Enforcement of Foreign Arbitral Awards in the Context of FEMA Violations | India

The process for enforcing foreign arbitral awards and the potential grounds for challenging such enforcement are contained in Section 48 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”). In the case of Cruz City 1 Mauritius Holdings v. Unitech Limited (2017) 239 DLT 649, there was a challenge to the enforcement of a foreign award passed by an arbitral tribunal constituted under the London Court of International Arbitration (LCIA) on the grounds of it being in contravention of FEMA circulars and thus in violation of public policy under Section 48 of the Arbitration Act.

Cruz City (a Mauritius-based investor) had entered into an agreement with Unitech (an Indian entity) and its Mauritius-based wholly owned subsidiary, Burley, under which Cruz City had agreed to invest in certain real estate projects in India. Under the 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 disputes leading to arbitration proceedings between the parties. Cruz City obtained an arbitral award in its favour worth approximately USD350 million (towards the purchase price of shares plus interest, legal costs and the tribunal fee) against Unitech and Burley.

Cruz City sought to enforce the arbitral award before the Delhi High Court (the “Court”), which was challenged by Unitech on the grounds, inter alia, that the agreement structured to ensure a predetermined return on equity through the put option clause was in violation of the extant Reserve Bank of India (RBI) Regulations.

The Court held that the public policy defence to resist enforcement of a foreign award is extremely narrow and that violations of FEMA would not warrant a challenge to the enforcement of foreign arbitral awards on public policy grounds. Consequently, the Court dismissed the challenge to the award based on the alleged violations of FEMA. The Court, however, clarified that the remittance of foreign exchange in favour of a foreign party pursuant to the enforcement of such an award would still be subject to receipt of the requisite permission, if any, from the RBI under FEMA.

The rationale in the Cruz City judgment of the Court was subsequently reiterated and affirmed in the case of Vijay Karia and others v. Prysmian Cavi E Sistemi SRL and others (2020) 11 SCC 1 by the Supreme Court. In this case, the appellant contended that the award, insofar as it directed the Indian parties to sell their shareholding to a non-resident party at a discounted price, was in violation of the Non-Debt Rules under FEMA and, therefore, unenforceable under the Arbitration Act.

The Supreme Court clarified that transactions that violate FEMA provisions cannot be declared void, as the RBI may grant post-facto authorisation. The Supreme Court affirmed that a mere violation of FEMA Regulations in a foreign arbitral award is insufficient grounds to resist its enforcement. It was clarified that when the directions provided under the award are executed, they would be subject to permissions from the RBI – ie, the RBI may step in to regulate the remittance of monies pursuant to allowing enforcement of a foreign award by Indian courts.

In the case of NTT Docomo v. Tata Sons Limited (2017) 241 DLT 65, under the relevant agreement, Tata Sons was obligated to find a buyer for the shares subscribed by NTT Docomo at a fair value on a specified date, or at 50% of their investment, whichever was higher. Following Tata Sons’ failure to fulfil the abovementioned obligation, Docomo initiated arbitral proceedings, wherein the Tribunal awarded the amount claimed by Docomo in the nature of damages owing to breach of contractual obligations by Tata Sons.

The enforcement of this arbitral award was challenged by Tata Sons, and additionally by the RBI by way of intervention, claiming violation of FEMA provisions given that the shares were to be sold or purchased at a predetermined rate.

The Court, drawing a distinction between the put option and the payment for damages, held that the arbitral award contemplated payment of damages to Docomo rather than the enforcement of the put option itself, thereby precluding any violation of FEMA.

Further, the Court held that RBI lacked locus standi in matters concerning the enforcement of arbitral awards involving the remittance of money to a non-Indian business outside India. It was held that the Tribunal effectuated an alternative mechanism by awarding the sum to Docomo in the nature of damages and not the sale price of the shares, and hence, the question of having to seek special permission from RBI did not arise. It was further held that once the court finds no impediment to enforcing the award, RBI will be bound by the determination made in the award and cannot refuse permission at the time of remittance of the amount post-enforcement of the foreign award.

However, in the case of GPE (India) Ltd & Ors. v. Twarit Consultancy Services Private Limited & Anr (2023) 1 Arb LR 292, the Madras High Court took a different view from the one taken in the NTT Docomo case on the issue of prior approval of RBI with respect to the put option, although it allowed the enforcement of the foreign award subject to RBI’s approval.

The High Court held that a transaction involving receipt of damages arising from a breach of contract to buy shares between a resident and non-resident entity, where the market value of shares at the time of breach was zero, requires prior approval of the RBI. Thus, it was held that, subject to the requirement of obtaining RBI approval before initiating further proceedings for enforcement, the foreign award can be recognised and enforced.

GPE (India), dissatisfied with the Madras High Court’s judgment making enforcement conditional on RBI approval, filed an appeal before the Supreme Court in GPE (India) Ltd v. Twarit Consultancy Services Private Limited, SLP (C) No. 6856/2023. At the time of this article, the matter is pending before the Supreme Court, and the finding of the Supreme Court on the requirement of RBI approval before initiating further proceedings for enforcement of a foreign award is awaited.

Indian courts reflect a pro-arbitration approach in matters of enforcing contractual obligations, even if there may be an incidental contravention of FEMA provisions. The courts have held that FEMA contraventions would not constitute valid grounds for resisting enforcement of a foreign award, as parties are bound by and cannot derogate from contractual obligations under the pretext of such alleged violations.