had agreed to invest approximately USD 170 million into the development and management of certain real estate projects in India. Under the terms of the Shareholders' Agreement, Cruz City was entitled to exercise a put option requiring Burley and Arsanovia Ltd. (an entity indirectly owned by Unitech) to purchase Cruz City's equity interest "at a price yielding a post-tax IRR of 15% of Cruz City's capital contribution".
In 2010, as a result of delays in the project, Cruz City elected to exercise the put option, giving rise to the dispute. There followed a series of arbitration proceedings, culminating in Cruz City obtaining the Award in its favour. Since the Award was issued in 2012, the award debtors have made repeated attempts to resist enforcement, including applications to have the Award set aside in the English Courts. In response, Cruz City obtained from the English Courts a series of noteworthy orders, including a worldwide disclosure order (reported on previously here), a worldwide freezing order and an order appointing receivers on award debtors' non-UK assets, the first of its kind (here).
When Cruz City sought to enforce the arbitral award against Unitech's assets in the Delhi High Court, Unitech challenged enforcement on the grounds set out pursuant to section 48 of the Arbitration & Conciliation Act, 1996 ("ACA 1996"), which broadly reflect the conditions for refusing enforcement under Article V of the New York Convention.
In addition to dismissing Unitech's other objections to enforcement, the Delhi High Court also considered Unitech's argument that permitting enforcement of the Award would contravene provisions of the Foreign Exchange Management Act, 1999 ("FEMA 1999"), and would therefore be contrary to public policy, a ground for refusing enforcement under section 48(2)(b) of the ACA 1996 (which reflects Article V(2)(b) of the New York Convention).
The principal basis for Unitech's contention that the award represented a breach of India's public policy was that provisions of the FEMA 1999 prohibit Foreign Direct Investment if made on an assured return basis. Accordingly, Unitech argued that agreements structured to ensure a predetermined return on equity, such as the Shareholders' Agreement's put option, were unlawful and, as a consequence, enforcing an award in respect of such an aware would be contrary to public policy.
The Delhi High Court rejected this contention, holding that, under the ACA 1996, the Court has discretion to either accept or dismiss a challenge to enforcement, regardless of whether one or more of the grounds for refusing enforcement under section 48 of the ACA 1996 has been met. The Court held that "The width of the discretion is narrow and limited, but if sufficient grounds are established, the court is not precluded from rejecting the request for declining enforcement of a foreign award".
Further, when considering the question "whether violation of any regulation or any provision of FEMA would ipso jure offend the public policy of India", the Court decided that "the width of the public policy defense to resist enforcement of a foreign award, is extremely narrow" and that "a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award". In other words, an application to resist enforcement in India on the basis of public policy grounds will only succeed if the objections are "such that offend the core values of a member State's national policy and which it cannot be expected to compromise", and that mere inconsistency with a regulation did not necessarily meet this test.
Notwithstanding the above, the Court decided that, although a contravention of FEMA 1999 would not in and of itself constitute a breach of public policy so as to preclude enforcement, any payment made to Cruz City by Unitech would still be required to comply with the regulatory requirements set out in FEMA 1999 by, for example, ensuring that "no funds are remitted outside the country in enforcement of a foreign award, without the necessary permissions from the Reserve Bank of India".
Tata/Docomo – background and judgment
Tata and Docomo entered into a shareholders agreement in 2009 whereby Docomo acquired 26% of the shares in a joint venture. Under the agreement, if the joint venture did not meet certain performance targets, Docomo would be entitled to exit the joint venture by issuing a 'sale notice' to Tata. Tata would then be obliged the purchase Docomo's shares at the higher of the fair value of the shares on exit, or 50% of the subscription price.
Docomo issued the sale notice to Tata in 2014 but Tata argued (amongst other things) that it was prevented from purchasing the shares at a price above the fair market value because of regulations issued by the Reserve Bank of India ("RBI") under India's Foreign Exchange Management Act. Docomo obtained an award in its favour, and the parties subsequently reached a settlement under which Tata agreed to withdraw its objections to enforcement. However, the RBI intervened, arguing that the award and the settlement were contrary to RBI regulations and the award should not be enforced as it was contrary to public policy of India.
The Delhi High Court found that the RBI did not have standing to challenge an award between two private parties, and that the tribunal had correctly found that Tata's obligations could be performed without breaching the relevant RBI regulation. The judge dismissed RBI's application to intervene and upheld the parties' settlement agreement.
As we noted here, the Indian Arbitration Act has recently been amended to narrow the scope of the public policy defence to the enforcement of domestic and international awards. Against that backdrop, the Delhi High Court's judgments are a welcome pro-enforcement signal which also may have wider implications for foreign investors in India. Further, the Tata/Docomo result in particular indicates that the court will be slow to allow Indian regulators to intervene in challenges to awards, particularly where the parties do not raise objections to enforcement. The court in that case recognised that its ruling would have implications on foreign investment into India and the long-term relationship between India and the investor's home state (here, Japan) and took these into account.
At this stage, it is not clear whether either or both judgments will be appealed to the Supreme Court and it remains to be seen whether the Delhi High Court's judgments will remain the final word.
For further information, please contact Donny Surtani, Partner, Kritika Venugopal, Senior Associate, Nathan Hooper, Senior Associate, Nihal Joseph, Associate or your usual Herbert Smith Freehills contact.