Renusagar
Power Co. Ltd. Vs. General Electric Co [1993] INSC 410 (7 October 1993)
AGRAWAL, S.C. (J) AGRAWAL, S.C. (J) VENKATACHALLIAH, M.N.(CJ) ANAND, A.S. (J) CITATION:
1994 AIR 860 1994 SCC Supl. (1) 644 JT 1993 Supl. 211 1993 SCALE (4)44
ACT:
HEADNOTE:
The
Judgment of the Court was delivered by S.C. AGRAWAL, J.- The decision in these
appeals would, we hope, mark the culmination of the protracted litigation
arising out of a contract entered into by the parties on August 24, 1964 for
the supply and erection of a thermal power plant at Renukoot in District
Mirzapur, U.P.
2.
Renusagar Power Co. Ltd. (for short 'Renusagar'), the appellant in C.A. Nos. 71
and 71-A of 1990 and the respondent in C.A. No. 370 of 1992, is a company
incorporated under the Indian Companies Act, 1956 engaged in the production and
sale of electric power. General Electric Company (for short 'General
Electric'), respondent in C.A.
Nos.
71 and 71-A and appellant in C.A. No. 370 of 1992, is a company incorporated
under the laws of the State of New York in United States of America and is
engaged in the business of manufacturing, selling and servicing electrical
products and various ancillary activities. After negotiations, the parties
arrived at an arrangement whereunder General Electric was to supply to
Renusagar the equipment and power services for setting up a thermal power plant
to be known as 'Renusagar Power Station' at Renukoot and, on November 27, 1963,
Renusagar moved the Government of 654 India for its approval. By its letter dated
January 2, 1964, the Government of India gave its
approval to the proposals and thereafter a formal contract was executed by the
parties on August 24,
1964. Under the said
contract, General Electric undertook to supply equipment and services for a plant
having a capacity of 135,800 K.W. The total price for the electrical and
mechanical equipment, spare parts, freight forwarding services, plant design
and consulting services was US $ 13,195,000. The contract price for all
electrical and mechanical equipment and spare parts was FAS vessel, U.S.A. port so selected by seller (Article
11). All items of the equipment were to be delivered along with vessel at New
York not later than 15 months from the contract effective date (which was
December 31, 1964) and the erection of the plant was to be completed within 30
months from the contract effective date (Article IV-A 1). 10 per cent of the
total contract basic price (US $ 1,319,500) was to be paid either in cash or by
Letter of Credit. The balance 90 per cent of the price (US $ 11,875,500) plus
interest at the rate of 6 1/2 per cent per annum from the 16th to the 30th
month of the contract effective date (US $ 900,558.75) totalling US $
12,776,058.75 was to be paid in 16 equal six monthly instalments commencing from
the date of the expiry of 30 months from the contract effective date, and the
last instalment was payable on the date of expiry of 120 months from the
contract effective date (Article III).
Since
the contract effective date was December 31, 1964 the first instalment was payable on June 30, 1967 and the last, i.e., 16th instalment
was payable on December
31, 1974. In the
contract, it was also provided that Renusagar would execute unconditional
negotiable promissory notes in four series (A-B-C-D) in respect of the 16
instalments [Article 111-A 3(a)] and that the notes shall be prepared
substantially in the form shown in the attached Ext. 'B' entitled
"Promissory Note" and shall bear interest, at the rate of 6 1/2 per
cent per annum on the outstanding principal balance commencing from 30 months
after contract effective date [Article III-A 3(c)]. A provision was also made
that the payment of the full amount of each note shall be unconditionally
guaranteed by the United Commercial Bank or other mutually acceptable bank.
[Article III-A 3(e)].
The
contract contained an arbitration clause which provides that any disagreement
arising out of or related to the contract which the parties are unable to
resolve by sincere negotiation shall be finally settled in accordance with the
Arbitration Rules of the International Chamber of Commerce (for short 'ICC').
Each party would appoint one arbitrator and the Court of Arbitration of the ICC
would appoint a third arbitrator (Article XVII). It was also agreed that the
rights and obligations of the parties under the Contract shall be governed in
all respects by the laws of the State of New York, USA (Article XIX-A).
3. It
was, also, provided that if General Electric received an exemption from the
Government of India from the payment of income tax levied by the Government of
India on interest payments made by Renusagar then the interest rate on that
series of promissory notes as exempted shall be reduced from 6 1/2 per cent to
6 per cent per annum commencing on the date such exemption is made effective
and the notes so affected shall be replaced by new notes [Article III-A 3(b)].
In the contract it was stated that General Electric intended to apply to the
Central Government of India for exemption from income tax on the interest (including
capitalised interest and interest thereon) and Renusagar undertook to assist
General Electric in expediting the application of General 655 Electric for
exemption. It was also agreed that should the application of General Electric
be denied Renusagar may withhold the Indian income tax applicable to any
payments of interest, but Renusagar was to furnish General Electric with
receipts on all withheld amounts paid to the Government of India. [Article
XIV-B].
4. By
its orders dated September 3, 1965 and June 7, 1967 the Government of India
gave their approval under Section 10(15)(iv)(c) of the Income Tax Act, 1961 to
the loan obtained by Renusagar from General Electric and thereby exempted the
interest paid on the said loan from payment of income tax. The said exemption
was, however, withdrawn by the order of the Government of India dated September 11, 1969 whereby the orders granting
exemption were cancelled retrospectively and General Electric was held liable
to pay Indian income tax on the interest payable @ 6.5 per cent per annum.
5.
Renusagar filed a writ petition (C.W. No. 179 of 1970) before Delhi High Court
on February 24, 1970 wherein it challenged the above
order of the Government of India dated September 11, 1969 relating to cancellation or revocation
of the tax exemption. In the said writ petition, the Delhi High Court on February 24, 1970 passed an ad interim order
restraining the Government of India and its officers from enforcing or
implementing the said order dated September 11, 1969. The said order was continued by
order dated May 18,
1970 subject to
Renusagar furnishing security for Rs 4 lakhs to the satisfaction of
Commissioner of Income Tax, Lucknow.
Renusagar
furnished the necessary security and as a result, the operation of the order
dated September 11,
1969 was suspended.
Renusagar, however, did not remit the amount of interest calculated @ 6 per
cent per annum payable to General Electric in terms of the contract. Renusagar
only remitted 27 per cent of the amount of interest calculated @ 6 1/2 per cent
per annum and it did not deposit the balance amount of 73 per cent by way of
tax with the Government but retained the same with themselves. It, however,
sent letters to General Electric to the effect that they had deducted the said
amount towards tax and had retained the same with itself. Originally General
Electric was not impleaded as a party in the writ petition before the Delhi
High Court and it got itself impleaded as a respondent in the writ petition by
moving an application dated October 28, 1977.
The writ petition was decided by the Delhi High Court by its judgment dated November 17, 1980 whereby the writ petition was
allowed and the order dated September 11, 1969 was set aside. As a result the exemption from the payment of income tax
on the interest payable by Renusagar was restored and the liability of
Renusagar for interest was reduced from 6 1/2 per cent to 6 per cent. On June
3, 1981, Renusagar moved the Reserve Bank of India for permission to remit the
balance amount of regular interest calculated @ 6 per cent per annum to General
Electric and on February 3, 1982, the Income Tax Officer, Bombay issued
"No Objection Certificate" for repatriating the balance regular
interest amount of US $ 2.130 million. The said amount was, however, not
remitted by Renusagar to General Electric.
6. It
appears that there was some delay on the part of the General Electric in
adhering to the time schedule for the supply of equipment and keeping the same
in view General Electric by their letter dated January 5, 1967 agreed to defer
the payment of the first instalment payable on June 30, 1967 by six months and
suggested that the promissory notes shall be recast into 15 notes instead of 16
656 which would commence on the 36th month from the contract effective date and
capitalised interest shall be calculated for 20 months instead of 14 months and
the said interest would then be reduced by a sum of 132,500 US $. By another
letter dated October 4, 1967, General Electric agreed to recast the note structure
to provide for 14 notes with the first note becoming due on June 30, 1968
instead of December 31, 1967 and the capitalised interest was to be calculated
for 20 months instead of 14 months and it would be reduced to 132,500 US $. It
appears that during the course of supply of equipment and erection of the
plant, some disputes arose between the parties and Renusagar made certain
claims against General Electric some of which were accepted by General Electric
and a settlement was arrived at on December 10, 1968 whereunder General
Electric agreed that the payment of the instalments due on December 30, 1968
and June 30, 1969 with accrued interest would be deferred for payment with the
result that there would be no payment on December 31, 1968 and June 30, 1969 both
of interest and principal and that the interest accrued up to December 31, 1968
and to accrue up to June 30, 1969 on the outstanding balance due would be
calculated at the rate provided for in the contract and capitalised and that
the entire sum, namely, the principal and interest to be so capitalised would
be recast in 13 notes, the first of which would be payable on December 31, 1969
and the last on December 31, 1975. As a result of these discussions and
settlement, instalments Nos. 1, 2, 4 and 5 were not paid by Renusagar on the
due dates.
Renusagar
moved the Government of India for approval of the revised schedules regarding
the payments of the instalments to General Electric. The said request of
Renusagar was, however, not accepted by the Government of India and by their
letter dated August 1, 1969, the Government of India expressed their inability
to agree to the revised proposals for repayment in view of the larger outgo of
foreign exchange (by way of interest) which was not contemplated when the loan
was approved originally. Renusagar were, therefore, asked to take necessary
action to effect payments of the past instalments immediately. The request for
review of the said decision was rejected by the Government of India by their
letter dated August 4,
1969. The first
instalment which was payable on June 30, 1967 under the original contract was
paid by Renusagar in instalments by July 1970, the second instalment which was
payable on December 31, 1967 was paid in instalments by December 1971, the fourth
instalment which was payable on December 31, 1968 was paid in instalments by
December 1973 and the fifth instalment which was payable on June 30, 1969 was
paid in instalments by February 1976.
7. On March 1, 1982, General Electric served a notice
on Renusagar indicating its intention to arbitrate pursuant to clause XVII of
the Contract. On March
2, 1982, General
Electric made a request to the Court of Arbitration of ICC for arbitration of
the disputes between General Electric and Renusagar. ICC, after taking
cognizance of the said request for arbitration made by General Electric, called
upon Renusagar to nominate their arbitrator, file its reply and remit certain
sums towards administrative expenses and arbitration fees. Renusagar raised an
objection that the claims of General Electric did not fall within the purview
of arbitration clause in the Contract and challenged the arbitrability of the
claims. The Arbitration Court of ICC accepted that there was a prima facie
dispute within the agreement and appointed Rt. Hon. Peter Thomes, Q.C. MP as
Chairman of the Arbitral Tribunal and confirmed the 657 appointment of Prof.
Boris 1. Bittker as arbitrator nominated by General Electric and Dr R.K. Dixit
as arbitrator nominated by Renusagar.
8. On
June 11, 1982, Renusagar filed a suit (Suit No. 832 of 1982) in the Bombay High
Court, on its original side, against General Electric and the ICC seeking a
declaration that the claims referred to the arbitration of ICC by General
Electric were beyond the purview and scope of Article XVII of the Contract
dated August 24, 1964 and that General Electric was not entitled to refer the
same to arbitration with consequential prayers for injunctions restraining the
ICC and General Electric to proceed further with the reference and restraining
ICC from requiring Renusagar to make any deposit towards administrative
expenses and arbitration fees. Renusagar obtained an ex parte ad interim relief
in the said suit. General Electric filed Arbitration Petition No. 96 of 1982
under Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961
(hereinafter referred to as 'the Foreign Awards Act') seeking stay of Suit No.
832 of 1982 and all proceedings therein with a prayer for vacating the ad
interim ex parte reliefs obtained by Renusagar in the said suit. Both the
matters, namely, stay petition of General Electric under Section 3 of the
Foreign Awards Act and Renusagar's notice of motion for confirmation of ad
interim relief were heard together and disposed of by a learned Single Judge of
the Bombay High Court by a common judgment and order dated April 20, 1983
whereby the prayer for stay of the suit filed by General Electric under Section
3 of the Foreign Awards Act was allowed and all proceedings in the said suit
were stayed and all the interim reliefs which were granted earlier by ad
interim order were vacated. C.A. Nos. 404-405 of 1983 filed by Renusagar
against the said judgment of the learned Single Judge were dismissed by a
Division Bench of the High Court by judgment dated October 21, 1983. The appeals filed by Renusagar against the said decision
of the High Court were dismissed by this Court on August 16, 1984. (See : Renusagar Power Co. Ltd. v. General Electric Co. 1
hereinafter referred to as 'Renusagar Case 1'.) In the said case, this Court
(Tulzapurkar and Pathak, JJ.) has held that the three claims referred by
General Electric to the ICC do 'arise out of' and are 'related to the contract'
and squarely fall within the widely-worded arbitration clause contained in
Article XVII of the Contract.
9. On August 19, 1982, General Electric filed a suit in
the Calcutta High Court against United Commercial Bank to enforce the bank
guarantee given by the said Bank at the instance of Renusagar. As a counter to
the said suit, Renusagar, on November 25, 1982, filed a suit (No. 127 of 1982)
in the Court of Civil Judge, Mirzapur, U.P. praying for a declaration that the
guarantee given by United Commercial Bank for and on behalf of Renusagar stood
discharged and had become ineffective and unenforceable and for a mandatory
injunction directing and ordering General Electric to settle the claim of
Renusagar regarding 75 MVA Transformers and to satisfy the settlement validly
arrived at of the claim of Renusagar as mentioned in the plaint of the said
suit. General Electric filed an application in the Mirzapur Court whereby it was prayed that the suit
was liable to be stayed under Section 10 and/or Section 151 CPC in respect of
the first relief and under Section 3 of the Foreign Awards Act in respect of
the second relief claimed by Renusagar in the plaint. The said 1 (1 984) 4 SCC
679 : (1985) 1 SCR 432 658 application was rejected by Mirzapur Court and
thereupon General Electric filed a petition under Article 227 of the
Constitution before the Allahabad High Court for quashing the proceedings in
the suit. The said petition was, however, dismissed by the High Court by order
dated April 4, 1985. Thereupon General Electric filed
Civil Appeal No.
2319
of 1986 in this Court which was allowed by this Court (Chinnappa Reddy and
Jagannatha Shetty, JJ.) by judgment dated August 11, 1987 reported as General Electric Co. v.
Renusagar
Power Co.2 hereinafter referred to as 'Renusagar Case II'. As a result of the
said judgment, the proceedings in Suit No. 127 of 1982 in the court of Civil
Judge, Mirzapur were stayed under Section 3 of the Foreign Awards Act.
10. We
may now revert to the arbitration proceedings.
After
the decision of the learned Single Judge of the Bombay High Court staying
further proceedings in Suit No. 832 of 1992 and vacating the interim order
passed in the said suit, Renusagar entered into the arbitration proceedings on
June 9, 1983 under protest and without prejudice to its claim on arbitrability
and gave answer to the claims of General Electric and also made counter-claims.
On February 7 and 8, 1984 both the parties met with the Arbitral Tribunal in Paris and agreed to sign the Terms of
Reference, though Renusagar did so under protest and without prejudice.
Certain
amendments were subsequently made in the Terms of Reference. In the said Terms
of Reference the issues to be determined were defined in clauses (a) to (cc) of
para 22.
Issues
in clauses (a) to (f) of para 22 of the Terms of Reference were determined by
an interim award on December 11, 1984 wherein the Arbitral Tribunal found that
General Electric and Renusagar were parties to a valid agreement to arbitrate
all disputes between them arising out of or related to the 1964 Contract and
that the issues referred to the Arbitral Tribunal, apart from two minor
exceptions which were reserved for determination, were such arbitral disputes
and that the Arbitral Tribunal had jurisdiction to adjudicate on them. The
Arbitral Tribunal also held that the applicable law was that of the State of New
York, U.S.A.
11.
After the decision of this Court in Renusagar Case II, both the parties
appeared before the Arbitral Tribunal in Paris for a hearing which lasted for ten days between February 25 and March 8, 1985. Each party was represented by
counsel and legal and other advisers and issues (g) to (p) of para 22 of the
Terms of Reference were argued and submitted for consideration by both the
sides and the hearing was adjourned to a later date for more detailed
consideration to be given to the remaining issues and for further written
submissions to be made by both parties. The next hearing was fixed to be in London to begin on October 1, 1985 and both parties were summoned to
appear before the Arbitral Tribunal. Khaitan & Partners, lawyers for
Renusagar sent a letter dated July 24, 1985 to the Arbitral Tribunal, wherein
they stated that an Indian Civil Court had seisin of the whole of the
subject-matter of the reference in this arbitration and submitted that in
consequence the Arbitral Tribunal and ICC had become functus officio and that
no further proceedings in this arbitration should be taken by the Arbitral
Tribunal. The said submission by Renusagar was disputed by General Electric and
the Arbitral Tribunal informed the parties that the matter would be considered
as a preliminary issue at the scheduled meeting in London on October 1, 1985. The scheduled meeting took 2 (1987)4SCC137:(1987)3SCR858
659 place in London on October 1, 1985. General Electric, represented by counsel and advisers,
appeared before the Arbitral Tribunal but Renusagar failed to appear. The
Arbitral Tribunal considered the written submissions of Renusagar on the issue
of the jurisdiction of the Arbitral Tribunal and heard the arguments of General
Electric and by majority (Dr Dixit dissenting), the Arbitral Tribunal ruled
that their jurisdiction remained and that the arbitration should proceed in the
absence of Renusagar. It appears that before the meeting on October 1, 1985, each Arbitrator had received from
the parties during the course of the arbitration a total of 33 bound volumes of
typed submissions, exhibits and legal authorities, (General Electric having
presented 19 and Renusagar 14) and in addition each party had put before the
Arbitral Tribunal a large number of papers. On October 2, 3 and 4, 1985 the
Arbitral Tribunal considered the said documents as well as the written
submissions of Renusagar on issues (q) to (bb) of the Terms of Reference and
heard the arguments of counsel for General Electric in reply. The Arbitral Tribunal
also considered the submissions of Renusagar on the validity of the claim of
entitlement of General Electric to 'dollar for dollar' foreign tax credit at
the relevant period in this action and also heard General Electric on the
question of costs. Thereafter, the Arbitral Tribunal by a majority (Dr Dixit
dissenting) made the award on September 16, 1986.
12.
The Arbitral Tribunal upheld the claim of GEC for US $ 2,130,785.52 towards
regular interest which was withheld by Renusagar. It was not disputed by
Renusagar that it had retained the said amount. The issue was whether by doing
so Renusagar acted wrongfully. The Arbitral Tribunal has found that the said
withholding or retention of the amount of interest by Renusagar was wrongful
since the failure on the part of Renusagar to pay the taxes over to the Indian
tax authorities rendered it impossible for General Electric to get the U.S.
foreign tax credit to which it would otherwise have been entitled for the
amount withheld. It was also held that nothing in the 1964 contract authorises
nonpayment of either the interest or the withheld taxes for tactical reasons
arising out of litigation brought by Renusagar. The Arbitral Tribunal rejected
the contention of Renusagar that the claim in respect of regular interest was
barred by limitation and held that the applications submitted by Renusagar to
Reserve Bank of India on June 3, 1981 and August 29, 1981 for permission to
remit the said amount to General Electric amount to acknowledgement. It was
also held that the said sum had to be computed in U.S. dollars regardless of
variation in dollar-rupee exchange rate prevailing from time to time. As
regards claim for compensatory damages on the said amount of regular interest,
which was withheld by Renusagar, the Arbitral Tribunal, after referring to the
decisions of New York Courts, has held that an arbitrator's paramount
responsibility is to reach an equitable result and that it is a basic principle
of damages for breach of contract applicable throughout the U.S. (including New
York) that a party to a contract who is injured by its breach is entitled to
compensation for the injury sustained and is entitled to be placed insofar as
this can be done by money in the same position he would have occupied if the
contract had been performed. The Arbitral Tribunal found that General Electric
would have benefited from 'dollar for dollar' from the foreign tax credits that
it could have claimed had Renusagar paid the disputed amounts over to the
Indian tax authorities and supplied General Electric with the appropriate tax
certificate. The Arbitral Tribunal, therefore, awarded compensatory damages and
computed the same by applying 660 the average prime rate to the amounts
withheld and observed that although General Electric was entitled to interest
from the due dates of the various notes but the interest that had been claimed
by General Electric in the Terms of Reference was computed from the later dates
set out in a detailed computation supplied to the Arbitral Tribunal and since
General Electric had accepted these later dates in its submission, the Arbitral
Tribunal awarded compensatory damages computed by applying the average prime
rate to the amounts withheld commencing with the dates listed in the statement
and compounded annually commencing with the last day of the calendar year for
each amount. The Arbitral Tribunal rejected the contention urged on behalf of
Renusagar that award of interest on regular interest as compensatory damages
would violate public policy of the State of New York against 'interest on
interest'. Relying upon the decision of the New York Court of Claims in City of
New York v. State of New York3 the Arbitral Tribunal held that
interest on interest is not against public policy in the State of New York. The Arbitral Tribunal also
rejected the contention of Renusagar that it would violate New York's public
policy to award compound interest as compensatory damages and, after referring
to the various decisions of the courts in the State of New York, the Arbitral
Tribunal has held that compounding of interest is equally appropriate in
actions of an equitable nature and in the circumstances of this case
compounding of interest would not violate the public policy of the State of New
York. In this context the Arbitral Tribunal has pointed out that they were not
concerned with a contract to pay compound interest but with the propriety of
compounding interest in fashioning a remedy for a breach of contract in order
to put the injured party in the same economic position it would have occupied
if the contract had been duly performed. As regards the claim for delinquent
interest on late payment of instalments by Renusagar, the Arbitral Tribunal
held that Renusagar was liable to pay such delinquent interest. The Arbitral
Tribunal found that under the 1964 Contract the notes evidencing the obligation
of Renusagar to pay the purchase price 'shall bear interest, at the rate of 6.5
per cent per annum on the outstanding principal balance', subject to the agreed
reduction to 6 per cent commencing with the date when tax exemption, if
granted, is made effective and that the rescheduling negotiations on which
Renusagar relied never resulted in an effective agreement and there was no
evidence of a waiver by General Electric of its right to be paid on the
original due dates when the rescheduling plan collapsed and further that
Renusagar had acknowledged in telex dated March 25, 1976 that they were liable
for interest on the delayed payment of the principal. The Arbitral Tribunal
also rejected the contention that the claim of General Electric in this regard
was barred by the statute of limitation. Taking into account the
acknowledgement contained in the telex dated March 25, 1976, the Arbitral
Tribunal deducted a sum of US $ 316,610 from the amount of US $ 783,686.20
computed as interest @ 6 per cent and held that General Electric was entitled
to net amount of US $ 467,076.20 by way of delinquent interest. The Arbitral
Tribunal rejected the contention urged on behalf of Renusagar that even if period
of limitation is computed from telex of March 25, 1976 the claim was barred by
limitation in view of the four-year limitation prescribed by Section 2- 275(1)
of New York's version of the Uniform Commercial Code which came into force with
effect from September 27, 1964.
The
Arbitral 3 408 NYS 2d 702, 707 (1978) 661 Tribunal held that the said provision
was not applicable to the present case and that it is governed by the 6-year
period of limitation that was prescribed in the State of New York prior to the commencement
of the said provision. The Arbitral Tribunal further held that General Electric
was entitled to compensatory damages on the aforesaid amount of delinquent
interest in the same manner as damages were to be computed on the unpaid amount
of regular interest. The Arbitral Tribunal also upheld the claim of General
Electric for US $ 119,053.31 towards purchase price of spare parts and further
held that the said claim was not barred by limitation in view of the
acknowledgement by Renusagar in the telex dated March 25, 1976. The Arbitral Tribunal also held that compensatory damages
were payable on account of Renusagar's failure to pay for spare parts in the
same manner as damages for failure of Renusagar to pay regular interest. With
regard to the counter-claim made by Renusagar, the Arbitral Tribunal had
earlier rejected the purported withdrawal of the said counter-claim in respect
of items 2 to 8 by Renusagar and after considering the said counter-claim on
merits, the Arbitral Tribunal rejected the same in respect of all the eight
items. In view of the rejection of counter-claim of Renusagar, the Arbitral
Tribunal rejected the claim made by General Electric by way of reply to the
claim of Renusagar. In the matter of costs, the Arbitral Tribunal held that
Renusagar must pay the costs of arbitration and apart from the amount which
General Electric was required to pay towards administrative expenses and
arbitration fees, the Arbitral Tribunal held that Renusagar must also pay the
normal legal costs incurred by General Electric. The Arbitral Tribunal awarded
the following amounts against various heads of claims:
1.
Regular interest wrongfully withheld US $2,130,785.52
2.
Compensatory damages up to March 31, US $6,347,748.50 1986 on the above regular
interest continuing at the annual rate of 8 per cent on the said regular
interest until payment.
3.
Delinquent interest on late payments of US $467,076.20 principal 4.Compensatory
damages up to March 31, 1986 US $1,324,357.75 on the above delinquent interest
continuing at the annual rate of 8 per cent on the said delinquent interest
until payment
5.
Spare parts US $ 119,053.00
6.
Compensatory damages up to March 31, 1986
US $276,702.17 on the above spare parts continuing at the annual rate of 8 per
cent on the said sum for the spare parts until payment.
7.
Towards costs of General Electric Us $1,549,899.00 Total US $12,215,622.14 The
Arbitral Tribunal has awarded interest at the annual rate of 8 per cent on
items 1, 3 and 5.
13. On
October 15, 1986, General Electric instituted
proceedings for enforcement of the award of the Arbitral Tribunal by filing
Arbitration Petition 7 No. 159 of 1986 under Section 5 of the Foreign Awards
Act in the Bombay High Conn. On October 17, 1986, Renusagar instituted a suit
(Suit No. 265 of 1986) in the Court of Civil Judge, Mirzapur, seeking a
declaration that the 662 award made by the Arbitral Tribunal was a nullity and
for restraining General Electric by a perpetual injunction from denying
Renusagar's rights and taking any action affecting Renusagar's rights in any
manner whatsoever on the basis of the said award. General Electric filed a
Transfer Petition (No. 388 of 1986) in this Court seeking transfer of the suit
filed by Renusagar in the Mirzapur Court
to the original side of the Bombay High Court. By order dated September 10, 1987, this Court stayed further
proceedings in the suit filed by Renusagar in the Mirzapur Court and the stay was to remain in
operation during the pendency of the petition filed by General Electric for enforcement
of the award. by General Electric in the Bombay High Court and submitted :
(i)
the award could not be filed as it did not become binding on the parties in the
country in which the award was made as prescribed under Section 7(1)(a)(v) of
the Foreign Awards Act and Rule 801(c) of the Rules framed by the Bombay High
Court under the Foreign Awards Act; (ii) the Bombay High Court did not have the
territorial jurisdiction to entertain the petition of General Electric under
Section 5 of the Act; (iii) General Electric had failed to comply with the
mandatory requirement of Section 8(1)(a) of the Foreign Awards Act and Rule
801(a) of the Rules framed by the Bombay High Court under the Foreign Awards
Act inasmuch as neither the original award nor a copy thereof duly
authenticated as required by the law of the country had been produced along
with the application; (iv) the award sought to be enforced was a nullity and
should be ignored as the arbitrators had become functus officio in view of
institution of Suit No.
127 of
1982 by Renusagar in the Court of Civil Judge, Mirzapur and refusal by the
Mirzapur Court to stay the suit under Section 3 of the Foreign Awards Act; (v)
the award could not be enforced in view of Section 7(1)(b)(ii) of the Foreign
Awards Act because its enforcement was contrary to public policy; (vi) the
claim for regular interest was barred by limitation; (vii) the claim for
delinquent interest had been wrongly accepted by the arbitrators;
(viii)
the award of interest on interest or compensatory damages in lieu of interest
on regular interest and delinquent interest and the award of compound interest
is contrary to public policy; (ix) the compensatory damages were excessive and
unusual; (x) the Chairman of the Arbitral Tribunal was biased against
Renusagar; and (xi) the costs of arbitration were unconscionable and excessive.
15.
The learned Single Judge (Pendse, J.) has considered all the aforesaid
objections raised on behalf of Renusagar in his very comprehensive judgment
dated October 21, 1988 wherein after rejecting the said objections, he has held
that the award is enforceable under the provisions of the Foreign Awards Act
and on that basis a decree in terms of the award was drawn.
16.
Renusagar filed an appeal (Appeal No. 680 of 1989) under clause 15 of the
Letters Patent of the Bombay High Court against the said judgment of the
learned Single Judge which was disposed of by a Division Bench of the said High
Court (C. Mookerjee, C.J. and Mrs Sujata Manohar, J.) by judgment dated October 12, 1989. The learned Judges of the High
Court held that the said appeal was not maintainable in view of Section 6(2) of
the Foreign Awards Act. The learned Judges, however, examined the matter on
merits and found that there was no substance in the appeal. In this context the
learned Judges have dealt with the objection about the arbitrators having
become functus officio on 663 account of the pendency of the civil suit filed
by Renusagar in the Mirzapur Court; the award being contrary to public policy;
the award being not binding; the failure to file the authenticated copy of the
award and the jurisdiction of the Bombay High Court to entertain the petition
and they have rejected the contentions urged by Renusagar in respect of the
said objections. Since the learned Single Judge had not specified the rate of
exchange for conversion of the decretal amount expressed in U.S.
dollars
to Indian rupees, the learned Judges have dealt with the said question and
taking into consideration the decision of this Court in Forasol v. ONGC4 they
have directed that the date of conversion of decretal amount which is in U.S.
dollars
to Indian rupees shall be the date on which the learned Single Judge completed
pronouncing of judgment, i.e., October 21, 1988
and that opening the rate of exchange shall be the selling rate of U.S. dollars
as ascertained by the State Bank of India. The learned Judges have granted a certificate for appeal to this Court
under Article 134-A read with Article 133 of the Constitution since they felt
that the case involves substantial questions of law of general importance which
need to be decided by this Court.
17.
Civil Appeal No. 71 of 1990 has been filed by Renusagar on the basis of the
said certificate against the judgment of the Division Bench of High Court dated
October 12, 1989.
Renusagar
has also filed Civil Appeal No. 71-A of 1990 against the judgment of the
learned Single Judge dated October 21, 1988
after obtaining the special leave to appeal from this Court. General Electric
has filed Civil Appeal No. 379 of 1992 against the judgment of the Division
Bench of High Court dated October 12, 1989
after obtaining special leave to appeal. The said appeal of General Electric
has been filed by way of abundant caution and is confined to the directions given
by the Division Bench of High Court in paras 117 to 119 of the judgment with
regard to rate of exchange for conversion of the decretal amount from U.S.
dollars
to Indian rupees. According to General Electric the said rate of exchange
should have been the rate prevailing on the date of payment.
18.
During the pendency of these appeals this Court, by Order dated February 21,
1990 on I.A. No. 1 of 1990 in Civil Appeal No. 71 of 1990, stayed the operation
of the judgment and decree under appeal subject to Renusagar depositing in the
original side of the Bombay High Court, the sums equivalent to one-half of the
decretal amount calculated as on date and furnishing security to the
satisfaction of the High Court in respect of the decretal amount. General Electric
was permitted to withdraw the deposit upon furnishment of security by way of
bank guarantee for the sum to be withdrawn in excess of Rupees four crores to
the satisfaction of the High Court. In the said order it was also directed that
interest @ 10 per cent per annum would be payable by Renusagar on the balance
of the decretal amount in the event of its failing in the appeal and
correspondingly General Electric would be liable to pay interest at the same
rate on amount withdrawn by it in the event of the appeal succeeding. In
pursuance of this order, Renusagar deposited, a sum of Rs 9,69,26,590.00 on March 20, 1990 which was withdrawn by GEC after
furnishing necessary bank guarantee. By another order dated November 6, 1990 on
I.A. No. 3 of 1990 in Civil Appeal No. 71 of 1990, this Court directed
Renusagar to deposit a further sum of Rs 1 4 1984 Supp SCC 263 :(1984) 1 SCR
526 664 crore and to furnish a bank guarantee for Rs 1.92 crores.
In
pursuance of the said order, Renusagar deposited, on December 3, 1990, a sum of
Rs 1 crore which amount has also been withdrawn by General Electric. Thus, a
total sum of Rs 10,69,26,590.00 has been deposited by Renusagar and the same
has been withdrawn by General Electric.
19.
Shri K.K. Venugopal, learned Senior Counsel appearing for Renusagar, and Shri
Shanti Bhushan, learned Senior Counsel appearing for General Electric, have
made elaborate submissions before us. The oral submissions have been
supplemented by written submissions.
20.
During the course of his submissions, Shri Venugopal did not pursue some of the
objections that were raised by Renusagar before the High Court. But at the same
time he has raised certain objections which were not raised before the High
Court. Shri Venugopal has not disputed the liability of Renusagar for US $
2,130,785.52 awarded under item No. 1 towards regular interest withheld by
Renusagar and US $ 119,053.00 awarded under item No. 5 towards price of spare
parts. The submissions of Shri Venugopal are confined to the award of compensatory
damages under item Nos. 2, 4 and 6, delinquent interest under item No. 3 and
costs under item No. 7. The submissions of Shri Venugopal broadly fall under
two heads : (i) enforceability of the award; and (ii) the rate of exchange for
conversion of the decretal amount from U.S. dollars to Indian rupees.
21.
Before we proceed to examine the submissions made by learned counsel, we
consider it necessary to briefly refer to the background in which the Foreign
Awards Act was enacted because it would have a bearing on the interpretation of
the provisions of the said Act.
22.
Arbitration is a well-recognised mode for resolving disputes arising out of
commercial transactions. This is equally true for international commercial
transactions.
With
the growth of international commerce there was an increase in disputes arising
out of such transactions being adjudicated through arbitration. One of the
problems faced in such arbitrations related to recognition and enforcement of
an arbitral award made in one country by the courts of other countries. This
difficulty has been sought to be removed through various international
conventions. The first such international convention was the Geneva Protocol of
1923 which was drawn up on the initiative of ICC under the auspices of the
League of Nations. The Geneva Protocol had two objectives, first, it sought to
make arbitration agreements, and arbitration clauses in particular, enforceable
internationally; and secondly, it sought to ensure that awards made pursuant to
such arbitration agreements would be enforced in the territory of the State in
which they were made. The Geneva Protocol of 1923 was followed by the Geneva
Convention of 1927 which was also drawn up under the auspices of the League of
Nations. The purpose of this Convention was to widen the scope of the Geneva
Protocol of 1923 by providing recognition and enforcement of protocol awards
within the territory of contracting States, (not merely the State in which the
award was made). (See : Alen Redfern and Martin Hunter: Law & Practice of
International Commercial Arbitration, 2nd Edn.
pp.
61-62). India was a signatory to the Protocol of 1923 and the Convention of
1927. With a view to implementing the obligations undertaken under the said
Protocol and Convention, the Arbitration (Protocol & Convention) Act, 1937
was enacted. A number of problems were encountered 665 in the operation of the
aforesaid Geneva treaties inasmuch as there were limitations in relation to
their field of application and under the Geneva Convention of 1927, a party
seeking enforcement had to prove the conditions necessary for enforcement and
in order to show that the awards had become final in its country of origin the
successful party was often obliged to seek a declaration in the countries where
the arbitration took place to the effect that the award was enforceable in that
country before it could go ahead and enforce the award in the courts of the
place of enforcement. ICC, in 1953, promoted a new treaty to govern
international commercial arbitration. The proposals of ICC were taken up by the
United Nations Economic and Social Council and it led to the adoption of the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards at New
York, 1958 (hereinafter referred to as 'the New York Convention'). The New York
Convention is an improvement on the Geneva Convention of 1927 in the sense that
it provides for a much more simple and effective method of obtaining
recognition and enforcement of foreign arbitral awards and it replaces Geneva
Convention of 1927 as between the States which are parties to both the
Conventions. The New York Convention also gives much wider effect to the
validity of arbitration agreements than does the Geneva Protocol of 1923. [See
: Alan Redfern and Martin Hunter, Law & Practice of International
Commercial Arbitration, (1 991) 2nd Edn. pp. 62-63.]
23.
India was a party to the New York Convention. The Foreign Awards Act has been
enacted to give effect to the New York Convention and for purposes connected
therewith. In the Statement of Objects and Reasons, reference has been made to
the defects in the Geneva Convention of 1927 which "hampered the speedy
settlement of disputes through arbitration and hence no longer met the
requirements of international trade" and which led to the adoption of the
New York Convention. Section 2 of the Act defines the expression 'foreign
award'. Section 3 makes provision for stay of proceedings in respect of matters
to be referred to arbitration. Section 4 deals with effect of foreign awards.
Sub-section
(1) of Section 4 provides that a foreign award shall, subject to the provisions
of this Act, be enforceable in India as if it were an award made on a matter
referred to arbitration in India. Sub-section (2) prescribes that any foreign
award which would be enforceable under this Act shall be treated as binding for
all purposes on the persons as between whom it was made and may be relied on by
any of those persons by way of defence, setoff or otherwise in any legal
proceedings in India. Section 5 makes provision for filing of foreign awards in
Court. In sub-section (1) it is laid down that any person interested in a
foreign award may apply to any court having jurisdiction over the subject-
matter of the award that the award be filed in Court. Sub- section (2) requires
that such an application shall be in writing and shall be numbered and
registered as a suit between the applicant as plaintiff and the other parties
as defendants. Sub-section (3) requires the court to give notice to the parties
to the arbitration other than the applicant requiring them to show cause within
a time specified why the award should not be filed. Section 6 deals with
enforcement of foreign awards. Sub-section (1) lays down that where the Court
is satisfied that the foreign award is enforceable under the Act, the Court
shall order the award to be filed and shall proceed to pronounce judgment
according to the award. Sub-section (2) provides that upon the judgment so
pronounced a decree shall follow, no appeal shall lie from such decree except
666 insofar as the decree is in excess of or not in accordance with the award.
Section 7 contains the conditions for enforcement of foreign awards and
prescribes the circumstances under which foreign awards will not be enforced.
Section 8 requires the production of the original award or a duly authenticated
copy thereof as well as original agreement for arbitration or a duly certified
copy thereof and the production of evidence to prove that the award is a
foreign award. Section 9 is a saving clause which excludes the applicability of
the Act to matters specified therein. Section 10 provides for repeal of the
Arbitration (Protocol and Convention) Act, 1937, in relation to foreign awards
to which the Act applies. Section 11 provides for rule-making power of the High
Court. The New York Convention is appended as a schedule to the Foreign Awards
Act.
24. In
the present case, we are concerned with conditions of enforcement laid down in
Section 7, which provides as follows:
"7.
Conditions for enforcement of foreign awards.- (1) A foreign award may not be
enforced under this Act- (a) if the party against whom it is sought to enforce
the award proves to the court dealing with the case that- (i) the parties to
the agreement were under the law applicable to them, under some incapacity, or
the said agreement is not valid under the law to which the parties have
subjected it, or failing any indication thereon, under the law of the country
where the award was made; or (ii) that party was not given proper notice of the
appointment of the arbitrator or of the arbitration proceedings or was
otherwise unable to present his case; or (iii) the award deals with questions
not referred or contains decisions on matters beyond the scope of the
agreement: Provided that if the decisions on matters submitted to arbitration
can be separated from those not submitted, that part of the award which
contains decisions on matters submitted t o arbitration may be enforced; or
(iv) the composition of the arbitral authority or the arbitral procedure was
not in accordance with the agreement of the parties or failing such agreement,
was not in accordance with the law of the country where the arbitration took
place; or (v) the award has not yet become binding on the parties or has been
set aside or suspended by a competent authority of the country in which, or
under the law of which, that award was made; or (b) if the Court dealing with
the case is satisfied that- (i) the subject-matter of the difference is not
capable of settlement by arbitration under the law in India; or (ii) the
enforcement of the award will be contrary to public policy;
(2) If
the Court before which a foreign award is sought to be relied upon is satisfied
that an application for the setting aside or suspension of the award has been
made to a competent authority referred to in sub-clause (v) of clause (a) of
sub-section (1), the Court may, if it deems proper, adjourn 667 the decision on
the enforcement of the award and may also, on the application of the party claiming
enforcement of the award, order the other party to furnish suitable
security."
25.
The objection of Renusagar against enforceability of the award is based on (i)
Section 7(1)(a)(ii) of the Foreign Awards Act, on the ground that Renusagar was
unable to present its case; and (ii) Section 7(1)(b)(ii) of the Foreign Awards
Act, on the ground that the enforcement of the award would be against public
policy.
26. In
support of his submission that Renusagar was unable to present its case, Shri
Venugopal has urged that after the Mirzapur Court had refused to stay the civil
suit filed by Renusagar on the application submitted by General Electric under
Section 3 of the Foreign Awards Act on July 9, 1985, Renusagar had raised a
preliminary objection before the Arbitral Tribunal that it had become functus
officio and on the said objection raised by Renusagar, the Arbitral Tribunal
had issued a further notice on September 2, 1985 stating that the effect of the
rejection of the application under Section 3 of the Foreign Awards Act would be
considered as a preliminary issue at the scheduled meeting of the Arbitral
Tribunal fixed for October 1, 1985. The submission of Shri Venugopal is that
Renusagar was not informed by the Arbitral Tribunal that if the decision of the
Arbitral Tribunal on the objection that the Arbitral Tribunal had become
functus officio were to go against Renusagar, the Arbitral Tribunal would
straight away proceed to hear the case on merits without informing Renusagar
about its decision and that if Renusagar had been put on notice, it would have
been able to decide whether to proceed with the merits or not and that the
action of the Arbitral Tribunal in going into the merits of the dispute without
notice to Renusagar was a gross, blatant and unpardonable violation of
principles of natural justice and the elementary tenets of fair play inasmuch
as on account of the said procedure adopted by the Arbitral Tribunal, Renusagar
was deprived of an opportunity to meet and deal with the entirety of claims of
General Electric.
27. As
regards bar to the enforcement of the award under Section 7(1)(b)(ii) of the
Foreign Awards Act, Shri Venugopal has argued that : (i) under Section
7(1)(b)(ii), enforcement of the award could be refused by the courts in India
not only on the ground that the award is against the public policy of India but
also that it is against the public policy of the State of New York; (ii) the
expression "public policy" in Section 7(1)(b)(ii) of the Act has to
be construed in a liberal sense and not narrowly and it would include within
its ambit disregard of the provisions of the Foreign Exchange Regulation Act,
1973 (hereinafter referred as FERA) and would also cover unjust enrichment;
(iii) it would be contrary to the public policy of India as well as of the
State of New York to award interest on interest and compounding it further and
to award damages on damages; (iv) under the contract, interest was payable only
up to the date of maturity of each promissory note and no interest was payable
for the period subsequent to the said date and the only remedy available to
General Electric in the event of default in payment of an instalment on the due
date was to enforce the bank guarantee or to recall all the promissory notes;
(v) under the original approval dated January 2, 1964 given by the Government
of India the total amount of loan was to be repaid in sixteen semi-annual
instalments between 30 and 120 months from contract effective date and payment
of interest was specifically 668 restricted for the period from 16th to 30th
month and thereafter upon capitalisation from the 30th month to the 120th month
and no interest was payable without FERA sanction after due date of each
instalment; (vi) no liability for interest for delayed payment of instalments
would accrue in respect of the period from June 30, 1967 to August 1, 1969
while the application for approval under FERA was pending before the Government
of India; (vii) after the refusal by the Government to give its approval to the
rescheduling of the instalments the award of interest was in breach of the
prohibition contained in FERA and was contrary to public policy of India;
(viii) while awarding compensatory damages under item Nos. 2 and 4 the Arbitral
Tribunal has failed to deduct 46 per cent U.S. tax payable by General Electric
on the amount of regular interest and delinquent interest and compensatory
damages could only be awarded on the amount receivable by General Electric
after deducting the said tax and this has resulted in unjust enrichment which
is contrary to public policy; (ix) compensatory damages have been awarded by
way of interest on interest and that too by compounding the rate of interest
which is contrary to public policy of India and New York;
(x)
compensatory damages awarded on delinquent interest under item No. 4
constitutes award of damages upon damages which is contrary to public policy of
India; (xi) award of compensatory damages on regular interest under item No. 2
in respect of the period from 1970 to 1980 when the interim order passed by the
Delhi High Court in the writ petition was operative was impermissible and
against public policy;
(xii)
the amount awarded as costs is unconscionable and constitutes unjust enrichment
inasmuch as it includes the amount which was admitted as part of the legal fees
and expenses for proceedings in India and which was found to be inadmissible by
the Arbitral Tribunal and the same amount was transposed into cost of the
arbitration on the pretext that the material collected for litigation in India
was also used in the arbitration proceedings; and (xiii) there has been
violation of principles of natural justice inasmuch as the vouchers of costs
regarding legal fees and expenses were never shown or given to Renusagar nor
were its objections heard in this regard.
28.
With regard to rate of exchange for conversion of the decretal amount in U.S.
dollars to Indian rupees, the submission of Shri Venugopal is that the date
with reference to which conversion of foreign currency is to be made is a
matter of substance and is governed by lex contractus, i.e., the law of the
contract, and not by lexfori, i.e., the law of the forum. It has been urged
that the law of the State of New York is the law of the contract and that the
said law provides the date of breach as the date of conversion and therefore,
the amount awarded in U.S. dollars under the award of the Arbitral Tribunal
must be converted into Indian currency on the basis of the rate prevalent on
the date of the breach. It has been submitted that the decision of this Court
in Forasol v. O.N.G.C.4 on which reliance has been placed by the Division Bench
of the High Court, has no application to the present case because in that case
the Court was not dealing with a foreign award but was dealing with an award made
under the Indian Arbitration Act, 1940.
29.
Shri Shanti Bhushan, has, on the other hand, submitted that : (i) the scope of
enquiry in proceedings under Section 5 of the Foreign Awards Act is confined to
questions relating to the enforcement of the award and does not comprehend a
challenge to the merits and even if a question of law decided by 669 the
Arbitrators is incorrect, it is not a ground of challenge under Section 7 of
the Foreign Awards Act; (ii) Renusagar cannot have any grievance that they were
unable to present its case because it had voluntarily refused to appear before
the Arbitral Tribunal when it met on October 1, 1985 and further that in the
sittings of the Arbitral Tribunal from February to March 1985 in which
Renusagar had participated it had made oral submissions and had also produced
documents before the Arbitral Tribunal, with regard to issues 22(g) to (p) and
that in the sittings held from October 1, 1985 onwards, the Arbitral Tribunal
had dealt with rest of the issues which related to the counter-claim of
Renusagar as well as the claim made by General Electric against the
counter-claim which claims have been rejected by the Arbitral Tribunal; (iii)
public policy, comprehended in Section 7(1)(b)(ii) of the Foreign Awards Act is
the public policy of India and does not cover the public policy of New York
State; (iv) for the purpose of Section 7(1)(b)(ii) of the Foreign Awards Act
the expression 'public policy' has a narrower connotation than in domestic law;
(v) the regular interest was wrongfully withheld by Renusagar because as a
result of the failure on the part of Renusagar to deposit the amount of tax
with the Government of India. General Electric was not able to claim relief
under the U.S. tax laws in respect of the amount payable as tax in India on the
interest and that the interim order passed by the Delhi High Court in the writ
petition filed by Renusagar did not preclude Renusagar from either depositing
the tax amount with the Government or remitting the interest amount to General
Electric at the rate of 6 per cent; (vi) for awarding compensatory damages for
withholding of regular interest and on delinquent interest for delayed payment
of instalments the tax payable in United States on the amount of regular
interest and delinquent interest could not be deducted since tax would be
payable in the United States by General Electric on the amount awarded as
compensatory damages; (vii) the amount of compensatory damages awarded by the
Arbitral Tribunal relates to the merits of the award and the same cannot be
questioned in proceedings for enforcement of the award under Section 7 of the
Foreign Awards Act;
(viii)
the challenge to the award on the basis of unjust enrichment, award of compound
interest, award of damages on damages does not fall within the ambit of
permissible objections on the ground of violation of public policy in Section
7(1)(b)(ii) of the Foreign Awards Act; (ix) there is no violation of the
provisions of FERA because in view of the approval that had already been granted
by the Government of India to the original contract, there was no prohibition
against remittance of regular interest on the instalments which had become due
and payable and the refusal on the part of the Government to give approval to
rescheduling of the payment of instalments did not in any way preclude the
Government of India from granting necessary permission for remittance of the
interest on the unpaid instalments under Section 9 of FERA; (x) in any event,
the bar of Section 9 of FERA is not applicable to the proceedings for
enforcement for the award in view of Section 47(3) of FERA and the enforcement
of the award does not involve contravention of the provisions of FERA; (xi) the
costs that have been awarded are reasonable and that three copies of the supporting
vouchers except for the vouchers relating to fees of M/s Amarchand Mangaldas, a
Bombay/Delhi firm of Solicitors, were sent to all the three arbitrators and
that one set of billings of M/s Amarchand Mangaldas was sent to the Chairman
but copies of the letter addressed to Chairman were sent to the other
Arbitrators and that the 670 bills of M/s Amarchand Mangaldas were in respect
of fees of Indian lawyers in Bombay High Court and Supreme Court which claim of
costs has been disallowed by the Arbitral Tribunal;
(xii)
the rate of exchange for conversion of foreign currency in proceedings for
enforcement of a foreign award is governed by lexfori, i.e., law of the forum
in which the proceedings have been instituted and not by the proper law of
contract or law of place of performance; (xiii) the relevant date for
conversion of U.S. dollars into Indian rupees in proceedings for enforcement of
a foreign award is the date of actual payment and not the date of judgment as
held by the Division Bench of the High Court; (xiv) the decision of this Court
in Forasol v. O.N.G.C.4 on which the reliance has been placed by the Division
Bench has no application and in any event the said decision does not lay down
the correct law and needs reconsideration; (xv) although under the award
interest has been awarded at 8 per cent in respect of items 1, 3 and 5 only but
in view of the interim order passed by this Court on February 21, 1990 interest
at the rate of 10 per cent is payable on the entire amount; (xvi) since the permission
was not granted to General Electric by the Reserve Bank of India to transfer
the sum of Rs 10.92 crores deposited by Renusagar in pursuance to the orders of
this Court dated February 21, 1990 and November 6, 1990 the said amount should
be adjusted against the decree that is ultimately passed after converting the
decretal amount in U.S. dollars to Indian rupees on the basis of the rate of
exchange prevailing on the date of the judgment of this Court.
30.Having
regard to the foregoing submissions of the learned counsel the questions that
arise for consideration in these appeals can be thus formulated:
(1)
What is the scope of enquiry in proceedings for enforcement of a foreign award
under Section 5 read with Section 7 of the Foreign Awards Act? (II) Were
Renusagar unable to present their case before the Arbitral Tribunal and
consequently the award cannot be enforced in view of Section 7(1)(a)(ii) of the
Foreign Awards Act? (III) Does Section 7(1)(b)(ii) of the Foreign Awards Act
preclude the enforcement of the award of the Arbitral Tribunal for the reason
that the said award is contrary to the public policy of the State of New York?
(IV) What is meant by 'public policy' in Section 7(1)(b)(ii) of the Foreign
Awards Act? (V) Is the award of the Arbitral Tribunal unenforceable as contrary
to public policy of India on the ground that- (a) it involves contravention of
the provisions of FERA;
(b) it
penalises Renusagar for acting in accordance with the interim order passed by
the Delhi High Court in the writ petition filed by Renusagar challenging the
withdrawal of exemption from income tax on the interest paid to General
Electric;
(c) it
results in charging of interest on interest which is compounded and also
damages on damages;
(d) it
would lead to unjust enrichment for General Electric.
671
(VI) Which law would govern the rate of exchange for conversion of foreign
currency in proceedings for enforcement of a foreign arbitral award? (VII) Does
Forasol v. O.N.G.C4 need reconsideration? (VIII) Is General Electric entitled
to interest pendente lite and future interest and if so, at what rate? (IX)
What should be the rate for conversion into U.S. dollars of the amount of Rs
10.92 crores deposited by Renusagar in pursuance to the interim orders passed
by this Court on February 21, 1990 and November 6, 1990 and which has been
withdrawn by General Electric?
1.
Scope of enquiry in proceedings for recognition and enforcement of a foreign
award under the Foreign Awards Act
31.
During the course of his submissions, Shri Venugopal has assailed the award of
the Arbitral Tribunal on grounds touching on the merits of the said award
insofar as it relates to the award of compensatory damages on regular interest
(item No. 2), delinquent interest (item No. 3), compensatory damages on
delinquent interest (item No. 4) and compensatory damages on the price of spare
parts (item No. 6). This gives rise to the question whether in proceedings for
enforcement of a foreign award under the Foreign Awards Act it is permissible
to impeach the award on merits.
32.
With regard to enforcement of foreign judgments, the position at common law is
that a foreign judgment which is final and conclusive cannot be impeached for
any error either of fact or of law and is impeachable on limited grounds,
namely, the court of the foreign country did not, in the circumstances of case,
have jurisdiction to give that judgment in the view of English law; the
judgment is vitiated by fraud on part of the party in whose favour the judgment
is given or fraud on the part of the court which pronounced the judgment; the
enforcement or recognition of the judgment would be contrary to public policy;
the proceedings in which the judgment was obtained were opposed to natural
justice. (See : Dicey & Morris, The Conflict of Laws, 11th Edn., Rules 42
to 46, pp. 464 to 476; Cheshire & North, Private International Law, 12th
Edn., pp. 368 to 392.)
33.
Similarly in the matter of enforcement of foreign arbitral awards at common law
a foreign award is enforceable if the award is in accordance with the agreement
to arbitrate which is valid by its proper law and the award is valid and final
according to the arbitration law governing the proceedings. The award would not
be recognised or enforced if, under the submission agreement and the law
applicable thereto, the arbitrators have no justification to make it, or it was
obtained by fraud or its recognition or enforcement would be contrary to public
policy or the proceedings in which it was obtained were opposed to natural
justice (See: Dicey & Morris, The Conflict of Laws, 11th Edn., Rules 62-64,
pp. 558 & 559 and 571 & 572; Cheshire & North, Private
International Law, 12th Edn., pp. 446-447).
The
English courts would not refuse to recognise or enforce a foreign award merely
because the arbitrators (in its view) applied the wrong law to the dispute or
misapplied the right law. (See : Dicey & Morris, The Conflict of Laws, 11th
Edn., Vol. II, p. 565.)
34.
Under the Geneva Convention of 1927, in order to obtain recognition or
enforcement of a foreign arbitral award, the requirements of clauses (a) to (e)
of 672 Article I had to be fulfilled and in Article 11, it was prescribed that
even if the conditions laid down in Article I were fulfilled recognition and
enforcement of the award would be refused if the Court was satisfied in respect
of matters mentioned in clauses (a), (b) and (c). The principles which apply to
recognition and enforcement of foreign awards are in substance, similar to
those adopted by the English courts at common law. (See : Dicey & Morris,
The Conflict of Laws, 11th Edn., Vol. I, p. 578). It was, however, felt that
the Geneva Convention suffered from certain defects which hampered the speedy
settlement of disputes through arbitration. The New York Convention seeks to remedy
the said defects by providing for a much more simple and effective method of
obtaining recognition and enforcement of foreign awards. Under the New York
Convention the party against whom the award is sought to be enforced can object
to recognition and enforcement of the foreign award on grounds set out in
sub-clauses (a) to (e) of clause (1) of Article V and the court can, on its own
motion, refuse recognition and enforcement of a foreign award for two
additional reasons set out in sub-clauses (a) and (b) of clause (2) of Article
V. None of the grounds set out in sub-clauses (a) to (e) of clause (1) and
subclauses (a) and (b) of clause (2) of Article V postulates a challenge to the
award on merits.
35.
Albert Jan van den Berg in his treatise The New York Arbitration Convention of
1958 : Towards a Uniform Judicial Interpretation, has expressed the view:
"It
is a generally accepted interpretation of the Convention that the court before
which the enforcement of the foreign award is sought ma y not review the merits
of the award. The main reason is that the exhaustive list of grounds for
refusal of enforcement enumerated in Article V does not include a mistake in
fact or law by the arbitrator. Furthermore, under the Convention the task of
the enforcement judge is a limited one. The control exercised by him is limited
to verifying whether an objection of a respondent on the basis of the grounds
for refusal of Article V(1) is justified and whether the enforcement of the
award would violate the public policy of the law of his country. This
limitation must be seen in the light of the principle of international
commercial arbitration that a national court should not interfere with the
substance of the arbitration." (p. 269)
36.
Similarly Alan Redfern and Martin Hunter have said:
"The
New York Convention does not permit any review on the merits of an award to
which the Convention applies and in this respect, therefore, differs from the
provisions of some systems of national law governing the challenge of an award,
where an appeal to the courts on points of law may be permitted." (Redfern
& Hunter, Law and Practice of International Commercial Arbitration, 2nd
Edn., p. 46 1.)
37. In
our opinion, therefore, in proceedings for enforcement of a foreign award under
the Foreign Awards Act, 1961, the scope of enquiry before the court in which
award is sought to be enforced is limited to grounds mentioned in Section 7 of
the Act and does not enable a party to the said proceedings to impeach the
award on merits.
II.
Bar to the enforcement of the award under Section 7(1)(a)(ii) of the Act
38. As
indicated earlier, the grievance of Renusagar is that the Arbitral Tribunal on
October 1, 1985 decided the preliminary objection raised by 673 Renusagar that
the Arbitrators had become functus officio and were not entitled to proceed
with the arbitration proceedings on merits and that the Arbitral Tribunal
thereafter proceeded to deal with the merits of the claim of General Electric
without any further notice to Renusagar and as a result Renusagar was unable to
present its case before the Arbitral Tribunal. This objection was not raised by
Renusagar either before the learned Single Judge or before the Division Bench
of the High Court. We have, however, considered the same and we do not find any
substance in it.
After
the Terms of Reference had been drawn before the Arbitral Tribunal on February
8, 1984, the parties had appeared before the Arbitral Tribunal at Paris for
hearing which lasted for ten days between February 25 to March 8, 1985 and
during the course of the said hearing Renusagar presented typed submissions and
legal authorities before the Arbitral Tribunal. In these hearings, the Arbitral
Tribunal concluded hearing on issues 22(g) to (p) and the matter was thereafter
adjourned by the Arbitral Tribunal to June 10 but on account of sudden illness
of Dr Dixit, one of the arbitrators, the matter had to be adjourned and it was
ultimately fixed for October 1, 1985. On June 26, 1988, the Chairman of the
Arbitral Tribunal sent a notice to the parties wherein it was stated that the
adjourned hearing would take place in London on Tuesday from October 1 to 4 and
to continue if necessary during the following week from October 7 to 11. In the
said communication, it was further stated:
"5.
At the beginning of the hearing, the Tribunal will be prepared to hear
submissions if necessary on the adequacy of the evidence before us on the
relevant issues of U.S.
foreign
tax credit. But the main purpose of the meeting is to deal with the respondent's
counter-claims together with the claimant's claims for 119,053 U.S. dollars
(unpaid purchase price of spare parts) and 103,500 U.S. dollars (unpaid repairs
on 75 M.V.A.
Transformers).
6. All
the above counter-claims and claims are old, so before going into details as to
merit, the Tribunal will wish to consider submissions on the raised issues of
limitation, laches, estoppel, abandonment and whether the right party is being
sued."
39. On
July 23, 1985, M/s Khaitan & Partners, on behalf of Renusagar, sent a
communication to the Arbitrators giving notice that Renusagar was abandoning
and withdrawing items (ii) to (vi) and (viii) of its claim set forth in para
19(g) of the Terms of Reference as amended by Paris hearings. On August 10,
1985, M/s Khaitan & Partners, on behalf of Renusagar, sent a communication
to the Arbitrators wherein a reference was made to the notice issued by
Renusagar to the effect that the ICC Arbitration Tribunal had become functus
officio and neither the ICC Arbitration Tribunal could proceed with the
arbitration nor Renusagar could participate in the same on the ground that the
application submitted by General Electric under Section 3 of the Foreign Awards
Act had been rejected by Mirzapur Civil Court and the said order of the court
had not yet been set aside or stayed by the Allahabad High Court in the
revision petition filed by General Electric. Renusagar, through their advocates
(M/s Khaitan & Partners) also sent petition dated August 23, 1985 to the
Secretary-General, ICC as well as Secretariat, ICC of Arbitration reiterating
their objection that the arbitrators had become flinctus officio and could not
proceed and/or function. In his communication to M/s Khaitan & Partners
dated 674 September 2, 1985 the Chairman of the Arbitral Tribunal intimated
that the question as to the effect of the suit filed in the Mirzapur Court on
the arbitration would be considered as a preliminary issue at the scheduled
meeting on October 1, 1985. On September 23, 1985, M/s Khaitan & Partners,
on behalf of Renusagar, addressed a communication to Mr Roberto Power in the
ICC (copies of the same were sent to the Arbitrators as well as to General
Electric) wherein it was stated: "Our plea is totally different. It is
that the Arbitrators have become functus officio in the facts and law stated by
us in the 23rd August, 1985 document and our telexes to the Arbitrators copies
of which have been sent to ICC. Therefore, the question of our appearing before
the Arbitrators or their determining the plea raised by us cannot and does not
arise." In the communication dated September 28, 1985 from M/s Khaitan
& Partners, it is stated: "We have been repeatedly informing you that
the Arbitrators have become functus officio. Therefore, be so kind as not to communicate
with us any further regarding the arbitration which has become
infructuous." From these documents, it would appear that the stand of
Renusagar was that the Arbitrators had become functus officio and they could
not proceed with the arbitration and there was, therefore, no question of
Renusagar appearing before the Arbitral Tribunal on the dates fixed for
hearing. In these circumstances, it is not open to Renusagar to say that the
Arbitral Tribunal, after having rejected, (by majority) the said objection
raised by Renusagar, by order dated October 1, 1985 should have given a further
notice to Renusagar asking them to appear to make their submission before the
Arbitral Tribunal on the merits on issues 22(q) to 22(bb).
In
this context, it may also be stated that issues 22(q) and 22(r) relate to the
claim of US $ 119,053.91 for purchase price of spare parts which is not
disputed by Renusagar and issue 22(s) relates to claim for compensatory damages
on the said amount which has been allowed on the same basis as the claim for
compensatory damages on regular interest (Item No.
2)
under issue 22(k). Rest of the matters covered by issues 22(t) to 22(bb)
related to counter-claims of Renusagar and claims by General Electric against
counter-claims which have been disallowed by the Arbitral Tribunal.
40. We
are, therefore, of the opinion that the enforcement of the arbitral award is
not barred by Section 7(1)(a)(ii) of the Foreign Awards Act on the ground that
Renusagar was unable to present its case before the Arbitral Tribunal.
III.
Objection to the enforceability of the award on the ground that it is contrary
to the public policy of the State of New York
41.
Shri Venugopal has urged that although under sub-clause (b) of clause (2) of
Article V of the New York Convention the recognition and enforcement of an
arbitral award can be refused if the competent authority in the country where
recognition and enforcement is sought finds that the recognition or enforcement
of the award would be contrary to the public policy of that country, i.e., the
country where the award is sought to be enforced, a departure has been made in
Section 7(1)(b)(ii) of the Foreign Awards Act which prescribes that the foreign
award may not be enforced under the said Act if the court dealing with the case
is satisfied that the enforcement of the award would be contrary to public
policy. The submission of Shri Venugopal is that in Section 7(1)(b)(ii) of the
Act, the Parliament has deliberately refrained from using the words
"public policy of India" which implies that the words "public
policy" are not restricted 675 to the public policy of India but would
cover the public policy of the country whose law governs the contract or of the
country of the place of arbitration and the enforcement of an award would be refused
if it is contrary to such public policy. In this context Shri Venugopal has
invited our attention to the provisions of Section 7(1) of the Arbitration
(Protocol & Convention) Act, 1937 wherein the words used are "and
enforcement thereof must not be contrary to the public policy or law of
India". According to Shri Venugopal while under the 1937 Act, objections
to enforcement are limited to the public policy of India or law of India, there
is no such limitation in Section 7(1)(b)(ii) of the Foreign Awards Act. Shri
Venugopal has also placed reliance on the decision of this Court in V/0
Tractoroexport, Moscow v. Tarapore & Co.5 wherein this Court has held that
there was clear deviation from the rigid and strict rule that the courts must
stay a suit whenever an international commercial arbitration as contemplated by
the Protocol and the Conventions, was to take place and that it was open to the
legislature to deviate from the terms of the Protocol and the Convention and
that it appears to have given only a limited effect to the provisions of the
1958 Convention. We find it difficult to accept this contention.
It
cannot be held that by not using the words "public policy of India"
and only using the words "public policy" in Section 7(1)(b)(ii) of
the Foreign Awards Act, Parliament intended to deviate from the provisions of
the New York Convention contained in Article V(2)(b) which uses the words
"public policy of that country" implying public policy of the country
where recognition and enforcement is sought.
That
Parliament did not intend to deviate from the terms of the New York Convention
is borne out by the amendment which was introduced in the Act by Act 47 of 1973
after the decision of this Court in Tractoroexport case5 whereby Section 3 was
substituted to bring it in accord with the provisions of the New York
Convention. The Foreign Awards Act has been enacted to give effect to the New
York Convention which seeks to remedy the defects in the Geneva Convention of
1927 that hampered the speedy settlement of disputes through arbitration. The
Foreign Awards Act is, therefore, intended to reduce the time taken in
recognition and enforcement of foreign arbitral awards. The New York Convention
seeks to achieve this objective by dispensing with the requirement of the leave
to enforce the award by the courts where the award is made and thereby avoid
the problem of "double exequatue'. It also restricts the scope of enquiry
before the court enforcing the award by eliminating the requirement that the
award should not be contrary to the principles of the law of the country in
which it is sought to be relied upon. Enlarging the field of enquiry to include
public policy of the courts whose law governs the contract or of the country of
place of arbitration, would run counter to the expressed intent of the
legislation.
42.
With regard to the provisions of the Arbitration (Protocol & Convention)
Act, 1937, it may be stated that Section 7(1) of the said Act, as originally
enacted, read as under:
"7.
Conditions for enforcement of foreign awards.- (1) In order that a foreign
award may be enforceable under this Act it must have- (a) been made in
pursuance of an agreement for arbitration which was valid under the law by
which it was governed, 5 (1969) 3 SCC 562: (1970) 3 SCR 53 676 (b) been made by
the Tribunal provided for in the agreement or constituted in manner agreed upon
by the parties, (c) been made in conformity with the law governing the
arbitration procedure, (d) become final in the country in which it was made,
(e) been in respect of a matter which may lawfully be referred to arbitration
under the law of British India, and the enforcement thereof must not be
contrary to the public policy or the law of British India.
(2) A
foreign award shall not be enforceable under this Act if the Court dealing with
the case is satisfied that- (a) the award has been annulled in the country in
which it was made, or (b) the party against whom it is sought to enforce the
award was not given notice of the arbitration proceedings in sufficient time to
enable him to present his case, or was under some legal incapacity and was not
properly represented or, (c) the award does not deal with all the questions
referred or contains decisions on matters beyond the scope of the agreement for
arbitration:
Provided
that if the award does not deal with all questions referred the Court may, if
it thinks fit, either postpone the enforcement of the award or order its
enforcement subject to the giving of such security by the person seeking to
enforce it as the Court may think fit.
(3) If
a party seeking to resist the enforcement of a foreign award proves that there
is any ground other than the non- existence of the conditions specified in
clauses (a), (b) and (c) of sub-section (1), or the existence of the conditions
specified in clauses (b) and (c) of sub-section (2), entitling him to contest
the validity of the award, the Court may, if it thinks fit, either refuse to
enforce the award or adjourn the hearing until after the expiration of such
period as appears to the Court to be reasonably sufficient to enable that party
to take the necessary steps to have the award annulled by the competent
tribunal."
43. By
Indian Independence (Adaptation of Central Acts and Ordinances) Order, 1948 the
words "British India" were substituted by the words "the
Provinces", which words were substituted by the words "the
States" by the Adaptation of Laws Order, 1950. By Part B States (Laws)
Act, 1951, the words "the States" were substituted by the word "India".
The
aforesaid amendments introduced from time to time indicate that the words
"public policy" and "the law of India" are independent of
each other and the words "public policy" are not qualified by the
words "of India" which follow the word "law" because there
was no separate public policy for each Province or State in India. This means
that even in the Protocol and Convention Act of 1937 the legislature had used
the words "Public Policy" only and by the said words it was intended
to mean "the public policy of India". The New York Convention has further curtailed the scope of
enquiry by excluding contravention of law of the court in which the award is
sought to be enforced as a ground for refusing recognition and enforcement of a
foreign award. The words "law of India" have, therefore, been omitted in Section 7(1)(b)(ii) of the
Foreign Awards Act.
It
cannot, 677 therefore, be said that by using the words "Public
Policy" only Section 7(1)(b)(ii) of the Foreign Awards Act seeks to make a
departure from the provisions contained in the Protocol and Convention Act of
1937 and, by using the words "Public Policy" without any
qualification, Parliament intended to broaden the scope of enquiry so as to
cover public policy of other countries, i.e., the country whose law governs the
contract or the country of the place of arbitration. In the U.K., the Arbitration Act, 1975 has been enacted to give
effect to the provisions of the New York Convention. Section 5(3) of the said
Act provides as under:
"Enforcement
of a Convention award may also be refused if the award is in respect of a
matter which is not capable of settlement by arbitration, or if it would be
contrary to public policy to enforce the award."
44.
Although the words "public policy" only are used without indicating
whether they refer to public policy of England, authors of authoritative textbooks have expressed the view that they
only mean "English public policy". In Russel on Arbitration, 12th
Edn. at p. 384 it is stated:
"The
New York Convention is to the same effect. Accordingly, though the 1975 Act
does not so specify, it must be taken that reference is intended to English
public policy which indeed is the only public policy into which the English
courts can sensibly inquire." The same view is expressed in Dicey &
Morris on The Conflict of Laws, 11th Edn., Vol. I at pp. 586-7.
45. We
are, therefore, of the view that the words "public policy" used in
Section 7(1)(b)(ii) of the Foreign Awards Act refer to the public policy of
India and the recognition and enforcement of the award of the Arbitral Tribunal
cannot be questioned on the ground that it is contrary to the public policy of
the State of New York.
IV.
Meaning of 'public policy' in Section 7(1)(b)(ii) of the Act
46.
While observing that "from the very nature of things, the expressions
'public policy', 'opposed to public policy' or 'contrary to public policy' are
incapable of precise definition" this Court has laid down:
(SCC
p. 217, para 92) "Public policy ... connotes some matter which concerns
the public good and the public interest. The concept of what is for the public
good or in the public interest or what would be injurious or harmful to the
public good or the public interest has varied from time to time." (See :
Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly6.)
47.
The need for applying the touchstone of public policy has been thus explained
by Sir William Holdsworth:
"In
fact, a body of law like the common law, which has grown up gradually with the
growth of the nation, necessarily acquires some fixed principles, and if it is
to maintain these principles it must be able, on the ground of public policy or
some other like ground, to suppress practices which, under ever new disguises,
seek to weaken or negative them." (History of English Law, Vol. III, p.
55)
48.
Since the doctrine of public policy is somewhat open-textured and flexible,
Judges in England have shown certain degree of
reluctance to invoke it in domestic law.
There
are two conflicting positions which are referred as the 6(1986)3SCC 156, 217:
1986 SCC (L&S) 429:
(1986)
1 ATC 103: (1986)2 SCR 278 ,372 678 ,narrow view' and the 'broad view'.
According to the narrow view courts cannot create new heads of public policy
whereas the broad view countenances judicial law making in this areas. (See :
Chitly on Contracts, 26th Edn., Vol. I, para 1133, pp. 685-686). Similar is the
trend of the decision in India. In Gherulal Parakh v. Mahadeodas
Maiya7 this Court favoured the narrow view when it said:
"...
though the heads are not closed and though theoretically it may be permissible
to evolve a new head under exceptional circumstances of a changing world, it is
admissible in the interest of stability of society not to make any attempt to
discover new heads in these days" (p. 440)
49. In
later decisions this Court has, however, leaned towards the broad view. [See :
Murlidhar Agarwal v. State of U.P.8; Central
Inland Water Transport Corpn. v. Brojo Nath Ganguly6 at p. 373; Rattan Chand
Hira Chand v. Askar Nawaz Jung9.]
50. In
the field of private international law, courts refuse to apply a rule of
foreign law or recognise a foreign judgment or a foreign arbitral award if it
is found that the same is contrary to the public policy of the country in which
it is sought to be invoked or enforced. The English courts follow the following
principles:
"Exceptionally,
the English court will not enforce or recognise a right conferred or a duty
imposed by a foreign law where, on the facts of the particular case,
enforcement or, as the case may be, recognition, would be contrary to a
fundamental policy of English law. The court has, therefore, refused in certain
cases to apply foreign law where to do so would in the particular circumstances
be contrary to the interests of the United Kingdom or contrary to justice or
morality." (See : Halsbury's Laws of England, 4th Edn., Vol. 8, para 418.)
51. A
distinction is drawn while applying the said rule of public policy between a
matter governed by domestic law and a matter involving conflict of laws. The
application of the doctrine of public policy in the field of conflict of laws
is more limited than that in the domestic law and the courts are slower to
invoke public policy in cases involving a foreign element than when a purely
municipal legal issue is involved. (See : Vervaeka v. Smith10; Dicey &
Morris, The Conflict of Laws, 11 th Edn., Vol. I p. 92; Cheshire & North,
Private International Law, 12th Edn., pp. 128-129).
The
reason for this approach is thus explained by Professor Graveson:
"This
concern of law in the protection of social institutions is reflected in its
rules of both municipal and conflict of laws.
Although
the concept of public policy is the same in nature in these two spheres of law,
its application differs in degree and occasion, corresponding to the fact that
transactions containing a foreign element may constitute a less serious threat
to municipal institutions than would purely local transactions." (R.H.
Graveson : Conflict of Laws, 7th Edn., p. 165) 7 1959 Supp 2 SCR 406: AIR 1959
SC 781 8 (1974) 2 SCC 472, 482: (1975) 1 SCR 575, 584 9 (1991) 3 SCC 67, 76-77
10 (1983) 1 AC 145,164: (1982) 2 All ER 144,158 679
52. In
Louchs v. Standard Oil Co. of New York' I Cordozo, J. has said:
"The
courts are not free to refuse to enforce a foreign right at the pleasure of the
judges, to suit the individual notion of expediency or fairness. They do not
close their doors unless help would violate some fundamental principle of
justice, some prevalent conception of good morals, some deep-rooted tradition
of the common weal." (p. 111)
53.
The particular rule of public policy that the defendant invokes may be of this
overriding nature and therefore enforceable in all actions, or it may be local
in the sense that it represents some feature of internal policy. If so it must
be confined to cases governed by the domestic law and it should not be extended
to a case governed by foreign law. In order to ascertain whether the rule is
allpervading or merely local, it must be examined in the light of its history,
the purpose of its adoption, the object to be accomplished by it and the local
conditions. (See : Cheshire and North, Private International Law, 12th Edn., p.
129.)
54.
The cases in which the English courts refuse to enforce a foreign acquired
right on the ground that its enforcement would affront some moral principle the
maintenance of which admits of no possible compromise, have been classified as
under:
"(i)
Where the fundamental conceptions of English justice are disregarded;
(ii)
Where the English conceptions of morality are infringed;
(iii)
Where a transaction prejudices the interests of the United Kingdom or its good
relations with foreign powers;
(iv)
Where a foreign law or status offends the English conceptions of human liberty
and freedom of action;" (See : Cheshire and North, Private International
Law, 12th Edn.,pp. 131-133.)
55. As
observed by Lord Simon of Glaisdale "an English Court will exercise such a
jurisdiction with extreme reserve". (Vervaeka v. Smith10)
56. In
Dalmia Dairy Industries Ltd. v. National Bank of Pakistan12 the Court of Appeal
refused to extend the doctrine of public policy to embrace the principle that
the English courts should refuse to enforce an award arising out of a contract
between persons who are nationals of foreign States which were at war with each
other but each of which was in friendly relationship with England. In support
of the applicability of the doctrine, it was argued that it would be harmful to
international relations of the United Kingdom with friendly countries if it
were to allow the machinery of its courts to be used to enforce a judgment, or
an arbitral award in favour of a national of one foreign State friendly to the
United Kingdom, against the national of another foreign State, also friendly to
the United Kingdom, when the two foreign States are enemies of one another.
Negativing the said contention, the Court of Appeal (Megaw, L.J.) has held:
"
If there is no authority binding on us which specifically adopts that supposed
doctrine, or principle, we should unhesitatingly decline to make 11 224 NY 99
(1918) 12 (1978) 2 Lloyd's LR 223 680 new law to that effect in this case. We
should regard it, on balance, as being contrary to public policy for such a
principle to apply." (p. 300)
57. In
Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v. Ras Al Khaima h National
Oil Co.13 decided by the Court of Appeal, Sir John Donaldson M.R. has said:
"Consideration
of public policy can never be exhaustively defined, but they should be
approached with extreme caution. As Burrough J. remarked in Richardson v.
Mellish14: 'It is never argued at all but when other points fail.' It has to be
shown that there is some element of illegality or that the enforcement of the
award would be clearly injurious to the public good or, possibly, that
enforcement would be wholly offensive to the ordinary reasonable and
fully-informed member of the public on whose behalf the powers of the State are
exercised." (p. 779)
58.
The approach of the American courts to the doctrine of public policy in its
application to recognition and enforcement of foreign arbitral awards under the
New York Convention is reflected in the decision of the US Court of Appeals in
Parsons & Whittemore Overseas Co. Inc. v. Societe Generale De L'Industrie
Du Papier (Rakta) and Bank of America15 wherein it has been observed:
"The
general pro-enforcement bias informing the Convention and explaining its
supersession of the Geneva Convention points toward a narrow reading of the
public policy defense.
An
expansive construction of this defense would vitiate the Convention's basic
effort to remove preexisting obstacles to enforcement. ... We conclude,
therefore, that the convention's public policy defense should be construed
narrowly. Enforcement of foreign arbitral awards may be denied on this basis
only where enforcement would violate the forum State's most basic notions of
morality and justice." (pp. 973-974)
59.
While dealing with arbitration agreements in international business
transactions, the U.S. Supreme Court, has disapproved a parochial refusal by
the courts of one country to enforce an international arbitration agreement as
well as the "parochial concept that all disputes must be resolved under
our laws and in our courts".
It has
been observed:
"We
cannot have trade and commerce in world markets and international waters
exclusively on our terms, governed by our laws, and resolved in our
Courts." (Fritz Scherk v.
Alberto-Culver
Co. 16) 60. Similarly in Mitsubishi Motors Corpn. v. Soler Chrysler-Plymouth
Inc. 17 it was observed:
"We
conclude that concerns of international comity, respect for the capacities of
foreign and transnational tribunals, and sensitivity to the need of the
international commercia l system for predictability in the resolution of
disputes require that we enforce the parties' agreement, even assuming that 13
(1987) 2 All ER 769 14 (1824) 2 Bing 229, 252: (1824-34) All ER Rep 258, 266 15
508 F 2d 969 (1974) 16 41 L Ed 2d 270, 279, 281 : 417 US 506 (1974) 17 87 L Ed
2d 444 681 a contrary result would be forthcoming in a domestic context."
(pp. 456457)
61. In
France, a distinction is made between international public policy ("order
public international") and the national public policy. Under the new
French Code of Civil Procedure, an international arbitral award can be set
aside if the recognition or execution is contrary to international public
policy. In doing so it recognises the existence of two levels of public policy
the national level, which may be concerned with purely domestic considerations,
and the international level, which is less restrictive in its approach. (See :
Redfern and Hunter, Law and Practice of International Commercial Arbitration,
2nd Edn., p. 445.)
62.
According to Redfern and Hunter, "if a workable definition of 'international
public policy' could be found, it would be an effective way of preventing an
award in an international arbitration from being set aside for purely domestic
policy considerations". But in the absence of such a definition
"there are bound to be practices which some States will regard as contrary
to international public interest and other States will not" [See : Redfern
& Hunter (supra) pp. 445-446.] 63.In view of the absence of a workable
definition of "international public policy" we find it difficult to
construe the expression "public policy" in Article V(2)(b) of the New
York Convention to mean international public policy. In our opinion the said
expression must be construed to mean the doctrine of public policy as applied
by the courts in which the foreign award is sought to be enforced.
Consequently, the expression 'public policy' in Section 7(1)(b)(ii) of the
Foreign Awards Act means the doctrine of public policy as applied by the courts
in India.
This
raises the question whether the narrower concept of public policy as applicable
in the field of public international law should be applied or the wider concept
of public policy as applicable in the field of municipal law.
64.
Keeping in view the object underlying the enactment of the Foreign Awards Act,
this Court has also favoured a liberal construction of the provisions of the
said Act. In Renusagar case I1 it has been observed: (SCC p. 723, para 50)
"It is obvious that since the Act is calculated and designed to subserve
the cause of facilitating international trade and promotion thereof by
providing for speedy settlement of disputes arising in such trade through
arbitration, any expression or phrase occurring therein should receive,
consisting with its literal and grammatical sense, a liberal construction."
(p. 492)
65.
This would imply that the defence of public policy which is permissible under
Section 7(1)(b)(ii) should be construed narrowly. In this context, it would
also be of relevance to mention that under Article I(e) of the Geneva
Convention Act of 1927, it is permissible to raise objection to the enforcement
of arbitral award on the ground that the recognition or enforcement of the
award is contrary to the public policy or to the principles of the law of the
country in which it is sought to be relied upon. To the same effect is the
provision in Section 7(1) of the Protocol & Convention Act of 1837 which
requires that the enforcement of the foreign award must not be contrary to the
public policy or the law of India. Since the expression "public
policy" covers the field not covered by the words "and the law of
India" which follow the said expression, 682 contravention of law alone
will not attract the bar of public policy and something more than contravention
of law is required.
66.
Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of
the Foreign Awards Act do not postulate refusal of recognition and enforcement
of a foreign award on the ground that it is contrary to the law of the country
of enforcement and the ground of challenge is confined to the recognition and
enforcement being contrary to the public policy of the country in which the
award is set to be enforced. There is nothing to indicate that the expression
"public policy" in Article V(2)(b) of the New York Convention and
Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in
which it was used in Article 1(c) of the Geneva Convention of 1927 and Section
7(1) of the Protocol and Convention Act of 1937.
This
would mean that "public policy" in Section 7(1)(b)(ii) has been used
in a narrower sense and in order to attract to bar of public policy the
enforcement of the award must invoke something more than the violation of the
law of India. Since the Foreign Awards Act is concerned with recognition and
enforcement of foreign awards which are governed by the principles of private
international law, the expression "public policy" in Section
7(1)(b)(ii) of the Foreign Awards Act must necessarily be construed in the
sense the doctrine of public policy is applied in the field of private
international law. Applying the said criteria it must be held that the
enforcement of a foreign award would be refused on the ground that it is
contrary to public policy if such enforcement would be contrary to (i) fundamental
policy of Indian law; or (ii) the interests of India; or (iii) justice or
morality.
V. Is
the award contrary to public policy of India?
67.
Having examined the scope of public policy under Section 7(1)(b)(ii) of the
Foreign Awards Act, we will now proceed to consider the various grounds on the
basis of which the said provision is invoked by Renusagar to bar the
enforcement for the award of the Arbitral Tribunal. As indicated earlier,
Renusagar has invoked the said provision on the ground that enforcement of the
award would be contrary to the public policy for the reason that such
enforcement- (a) would involve contravention of the provisions of FERA;
(b)
would amount to penalising Renusagar for not disregarding the interim orders
passed by the Delhi High Court in the writ petition filed by Renusagar;
(c)
would enable recovery of compound interest on interest;
(d)
would result in payment of damages on damages;
(e)
would result in unjust enrichment by General Electric; We will examine the
submissions of learned counsel under each head separately.
(a)
Violation of FERA
68. As
mentioned in the Preamble, FERA is a law regulating certain payments, dealings
in foreign exchange and securities, transactions indirectly affecting foreign
exchange and the import and export of currency for the conservation of the
foreign exchange resources of the country and the proper utilisation thereof in
the interests of the economic development of the country. It was preceded by
Foreign Exchange Regulation Act, 1947. Similar enactments 683 providing for
exchange control exist in other countries. In the United Kingdom, there is a
similar enactment, viz., Exchange Control Act, 1947, which remains in force but
its operation has been suspended since 1979. The view of the English courts is
that the exchange control legislation does not belong to the field of revenue
laws and application of such law is not obnoxious to English public policy.
(See :
Kahler
v. Midland Bank Ltd.18; Zivnostenska Banka National Corpn. v. Frankman19.) In
Herbert Wagg & Co. Ltd., Re2O, Upjohn J., has said:
"It
cannot be doubted that legislation intended to protect the economy of the
nation and the general welfare of its inhabitant s regardless of their
nationality by various measures of foreign exchange control or by altering the
value of its currency, is recognised by foreign courts although its effect is
usually partially confiscatory.
Probably
there is no civilized country in the world which has not at some stage in its
history altered its currency or restricted the rights of its inhabitants to
purchase the currency of another country. (p. 349) In my judgment these courts
must recognize the right of every foreign State to protect its economy by
measures of foreign exchange control and by altering the value of its currency.
Effect must be given to those measures where the law of the foreign State is
the proper law of the contract or where the movable is situate within the
territorial jurisdiction of the State."(p.351) 69.The following principle
of Private International Law is applicable in relation to such legislation:
"212.
(1) A contractual obligation may be invalidated or discharged by exchange
control legislation if- (a) such legislation is part of the proper law of the
contract; or (b) it is part of the law of the place of performance; or (c) it
is part of English law and the relevant statute or statutory instrument is
applicable to the contract:
Provided
that foreign exchange legislation will not be applied if it is used not with
the object of protecting the economy of the foreign State, but as an instrument
of oppression or discrimination." (See : Dicey & Morris, The Conflict
of Laws, 11 th Edn., Vol. II, 1466.)
70. In
the comments on the said rule, it is stated:
"An
English court would clearly refuse to enforce a contract the making or
performance of which was prohibited by the Exchange Control Act, 1947 (now
suspended) or by any statutory instrument made in virtue of that Act, or which
was prohibited by earlier United Kingdom exchange control legislation. This
would apply irrespective of the proper law of the contract and irrespective of
the place of performance. The question whether the Act or statutory instrument
applied to the transaction would have to be answered by construing it in accordance
with the principles of statutory interpretation which are part of English law.
If it did so apply , it would be an example of an 'overriding statute'."
18 1950 AC 24, 27, 36, 46-47, 57 : (1949) 2 All ER 621 19 1950 AC 57,72, 78:
(1949) 2 All ER 671 20 (1956) 1 Ch 323 684 (See: Dicey & Morris, op. cit.
p. 1469.)
71. In
support of this statement of law reference has been made to the decision of
House of Lords in Boissevain v. Weil21. In that case, the respondent, a British
subject, and the appellant, a Dutch subject, were involuntarily resident in
Monaco an enemy-occupied territory, in 1944, due to war conditions. The
respondent borrowed a sum of 960,000 French francs from the appellant in Monaco
on an undertaking to repay the money in sterling in London at an agreed rate of
160 francs to the pound and drew cheques in blank for the full amount on
English Bank. The appellant filed a suit in England claiming 6000 pounds from
the respondent. The said claim was opposed by the respondent on the ground that
the loans given by the appellant to the respondent were invalid and illegal
being contrary to Regulation 2(1) of the Defence (Finance) Regulations, 1939.
The said claim of the appellant was allowed by the trial Judge, but on appeal,
it was dismissed by the Court of Appeal. The House of Lords agreed with the
view of the Court of Appeal that Regulation 2(1) prohibited this borrowing and
therefore rendered the appellant's claim for repayment unmaintainable. Lord
Radcliffe, who delivered the main speech, has observed:
"If
Regulation 2 did extend to this transaction it forbade the very act of
borrowing, not merely the contractual promise to repay. The act itself being
forbidden, I do not think that it can be a source of civil rights in the courts
of this country. ... A court that extended a remedy in such circumstances would
merit rather to be blamed for stultifying the law than to be applauded for
extending it." (p. 341)
72.
Another interesting case is that of Wilson, Smithett & Cope Ltd. v.
Terruzzi22. In that case, the plaintiffs were brokers on the London Metal
Exchange and the defendant, Terruzzi, was a dealer and speculator in metals who
lived in Italy. The defendant entered into various contracts for the sale and
purchase of metals with the plaintiffs and a sum of 195,000 pounds was payable
by the defendant to the plaintiffs in respect of those contracts. Before
entering the said contracts, defendant had, however, not obtained ministerial
authorisation as required by the Italian Exchange Control Regulations. An
action was brought in the English court by the plaintiffs against the defendant
in which the defendant pleaded that it was unlawful for him under Italian law
to enter into any of the contracts which were "exchange contracts"
within the meaning of Article VIII, Section 2(b) of the Bretton Woods Agreement
and unenforceable by reason of the Bretton Woods Agreements Order in Council,
1946. The said plea of the defendant was rejected by the trial Judge who gave a
judgment in favour of the plaintiffs and the said judgment was affirmed by the
Court of Appeal. It appears that the judgment of the English court was sought
to be enforced by the plaintiffs in Italy but the Italian courts refused to
recognise and enforce the said judgment on the view that since the contracts '
were entered in violation of the Italian Exchange Control Regulations their
enforcement would amount to infringement of Italian public policy and the
contracts were unenforceable in Italy. (See : Mauro Rubino-Sammartano, Public
Policy in Transnational Relationships, p. 91.) 21 1950 AC 327: (1950) 1 All ER
728 22 (1976) 1 QB 683 :(1975) 2 All ER 649 685
73.
Our attention has also been invited to a decision of the Supreme Court of
Austria dated May 11, 1983 which is extracted, in brief, in Yearbook of
Commercial Arbitration, Volume X (1985) pp. 421-23. In that case, an award had
been made in favour of the appellant who was a national of Holland against the
respondent who was an Austrian whereby the respondent was directed to pay to
the appellant DM 667,500. The appellant sought enforcement of the award in
Austria and the said enforcement was opposed by the respondent on the ground
that the underlying contracts, though nominally delivery contracts, were in
reality sales and purchases on a margin basis and such contracts are contrary
to Austrian foreign exchange law, unless specific authorisation therefor was
given by the competent authorities. The respondent invoked Article V(2)(b) of
the New York Convention, 1958 to oppose the recognition and enforcement of the
award. The Austrian Supreme Court dismissed the claim of the Dutch national and
held that the award could not be recognised and enforced by the court in view
of Article V(2)(b) of the New York Convention and, in that context, it was
held:
"That
the transactions concluded between the parties are not subject to Austrian but
to Dutch law is irrelevant because domestic law is applicable to the
examination whether there has been a sale and purchase on a margin basis, for
determining whether enforcement is to be refused. According to Article 81, para
4, of the Austrian Law on Enforcement Procedure, enforcement has to be refused
if sought for awards rendered in respect of claims which, under Austrian law,
cannot be brought before Austrian courts. This is a specific, special provision
of domestic Austrian law on public policy." (p. 422)
74. Dr
F.A. Mann has also expressed views to the same effect. He has said: "There
remains the question whether a foreign judgment rendered in disregard of
foreign exchange regulations operating in the country in whic h it is to be
enforced, may or must be rejected by the courts of the latter country as being
contrary to order public. Subject to local regulations the answer would seem to
be in the affirmative." (See: F.A. Mann, The Legal Aspect of Money, 5th
Edn., (1992) p. 403,note 31.)
75. As
laid down by this Court, FERA is a statute enacted for the "national
economic interest" and the object of various provisions in the said Act is
to ensure that the nation does not lose foreign exchange which is very much
essential for the economic survival of the nation. (See : LIC of India v.
Escorts Ltd. 23 and M.G. Wagh v. Jay Engineering Works Ltd. 24)
76.
Keeping in view the aforesaid objects underlying FERA and the principles governing
enforcement of exchange control laws followed in other countries, we are of the
view that the provisions contained in FERA have been enacted to safeguard the
economic interests of India and any violation of the said provisions would be
contrary to the public policy of India as envisaged in Section 7(1)(b)(ii) of
the Act. The submissions urged by Shri Venugopal to show that there has been a
violation of the provisions of FERA, therefore, need examination.
23
(1986) 1 SCC 264, 314: 1985 Supp 3 SCR 909, 981 24 (1987) 1 SCC 542, 546:
(1987) 1 SCR 981, 987 686
77.
Shri Venugopal has made a two-fold submission in this regard. In the first
place, he has urged that in awarding delinquent interest, under item No. 3 the
Arbitral Tribunal has acted in disregard of the provisions of FERA and secondly
the enforcement of the award of the Arbitral Tribunal would result in violation
of the provisions of FERA. As regards the first submission relating to award of
delinquent interest, it may be stated that the said submission involves an
attack on the merits of the award which is impermissible at the stage. of
enforcement. We have, however, examined this submission on merits and are of
the view that it is without substance. Shri Venugopal has urged that under the
original approval of January 2, 1964 by the Government of India of the terms of
the loan by General Electric to Renusagar the total amount of loan was to be
repaid in 16 equal semi-annual instalments between the 30th and the 120th month
from the effective date of the contract with specific provision for interest
from the 16th to the 30th month to be capitalised and the interest was
specifically restricted to the period from the 16th to the 30th month and
thereafter on capitalisation from the 30th month to the 120th month and that no
interest was payable without FERA sanction after the due date of each
instalment.
This
contention is no longer open to Renusagar in view of the earlier decision of
this Court in Renusagar Case 11, wherein this Court has considered the question
whether there was an obligation to pay further interest after June 30, 1967
till payment under the contract. This Court has referred to Articles IIIA3(c)
and XIV-B of the contract and has held: (SCC p. 710, paras 32 and 33) "In
our view these provisions which are to be found in the contract clearly show
that the promissory notes are not sole and exclusive repository of GEC's right
to claim and receive future interest on unpaid price after June 30, 1967 but
that the contract itself provides for the obligation to pay such interest after
that date till payment.
obligation
to pay future interest from June 30, 1967 onwards till payment and that these
two claims have been preferred by GEC before the Court of Arbitration of I.C.C.
as arising not merely 'out of' but 'under the contract'." (pp. 477-478)
78.
Shri Venugopal has, however, urged that the earlier approval to the terms of
the contract was of no consequence in view of the subsequent refusal by the
Government on August 1, 1969 to approve the agreement between General Electric
and Renusagar with regard to the rescheduling of the dates of payment of
instalments 1, 2, 4 and 5. This contention also stands concluded by the
decision in Renusagar Case II wherein it has been observed: (SCC p. 691, para 7)
"In July 1969 Renusagar sought the Central Government's approval to the
rescheduling of the dates of payment as embodied in October 1968 Amendment as
also in the Memorandum of the Meeting held in December 1968 but by letters
dated August 1, 1969 and August 4, 1969 the Central Government declined to
approve the rescheduling of the dates of payment on the ground that it would
result in larger outflow of foreign exchange and advised Renusagar to effect
payments as per the original schedule including instalments which had since
fallen due. The result was that the original schedule of payment remained
operative and there was delay on the part of the Renusagar to make payment of
certain instalments on due dates." (p. 457) 687
79.
From the observations aforementioned in Renusagar Case II it is apparent that
the original contract postulates payment of interest till payment and the
effect of the order of the Government of India dated August 1, 1969 was that
the original schedule of payment remained operative. Since the original
contract had been approved by the Government of India it cannot be said that
the award of interest for delayed payment of instalments involved violation of
the provisions of FERA.
80.
Shri Venugopal has submitted that in Renusagar Case I1 this Court was only
required to consider the question of arbitrability of the disputes and was not
concerned with the merits of the claim and, therefore, the said decision cannot
be held to conclude the matter. We are unable to agree. It is true that in that
case this Court was considering the question of arbitrability of the disputes
but for the purpose of deciding that issue it was necessary to consider whether
disputes arose out of or are related to the contract and for that purpose it
was necessary to construe the terms of the contract and it cannot, therefore,
be said that the said decision does not conclude this aspect of the matter.
In
this context, it may also be pointed out that after the decision in Renusagar
Case I, an application for clarification of the said judgment was moved by
Renusagar in this Court wherein clarification was sought in respect of certain
paragraphs in the judgment and in the said application no objection was raised
with regard to the observations quoted above. Moreover, the said application
was dismissed by this Court by order dated October 29, 1988.
81. As
regards the second submission of Shri Venugopal that the enforcement of the
Arbitral award would constitute violation of Section 9(1) of FERA which imposes
prohibition to make any payment to or for the credit of any person resident
outside India except in accordance with any general or special exemption from
the provisions of this sub-section which may be granted conditionally or
unconditionally by the Reserve Bank. The submission is that in view of the
earlier order of the Government of India dated August 1, 1969 refusing to
approve rescheduling of payments the bar of Section 9 will operate and no order
for enforcement of the award can be made. The High Court in this regard has
placed reliance on the provisions of Section 47(3) of FERA which provides as
follows:
"Neither
the provisions of this Act nor any term (whether express or implied) contained
in any contract that anything for which the permission of the Central Government
or the Reserve Bank is required by the said provisions shall not be done
without that permission, shall prevent legal proceedings being brought in India
to recover any sum which, apart from the said provisions and any such term,
would be due, whether as debt, damages or otherwise, but- (a) the said
provisions shall apply to sums required to be paid by any judgment or order of
any court as they apply in relation to other sums;
(b) no
steps shall be taken for the purpose of enforcing any judgment or order for the
payment of any sum to which the said provisions apply except as respects so
much thereof as the Central Government or the Reserve Bank, as the case may be,
may permit to be paid; and 688 (c) for the purpose of considering whether or
not to grant such permission, the Central Government or the Reserve Bank, as
the case may be, may require the person entitled to the benefit of the judgment
or order and the debtor under the judgment or order, to produce such documents
and to give such information as may be specified in the requisition."
82. In
Dhanrajamal Gobindram v. Shamji Kalidas & Co.25 this Court has construed
the provisions of Section 21 of the Foreign Exchange Regulation Act, 1947.
Sub-section (3) of Section 21 of the said Act was more or less similar to
Section 47(3) of FERA. This Court has held:
"Sub-section
(3) allows legal proceedings to be brought to recover sum due as a debt,
damages or otherwise, but no steps shall be taken to enforce the judgment,
etc., except to the extent permitted by the Reserve Bank.
The
effect of these provisions is to prevent the very thing which is claimed here,
namely, that the Foreign Exchange Regulation Act arms persons against
performance of their contracts by setting up the shield of illegality. An
implied term is engrafted upon the contract of parties by the second part of
sub-section (2), and by sub-section (3), the responsibility of obtaining the
permission of the Reserve Bank before enforcing judgment, decree or order of
Court, is transferred to the decree-holder.
The
section is perfectly plain, though perhaps it might have been worded better for
which a model existed in England." (p. 1031)
83. To
the same effect is the law laid down by the House of Lords in England in
Contract and Trading Co. (Southern) Ltd. v. Barbey26 wherein the following
observations from the judgment of Somerwell LJ in Cummings v. London Bullion
Co. Ltd.27 have been quoted with approval:
"The
person entitled to the payment issues a writ. The fact that permission has not
been obtained is not a defence to the action. On the one hand, the plaintiff
can obtain judgment, the money due under the judgment being subject to Part 11
of the Act and the Rules to which I have referred. The defendant assuming that
he is admitting liability, apart from the provisions of the Act, can make a
payment into court. The Act,is not to be used to enable the defendant to retain
the money in his pocket but to control its reaching its destination, namely,
the plaintiff." (p. 253) 84.Shri Venugopal has urged that Section 47(3)
cannot be applied in the present case because it postulates a situation where
permission of the Central Government has not been sought and that in the
present case permission was sought but was refused earlier. In our view the
earlier refusal by the Government to give its approval to the rescheduling of
payment of instalments does not in any way preclude the Government of India
from considering the matter in the light of the subsequent developments and it
cannot be said that merely because the Government of India had refused to give
its approval to rescheduling of payment of instalments it would not grant
permission under Section 47(3) of FERA to the enforcement of the judgment that
may be passed in these proceedings. It has also been urged that Section 47(3)
of FERA is applicable where the legal proceedings are brought in India to
recover a sum 25 (1961) 3 SCR 1020: AIR 1961 SC 1285 26 1960 AC 244: (1959) 3
All ER 846 27 (1952) 1 KB 327 :(1952) 1 All ER 383 689 which is 'due', i.e., as
liquidated sum presently owing and the said provision would not apply to an
obligation to pay on a future date. We do not find any support for this
submission from the language of Section 47(3) of FERA wherein the words used
are "to recover any sum which, apart from the said provisions and any such
term, would be due, whether as debt, damages or otherwise". The words
"would be" which precede the word "due" indicate that the
quantum of the amount has to be fixed in the legal proceedings and that it need
not be a predetermined amount. Moreover in the present case, we are concerned
with the proceedings for the enforcement of the award wherein the amount due
has already been determined by the Arbitral Tribunal. We are, therefore, unable
to hold that the enforcement of the award would involve violation of any of the
provisions of FERA and for that reason it would be contrary to public policy of
India so as to render the award unenforceable in view of Section 7(1)(b)(ii) of
the Act.
(b)
Disregard of the orders of Delhi High Court
85. It
is the fundamental principle of law that orders of courts must be complied with
for any action which involves disregard for such orders would adversely affect
the administration of justice and would be destructive of the rule of law and would
be contrary to public policy. The question, however, is whether the enforcement
of the award of the Arbitral Tribunal would involve disregard of any order of a
court. The submission of Shri Venugopal is that in the matter of withholding of
payment of regular interest Renusagar were acting in accordance with the
interim orders that were passed by Delhi High Court in the writ petition filed
by Renusagar which remained in operation from 1970 to 1980 and, therefore, the
Arbitral Tribunal was in error in awarding compensatory damages for retention
by Renusagar of the amount of income tax payable on the regular interest during
the period the writ petition was pending in the Delhi High Court and
enforcement of the award of compensatory damages on regular interest under item
No. 2 is, therefore, contrary to public policy. We find it difficult to accept
this contention. Renusagar had filed an application, C.M. No. 286-W/70, in C.W.
No. 170 of 1970 in the Delhi High Court. Prayer (i) of C.M. No. 286-W/70 was as
under:
"Pending
the hearing and final disposal of this petition for an interim order an
injunction restraining the respondent and its officers, servants and agents
from taking any steps on proceedings in enforcement furtherance, pursuance or
implementation or in any manner giving effect to the said orders both dated
September 11, 1969 or from preventing the payment by the petitioner of tax free
interest of 6 per cent per annum to IGE in accordance with the approval granted
by the respondent Orders dated September 8, 1965 and June 7, 1967 and to grant
an ex parte order pending notice."
86. On
February 24, 1970, the following interim order was passed in C.M. No. 286-W/70:
"There
shall be interim injunction as prayed for. Mr Kirpal to file his counter by
March 24, 1970."
87.
The matter came before the court after notice on May 18, 1970 on which date the
following order was passed:
"Mr
Ravinder Narain states that he will give security, of the assets of the company
to the satisfaction of the Commissioner of Income Tax, 690 Lucknow for Rs Four
lakhs. Let this be done within a month from today. Interim injunction and stay
to continue. In default of compliance, as above, petition for stay will stand
dismissed."
88.
From the prayer contained in C.M. 286-W and the orders dated February 24, 1970
and May 18, 1970 passed on the said application, it would appear that pending
the hearing and final disposal of the writ petition, there was an interim
injunction restraining the Union of India, the respondent in the said writ
petition, and its officers, servants and agents from taking any steps on
proceedings in enforcement, furtherance, pursuance or implementation or in any
manner giving effect to the said orders dated September 11, 1969 whereby tax
exemption had been withdrawn and also restraining from preventing Renusagar
from paying tax on interest of 6 per cent per annum to General Electric in
accordance with the approval granted under orders dated September 3, 1965 and
June 7, 1967. The only condition imposed by the Court was that Renusagar was
required to give security for Rs 4,00,000 to the satisfaction of Commissioner
of Income Tax, Lucknow within one month. These orders would, therefore, show
that on furnishing of the said security Renusagar was free to remit regular interest
@ 6 per cent per annum to General Electric as per the approval granted under
orders dated September 8, 1965 and June 7, 1967. The said orders of the Delhi
High Court did not also prevent Renusagar from depositing in the Government
Treasury the income tax payable on the amount of regular interest payable @ 6
1/2 per cent per annum. The said orders instead of preventing Renusagar from
remitting the said amount of tax free interest in fact permitted Renusagar to
make the said payments to General Electric. It cannot, therefore, be said that
in retaining the said amount with itself while the writ petition was pending in
the Delhi High Court during the period from 1970 to 1980 Renusagar was acting
in accordance with the orders passed by the Delhi High Court and the payment of
the said amount by Renusagar to General Electric or depositing in the
Government Treasury the income tax on the amount of regular interest payable to
General Electric would have amounted to disregard of the said orders. In the
circumstances, it is not possible to hold that in awarding compensatory damages
under item No. 2 for wrongfully withholding the amount of regular interest
during the period from 1970 onwards the Arbitral Tribunal has penalised
Renusagar for not disregarding the orders of the Delhi High Court and the
enforcement of the said award would be contrary to public policy of India.
(c)
Interest on Interest (Compound Interest)
89.
This relates to award of compensatory damages under item Nos. 2, 4 and 6. It
has been urged that the award of interest on interest (compound interest) is
not permissible under the law of New York as well as the law in India and is
also contrary to public policy of the State of New York as well as the public
policy of India. While construing the provisions of Section 7(1)(b)(ii) of the
Foreign Awards Act, we have held that under the said provisions the enforcement
of a foreign award can be objected to only on the ground of such enforcement
being contrary to public policy of India and that public policy of other
countries e.g. country of the law of contract of the courts of the place of
arbitration cannot be taken into consideration. For that reason an objection to
the enforceability of the award of the Arbitration Tribunal cannot be
entertained on the ground it is contrary to the public policy of the State of
New York. We 691 would, however, examine whether award of interest on interest
or compound interest is contrary to public policy of India. Before we refer to
the law in India in this regard, we may take note of the law in England to
which reference has been made by Shri Venugopal during the course of his
submissions. At common law in England the principle that is applied is that
laid down in "the reluctant decision" of the House of Lords in London
Chatham and Dover Rly. Co. v. South Eastern Rly. Co.28 that in the absence of
any agreement or statutory provision for the payment of interest, a court has
no power to award interest, simple or compound, by way of damages for the
detention (i.e., tile late payment) of a debt. The injustice resulting from
this rule has been sought to be removed by legislative intervention. By Section
3 of the Law Reform Miscellaneous Provisions) Act, 1934 power was conferred on
the court of record to award interest in proceedings for recovery of any debt
or damages where the debt remained unpaid until the judgment was given. Section
3 of the 1934 Act was repealed and replaced by Section 35-A inserted in the
Supreme Court Act 1981 by the Administration of Justice Act 1982 and power to
award interest was extended to cover a case where the debt is paid late, after
Proceedings for its recovery have begun but before they have been concluded.
The power to award interest does not extend to a case where a debt is paid
later but before any proceeding for its recovery have begun. The rule in Lo don
Chatham and Dover Rly V. case 28 has been qualified by the Court of Appeal in
Wadsworth v.
Lydall29
to apply only to claims for interest by way of general damages and does not
extend to claims for special damages. In the field of Admiralty law simple
interest is awarded, as a matter of course, on damages recovered in a damage
action. In the area of equity the Chancery Courts, differing from the common
law courts, have regularly awarded simple interest is ancillary relief in
respect of equitable remedies, such as specific Performance, recession and the
taking of an account and the Chancery Courts gave regularly awarded interest,
including not only simple interest but also compound interest, when they
thought that justice so demanded, that is to say in cases where money had been
obtained and retained by fraud or where it had been withheld or misapplied by a
trustee or anyone else in a fiduciary position. See : President of India v. La
Pintada Cia Navegacion SA 30.)
90. In
Australia, the matter has been considered by the Australian High Court in the
recent decision in Hungerfords v. Walker31. Mason, CJ and Wilson, I., after
referring to the decisions of the House of Lords in London Chatham and Dover
Rly. Co. v. South Eastern Rly. Co. 28 and President of India v. La Pintada,
Cia30) have observed:
"But
we see no reason for allowing the reluctance of the common law to extend to
cases where the defendant's breach of contract or negligence has caused the
plaintiff to pay away or the defendant to withhold money and, as a result, the
plaintiff has been deprived of the use of the money so paid away or
withheld." (p. 218) 28 1893 AC 429 : (1891-94) All ER Rep Ext 1610 29
(1981) 2 All ER 401 30 (1984) 2 All ER 773 31 (1989) 63 Aus LJR 210 692 They
upheld the decision of the Full Court of South Australia awarding damages for
the added cost of funding the business with borrowed money as result of the
loss of the use of money overpaid in tax by awarding compound interest for the
reason that simple interest would not reflect accurately the extent of the
respondent's loss since simple interest almost undercompensates the injured
party's true loss. It was observed:
"The
disdain of the common law for interest especially compound interest, is a relic
from the days when interest was regarded as necessarily usurious." (p.
218) Brennan and Deane JJ. have expressed their general agreement with the
reasons given by Mason, C.J. and Wilson, J. but Dawson, J. has given a dissenting
judgment.
91. It
appears that in Canada also, the Canadian Federal Court of Appeal has expressed
the view that there is no longer any reason to retain the common law rule
against interest as damages and the said rule has been described as "a
judge-made limitation on the awarding of interest which is clearly no longer
seen to be good public policy". (See :
Algonquin
Mercantile Corp. v. Dart Industries Canada Ltd.32)
92.
This would show that award of interest on damages or interest on interest i.e.
compound interest is not regarded as being against public policy in these
countries.
93. We
may now examine the law governing award of interest in India. Shri Venugopal
has placed reliance on the provisions of Section 3(3)(c) of the Interest Act,
1978.
Section
3 empowers a court to allow interest and sub-section (3) of the said section
provides exceptions to the main provision. In clause (c) of sub-section (3) it
is laid down that nothing in this section shall empower the court to award
interest upon interest. Shri Venugopal has also placed reliance on the decision
of the Judicial Committee of the Privy Council in Bengal Nagpur Rly. Co. Ltd.
v. Ruttanji Ramji33 and the decisions of this Court in Union of India v. West
Punjab Factories Ltd.34; Union of India v. Watkins Mayor & Co.35; Union of
India v. A.L. Rallia Ram36 and Thawardas Pherumal v. Union of India37. The
decision of the Judicial Committee of the Privy Council in Bengal Nagpur Rly.
Co. v. Ruttanji Ramji33 is based on London Chatham & Dover Rly. Co. case28
and following the said decision, it has been laid down that "interest for
the period prior to the date of the suit may be awarded, if there is an
agreement for the payment of interest at a fixed rate, or it is payable by the
usage of trade having the force of law, or in the provision of any substantive
law entitling the plaintiff to recover interest". The said decision of the
Privy Council has been followed by this Court in Thawardas Pherumal v. Union of
India37, Union of India v. Rallia Ram36, Union of India v. Watkins Mayor &
Co.35 and Union of India v. West Punjab Factories34 and it has been held that
in the absence of any agreement, express or implied, or any provision of law,
it is not 32 (1987) 16 CPR (3d) 193, 201 33 AIR 1938 PC 67: 65 IA 66: (1938) 1
MLJ 640 34 (1966) 1 SCR 580: AIR 1966 SC 395 35 AIR 1966 SC 275 36 (1964) 3 SCR
164: AIR 1963 SC 1685 37 AIR 1955 SC 468 : (1955) 2 SCR 48 693 possible to
award interest by way of damages. This would show that there is no absolute bar
on the award of interest by way of damages and it would be permissible to do so
if there is usage or contract, express or implied, or any provision of law to
justify the award of such interest.
Merely
because in Section 3(3)(c) of the Interest Act, 1978, the court is precluded
from awarding interest on interest does not mean that it is not permissible to
award such interest under a contract or usage or under the statute. It is
common knowledge that provision is made for the payment of compound interest in
contracts for loans advanced by banks and financial institutions and the said
contracts are enforced by courts. 'Hence, it cannot be said that award of
interest on interest, i.e., compound interest, is against the public policy of
India. We are, therefore, unable to accept the contention that award of
interest on interest, i.e., compound interest is contrary to public policy of
India and the award in respect of compensatory damages awarded under item Nos.
2, 4 and 6 cannot be enforced under Section 7(1)(b)(ii) of the Act.
(d)
Damages on Damages
94.
This objection relates to award of compensatory damages under item No. 4. The
submission of Shri Venugopal is that since the contract did not provide for
payment of interest for the period subsequent to the date of maturity, the
delinquent interest that has been awarded under item No. 3 is in the nature of
damages and the award of compensatory damages under item No. 4 amounts to award
of damages on damages which is impermissible and is contrary to public policy
of India. In support of this submission, Shri Venugopal has placed reliance on
the decision of this Court in Trojan & Co. Ltd. v. Nagappa Chettiar38
wherein interest had been allowed on damages and it was contended before this
Court that the said interest could not be allowed on damages because it would
amount to awarding damages on damages which is opposed to precedent and
principle. The Court rejected the said contention and held that interest is
allowed by court of equity in the case of money obtained or retained by fraud
and in that case, the plaintiff had paid the money to defendants on account of
fraudulent practices by the defendants on the plaintiffs.
95. In
the present case, the said decision has no application because the basic
postulate of the contention of Shri Venugopal is that the contract did not make
any provision for payment of interest for the period subsequent to the date of
maturity of the promissory notes. This contention has been considered by us and
it has been negatived and in view of the earlier decision of this Court in
Renusagar Case 11 we have held that the contract provided for payment of
interest for the period subsequent to the date of maturity of the promissory
notes till actual payment was made. In the circumstances, it cannot be said that
the delinquent interest that has been awarded under item No. 3 has been awarded
by way of damages and not by way of interest. Once it is held that delinquent
interest awarded under item No. 3 is by way of interest then there is no
question of damages being awarded on damages and it is, therefore, not
necessary to go into the question whether awarding damages on damages is
contrary to public policy of India.
38
1953 SCR 789 : AIR 1953 SC 235 : (1953) 23 Comp Cas 307 694 (e) Unjust
Enrichment
96.
Relying upon the decision of the Supreme Court of Romania date( February 16,
1985, which is extracted, in brief, in the Year Book of Commercial Arbitration,
Vol. XIV (1989) pp. 689 to 691, Shri Venugopal has submitted that unjust
enrichment is contrary to public policy of India and since the enforcement of
award of the Arbitral Tribunal would result in unjust enrichment of General
Electric it cannot be enforced under Section 7(1)(b)(ii) of the Foreign Awards
Act. This contention of Shri Venugopal has a bearing on the award of delinquent
interest under item No. 3, as well as on the award of compensatory damages
under item Nos. 2 and 4 and award of costs under item, No. 7.
97. In
the case decided by the Romanian Supreme Court, a Lebanese shipowner had agreed
by a charter party with the Romanian State enterprise to transport from
Costantza (Romania) to Bandar Abbas (Iran) certain goods which had been sold
C&F to an Iranian buyer. The voyage was interrupted at Tripoli (Lebanon)
where the shipowner had its seat. At Tripoli all merchandise disappeared,
according to the shipowner because of war, and according to the Romanian
enterprise because of a local fraudulent sale. The dispute was referred to
arbitration and in the arbitration award, the shipowner was directed to refund
to the Romanian enterprise part of the freight it had received as well as the
value of the lost goods. The Romanian enterprise sought enforcement of the
arbitration award in Romania. The Lebanese shipowner objected to the request on
various grounds including the ground that it was not obliged to refund the
value of the goods since they had been fully paid for by the Iranian buyer. It
was submitted that the enforcement of the award was contrary to Romanian public
policy since it resulted in unjust enrichment of the Romanian enterprise
inasmuch as the said enterprise was allowed to receive for the second time the
price of goods which had already been paid by the Iranian buyers.
Rejecting
the said objection the Romanian Supreme Court held that the arbitral award
showed that the Romanian enterprise meant to obtain repayment of the value of
the cargo and the freight on behalf of the Iranian buyer acting as agent or
trust and since the Romanian enterprise did not act on its own behalf, although
it had no express mandate, the conditions for unjust enrichment were not met in
the case at issue and, consequently, the public policy of Romanian
international private law had not been violated. The said decision has
proceeded on the basis that unjust enrichment was part of the public policy of
Romanian international private law but in that case it was found that there was
no violation of the said principle of public policy.
98.
The principle of unjust enrichment proceeds on the basis that it would be
unjust to allow one person to retain a benefit received at the expense of
another person. It provides the theoretical foundation for the law governing
restitution. The principle has, however, its critics as well as its supporters.
In the words of Lord Diplock : "...
there is
no general doctrine of unjust enrichment in English law. What it does is to
provide specific remedies in particular cases of what might be classed as
unjust enrichment in a legal system that is based upon civil law." (See :
Orakpo v. Manson Investments Ltd.39) In The Law of Restitution by Goff and
Jones, it has, however, been stated "that the case-law is now sufficiently
mature for the courts to recognise a generalised right of 39 1978 AC 95, 104:
(1977) 3 All ER 1 695 restitution" (3rd Edn., p. 15). In Chitty, on
Contracts, 26th Edn., Vol. I, p. 1313, para 2037, it has been stated that
"the principle of unjust enrichment is not yet clearly established in
English law". The learned editors have, however, expressed the view:
"
Even if the law has not yet developed to that extent, it does not follow from
the absence of a general doctrine of unjust enrichment that the specific
remedies provided are not justifiable by reference to the principle of unjust
enrichment even if they were originally found without primary reference to
it." (pp. 1313-1314, para 2037)
99. In
Indian law the principle of unjust enrichment finds recognition in the Indian
Contract Act, 1872 (Sections 70 and 72).
100.
We do not consider it necessary to go into the question whether the principle
of unjust enrichment is a part of the public policy of India since we are of
the opinion that even if it be assumed that unjust enrichment is contrary to
public policy of India, Renusagar cannot succeed because the unjust enrichment
must relate to the enforcement of the award and not to its merits in view of
the limited scope of enquiry in proceedings for the enforcement of a foreign
award under the Foreign Awards Act. The objections raised by Renusagar based on
unjust enrichment do not relate to the enforcement of the award because it is
not the case of Renusagar that General Electric has already received the amount
awarded under the arbitration award and is seeking to obtain enforcement of the
award to obtain further payment and would thus be unjustly enriching itself.
The objections about unjust enrichment raised by Renusagar go to the merits of
the award, that is, with regard to the quantum awarded by the Arbitral Tribunal
under item Nos. 2, 3, 4 and 7, which is beyond the scope of the objections that
can be raised under Section 7(1)(b)(ii) of the Foreign Awards Act. To hold
otherwise would mean that in every case where the arbitrators award an amount
which is higher than the amount that should have been awarded, the award would
be open to challenge on the ground of unjust enrichment. Such a course is not
permissible under the New York Convention and the Foreign Awards Act. We have,
however, examined the objections raised by Renusagar relating to unjust
enrichment even on merits and we are not satisfied that the amounts awarded
under item Nos. 2, 3, 4 and 7 are so excessive as to result in unjust
enrichment of General Electric.
101.
One of the contentions that was urged by Shri Venugopal in support of the
objections relating to unjust enrichment was that the compensatory damages
should have been awarded after deducting the US tax payable by General Electric
on the amount of regular interest as well as delinquent interest. Reliance, in
this regard, has been placed on the decision of the House of Lords in British
Transport Commission v. Gourley40 wherein it has been laid down that when
assessing damages for loss of actual or prospective earnings allowance must be
made for any income tax on the earnings. This rule in Gourley case40 will,
however, apply only where two conditions are satisfied : ( 1) the money, for
the loss of which damages are awarded, would have been Subjected to tax as
income; and (2) the damages awarded to the plaintiff are not subject to tax in
his hands. (See : Chitty on Contracts, 26th Edn., Vol. I, pp. 1186-87, para
1841.) 40 (1955) 3 All ER 796 : 1956 AC 185 696 102. In Hanover Shoe v. United
Shoe Machinery v Corpn.41 the Court of Appeal had remanded the matter to the
District Court to take account of the additional taxes Hanover would have paid
for computation of damages, on the view that since only after-tax profits can
be reinvested or distributed to shareholders, Hanover was damaged only to the
extent of the after-tax profits that it failed to receive.
The
U.S. Supreme Court reversed the said decision of the Court of Appeal and held
that the District Court did not err on the question of computation. The Court
observed:
"As
Hanover points out, since it will be taxed when it recovers damages from United
for both the actual and the trebled damages, to diminish the actual damages by
the amount of the taxes that it would have paid had it received greater profits
in the years it was damaged would be to apply a double deduction for taxation,
leaving Hanover with less income than it would have had if United had not
injured it." (p. 1247) 103. Since General Electric would be liable to pay
U.S. tax on the amount of compensatory damages awarded under item Nos. 2 and 4
of the Award, it cannot be said that there would be unjust enrichment by General
Electric on account of non-deduction of U.S. tax payable on the amount of
regular interest and delinquent interest while assessing compensatory damages
under item Nos. 2 and 4.
104.
As regards amount of delinquent interest awarded under item No. 3, it has been
submitted that since interest is not payable under the contract in respect of
the period subsequent to the date of maturity of the promissory notes, the
award of delinquent interest for the said period would result in unjust
enrichment. This argument about liability for such interest has already been
considered by us and we have found that under the contract interest is payable
for the period subsequent to the maturity of the promissory notes till payment.
There is, therefore, no substance in the contention about unjust enrichment on
this account.
With
regard to the award of delinquent interest Linder item No. 3 and compensatory
damages on the delinquent interest under item No. 4 it has been contended that
in view of the agreement between General Electric and Renusagar for
rescheduling of the instalments Renusagar were not required to pay the
instalments as per the original schedule and, therefore, Renusagar could not be
held liable for interest for delayed payment of the instalments which fall due
till August 1, 1969, and they could not also be saddled with compensatory
damages for non-payment of instalments that fall due till August 1, 1969 as per
the original schedule.
We
have dealt with the effect of order of the Government of India dated August 1,
1969, refusing to give its approval to the proposed arrangement for
rescheduling of payment of instalments and we have held that as a result of
such refusal the original contract regarding payment of those instalments would
revive and Renusagar were required to pay the instalments in accordance with
the terms of the said contract and were required to pay interest for delayed
payment of those instalments and therefore, it cannot be said that award of
delinquent interest for the period during which the matter was pending
consideration with the Government of India, would result in unjust enrichment
of General Electric.
41 20
L Ed 2d 1231 : 392 US 481 (1968) 697 105. As regards item No. 7 relating to
costs, the case of Renusagar is that the costs awarded by the arbitrators are
excessive and unconscionable and further that the costs incurred in relation to
the litigation in India, which has been found inadmissible earlier by the
Arbitral Tribunal has been included in the costs of arbitration that have been awarded
resulting in unjust enrichment of General Electric.
We
have considered this objection of Renusagar and we do not feel that it can be a
ground for refusal of enforcement of award under Section 7(1)(b)(ii) of the
Foreign Awards Act.
106.
For the reasons aforesaid, none of the objections raised by Renusagar against
the enforcement of the award under Section 7(1)(b)(ii) of the Foreign Awards
Act for the reason that such enforcement is contrary to public policy of India
merits acceptance.
VI.
Relevant date for conversion of the amount awarded front foreign currency to
Indian currency 107. In the field of conflict of laws money serves a two- fold
function, viz., (i) as a means of measurement; and (ii) medium of payment. The
currency in which a debt is expressed or a liability to pay damages is
calculated is called the " money of account" or "money of
contract" or "money of measurement" and the currency in which
the said debt or liability is to be discharged is called the " money of
payment". The money of account is to be ascertained from the terms of the
contract construed in accordance with the proper law of the contract and the
money of payment is determined by the law of the country in which such debt or
liability is payable i.e. lex loci solutionis. (See : Dicey & Morris, The
Conflict of Laws, 11 th Edn., Vol. 2, Rules 209 and 210.) 108. Where the money
of account and the money of payment are not identical the amount of units of
the currency of account owed by the debtor must, by an exchange operation, be
translated into the currency in which he is obliged to pay.
This
is a matter of substance and the rate of exchange for such conversion is
determined by the proper law of the contract or the law governing the
liability. (See : Dicey & Morris, The Conflict of Laws pp. 1442 and 1453.)
By this process the quantum of the monetary obligation is determined. The
questions relating to conversion of currency often arise at the stage of
discharge of the monetary obligation when the debtor makes the payment in a currency
other than the money of payment. Such conversion is to be made on the basis of
the exchange rate prevailing on the date of payment at the place of payment.
(See : Dicey & Morris, The Conflict of Laws, Rule 210(2) at pp. 1453-54;
Mann:
The Legal Aspect of Money, 5th Edn., p. 323.) Conversion of the currency is
also necessary in cases where legal proceedings have to be instituted by the
creditor. In some legal systems the judgment can be given by the courts in the
currency of that country only and, therefore, it becomes necessary to convert
the monetary obligation into the currency of that country at the time of
institution of the legal proceedings. The exchange for such conversion will
depend on the lex fori, i.e., the law of the forum and in many legal systems it
is the date the cause of action arose, i.e., the date of breach while in some
systems it is the date of judgment. In legal systems where it is permissible to
obtain a judgment in foreign currency conversion would be necessary at the
stage of enforcement or execution of the judgment. Same problem would arise
when a judgment of a foreign court is sought to be enforced. The relevant date
for applying the 698 exchange rate for such conversion depends upon the lex
for, i.e., the law of the forum because it is a matter relating to the
procedure. (See : Cheshire & North, Private International Law, 12th Edn.,
p. 106.) What applies to enforcement of judgments equally applies to
enforcement of arbitral awards.
109.
In the instant case, there is no dispute that the money of account as well as
the money of payment is the same, namely, U.S. dollar. Here, the question of
convertibility from U.S. dollars to Indian rupees arises in the context of
enforcement of the award of the Arbitral Tribunal which is in U.S. dollars. We
are, therefore, required to examine the position under the Indian law with
reference to conversion of foreign currency into Indian currency at the stage
of enforcement of a judgment or award in foreign currency.
110.
Prior to 1975, the law in England, was that an English court will not give
judgment for the payment of an amount expressed in foreign currency and the
amount of any foreign currency had to be converted in sterling on or before the
date of judgment and the date for the purpose of such conversion was the date
when the cause of action arose.
This
was the law laid down by the House of Lords in United Railways of Havana &
Regla Warehouses Ltd., Re42. This decision was overruled by the House of Lords
(by majority) in 1975 in Miliangos v. George Frank (Textiles) Ltd.43 In that
case, a Swiss seller had agreed to supply English buyers with goods at a price
expressed in the contract in Swiss francs. The goods and invoices were
delivered but the price was not paid and bills of exchange drawn in Switzerland
and accepted by the buyers were dishonoured on presentation. The seller brought
action in England wherein he claimed the sums due in Swiss francs. Originally
he had asked for conversion of Swiss francs into sterling at the breach date in
view of the law laid down in United Railways of Havana, Re, case42 but
subsequently in view of the decision of the Court of Appeal in Schorsch Meier
G.m.b.H. v. Hennin44 the seller amended his statement of claim so as to claim
the amount due to him in Swiss francs as an alternative to claiming judgment in
sterling. Bristow, J. gave judgment for the moneys due expressed in sterling,
holding that the rule that the English courts could express their judgments
only in sterling had not been altered either by Parliament or by any decision
of the House of Lords. The Court of Appeal reversed the said decision and,
following Schorsch Meier G.m.b.H. v. Hennin44 gave judgment for the seller
ordering the buyers to pay the sum due in Swiss francs, or the equivalent in sterling
at the time of payment. Affirming the said decision of the Court of Appeal and
departing from its earlier decision in the Havana Railways case42 the House of
Lords has held that it was legitimate for the House of Lords to depart from the
"breach date conversion" rule and recognise that an English court was
entitled to give judgment for a sum of money expressed in a foreign currency in
the case of obligations of a money character to pay foreign currency arising
under a contract, the proper law of which was that of a foreign country and
where the money of account and payment is that of that country, or possibly of
some other country but not of the United Kingdom. It was further held that the
claim had to be specifically for the 42 1961 AC 1007 : (1960) 2 All ER 332 sub
nom Tomkinson v. First Pennsylvania Banking and Trust Co. 43 1976 AC 443:
(1975) 3 All ER 801 44 1975 QB 416: (1975) 1 All ER 152 699 foreign currency or
its sterling equivalent and the conversion shall be at the date of payment,
i.e., the date when the courts authorise enforcement of the judgment in terms
of sterling. The said decision was, however, confined in its application to
foreign money obligations and the court left open for future discussion the
question whether the rule applying to money obligations should apply as regards
claims for damages for breach of contract or for tort. In his dissenting
opinion, Lord Simon, has reiterated the law laid down in Havana Railways case
42. it may be of interest to note that Lord Wilberforce, who gave the leading
speech in Miliangos case 43 had appeared in Havana Railway case 42 but failed
to persuad the House of Lords to accept his contention. He, however, succeeded
15 years later, in having his views accepted by the House of Lords.
Subsequently
in Services Europe Atlantique Sud (Seas) of Paris v. Stockholms
Rederiaktiebolag Svea of Stockholm45 the House of Lords has extended the rule
laid down in Miliangos case 43 to claims for damages for tort and breach of
contract. The rule laid down in Miliangos case 43 has been held to be
applicable to an action at common law on a foreign judgment (See : Dicey &
Morris, The Conflict of Laws, 11 th Edn., Vol. 2, p. 146 1.) In relation to
arbitral awards the matter had come up before the Court of Appeal in Jugoslavenska
Oceanska Plovidba v. Castle Investment Co.
InC.46
wherein it was held that an award could be made by the arbitrators in England
in terms of U.S. dollar and that the same could be enforced by converting the
foreign currency into sterling at the rate prevailing at the date of the award.
While referring the said decision, Lord Wilberforce, in Miliangos case 43 has
said:
"In
the case of arbitration, there may be a minor discrepancy, if the practice
which is apparently adopted (see the Jugoslavenska case(46) remains as it is,
but I can see no reason why, if desired, that practice should not be adjusted
so as to enable conversion to be made as at the date when leave to enforce in
sterling is given." (p. 469) 111. The impact of Miliangos case43 was not
confined to the British shores. It has been felt across the Atlantic and there
is a perceptible change in the law in Canada as well as in the United States.
112.
Following the law in England, the Supreme Court of Canada had applied the
breach date rule for converting foreign currency into Canadian dollar in two
earlier decisions. (See : The Custodian v. Bhucher47; Gatineau Power Co. v.
Crown Life Insurance Co.48) But subsequent to Miliangos cas43 Carruthers J. of
the High Court of Ontario, in Batavia Times Publishing Co. v. Davis49 applied
the judgment date rule in a suit for enforcement of a foreign judgment.
Distinguishing the earlier judgments of the Supreme Court as dealing with
actions based on the original cause of action, the learned judge held that in a
proceeding to enforce a foreign judgment he was free to adopt that conversion
date which in his view "avoids an injustice" and is "in step
with commercial needs". The said judgment was affirmed by the Court of
Appeal.50 In Clinton v. 45 1979 AC 685 : (1979) 1 All ER 421 sub nom
Eleftherotria (M. V.) (Owners) v. Despina (M. V.) (Owners) sub nom Despina R.
The 46 1974 QB 292 :(1973) 3 All ER 498 47 1927 SCR 420, 427 (Can) 48 1945 SCR
655, 658 (Can) 49 1978 DLR 3d 144 50 (1980) 102 DLR (3d) 192 700 Ford51 the
Court of Appeal of Ontario affirmed the order of the trial Judge applying the
rate prevailing at the date of the Statement of Claim on the view that in
awarding judgment on a foreign judgment the trial Judge should be free to adopt
a date for the conversion of foreign currency into domestic currency which
avoids injustice and which is in step with commercial needs.
113.
The federal law in the United States is thus explained by Prof. F.A. Mann:
"Where
the breach or wrong occurred in a foreign country (especially by non-payment of
money due there), the damages are measured in the currency of that country and
the dollar equivalent calculated at the rate of exchange obtaining at the date
of judgment can be recovered; where the breach or wrong occurred in the United
States (especially by non- payment of foreign money due there), the damages,
being measured in dollars, are to be converted at the rate of exchange of the
date of breach or wrong." (Mann: Legal Aspects of Money, 5th Edn., p. 347)
114. According to the learned author the first part of the above statement is
based on the decision of the U.S. Supreme Court in Deutsche Bank Filiale
Nurenberg v. Humphrey52 and the latter part of the statement is supported by
the decision of the U.S. Supreme Court in Hicks v. Guinness53.
115.
Most of the States, including the State of New York (till recently), follow the
old English rule and apply the rate of exchange prevailing at the date of
breach. In the State of New York, however, there has been a departure in some
cases where the judgment-date rule has been applied.
(See :
John S. Metcalf Co. v. Mayer54 and Sirie v. Godfrey55.) Even in the matter of
application of the breach date rule in actions for enforcement of a foreign
judgment, the New York courts have applied the breach date rule with effect
from the date of the judgment sought to be enforced.
In
Indag v. Irridelco Corpn.56 one of the cases on which reliance was placed by
Shri Venugopal, the action was brought to enforce a judgment entered in favour
of the plaintiff by the courts of Switzerland and the United States District
Court in New York held that the date of entry of Swiss judgment, rather than
the date of breach of underlying obligation, i.e., its agreement to repay
certain notes, was controlling as to application of breach-day conversion rule.
It was
held that the date of award for damages by Cantonal Court was the relevant date
for application of breach date conversion rule even though that judgment was
subsequently appealed. In taking this view, the Court relied upon the decision
in Competex S.A. v. Lalord57. It appears that the provisions in this regard
contained in Section 27 of the Judiciary Law of the State of New York have now
been amended in 1987. Earlier Section 27 provided that all judgments or decrees
rendered by any court for any debt, damages or costs, all executions issued
thereupon, and all accounts arising from judicial proceedings shall be
computed, as near as may be, in U.S. 51 (1982) 137 DLR 3d 192 52 272 US 517 :
71 L Ed 383 (1926) 53 269 US 71 : 70 L Ed 168 (1925) 54 (1925) 211 NY Supp 53
55 (1921) 188 NY Supp 52 56 (1987) 658 F Supp 763 57 (1986) 783 F 2d 333 701
dollars and cents, rejecting lesser fractions, and no judgment or other
proceeding, shall be considered erroneous for such means. Section 27 as amended
reads as under:
"27.
(a) Except as provided in sub-division (b) of this section, judgments and
accounts must be computed in dollars and cents. In all judgments or decrees
rendered by any court for any debt, damages or costs, all executions issued
thereupon, and all accounts arising from judicial proceedings shall be
computed, as near as may be, in U.S. dollars and cents, rejecting lesser
fractions, and no judgment or other proceeding, shall be considered erroneous
for such means.
(b) In
any case in which the cause of action is based upon an obligation denominated
in a currency other than currency of the United States, a court shall render or
enter a judgment or decree in the foreign currency of the underlying
obligation. Such judgment or decree shall be converted into currency of the
United States at the rate of exchange prevailing on the date of entry of the
judgment or decree." 116. As a result of this amendment, instead of
breach-date rule which was prevailing earlier the judgment-date rule has been
introduced. This amendment came into operation on July 20, 1987. It was
introduced at the request of New York State Bar Association and the Erie County
Bar Association and it was supported by the Association of the Bar of the City
of New York. According to the chairman of the Committee on International Trade
and Transactions of the New York State Bar Association the said amendment was
necessary because in view of the decision of House of Lords in Miliangos case
43 " a number of transactions which would otherwise be governed by New
York law, and, involve professional and financial advisors in New York, have
been structured in England and covered by English law".
117.
In India, the law relating to conversion of foreign currency into Indian
currency in the matter of enforcement of judgments or awards is governed by the
decision of this Court in Forasol case 4. That case arose out of a contract
between Forasol, a foreign company and the Oil and Natural Gas Commission, a
Government of India Undertaking. Certain disputes arose between the parties
which were referred to arbitration in accordance with the arbitration clause
contained in the contract. The said arbitration was governed by the Indian
Arbitration Act, 1940. The award directed certain payments to be made in French
francs but did not specify the rate of exchange at which the French francs were
to be converted into Indian rupees. Proceedings were initiated ill Delhi High
Court for passing a decree in terms of the award and a question arose as to the
exchange rate for conversion of French francs into Indian rupees.
This
Court examined the question with reference to the following dates:
(1)
the date when the amount become due and payable;
(2)
the date of the commencement of the action;
(3)
the date of the decree;
(4)
the date when the court orders execution to issue; and (5) the date when the
decretal amount is paid or realised.
118.
The court also pointed out that in a case where a decision has been passed by
the court in terms of an award made in a foreign currency a sixth date, namely,
the date of award also enters the competition. As there was lack of 702
authority of any Indian court, this Court has considered the decision of
English Courts including the Miliangos case43.
119.
The first date, i.e., the date when the amount became due and payable, was not
accepted by the Court for the reason that it cannot be said to be just, fair or
equitable because in a case where the rate of exchange has gone against the
plaintiff, the defendant escapes by paying a lesser sum than what he was bound
to and thus is the gainer by his default while in the converse case where the
rate of exchange has gone against the defendant, the defendant would be subject
to a much greater burden than what he should bear. The Court felt that the same
criticism would apply to the second of the dates, namely, the date of the
commencement of the action or suit because suits are not often disposed of for
an unconscionably long time and if we take into account the time that would be
spent in appeals, further appeals, and revision and review applications which
may be filed, the longevity of the litigation is doubled, if not tripled, so
that none can with any certainty predict even a probable date for its termination.
As regards the third date, namely, the date of the decree, the Court observed
that a decree crystallizes the amount payable by the defendant to the plaintiff
and it is the decree which entities the judgment-creditor to recover the
judgment debt through the processes of law. Dealing with the objection that the
date of tile decree of the trial court is not final decree for there may be
appeals or other proceedings against it in superior courts and by the time the
matter is finally determined, the rate of exchange prevailing on that date may
be nowhere near that which prevailed at the date of the decree of the trial
court, it was observed that this difficulty is easily overcome by selecting the
date when the action is finally disposed of, in the sense that the decree
becomes final and binding between the parties after all remedies against it are
exhausted. As regards the fourth date, i.e., the date when the court orders
execution to issue, it was felt that execution of a decree is not a simple
matter because it involves execution of a money decree and the
judgment-debtor's property has to be attached and pending attachment a third
party, at times set up by the judgment-debtor, may prefer a claim to the
attached property which will have to be investigated and determined by the
executing court and even where no claim is preferred the attached property
cannot be brought to sale immediately and certain formalities have to be
complied with and even after the sale has taken place, the judgment debtor may
further hold up the receipt of the sale proceeds by the decree- holder by
raising objection to the conduct of the sale and at times, a fresh auction sale
may be have to be held if the auction-purchaser commits default in paying the
balance of the purchase price and a considerable time would thus elapse between
the date when the court orders execution to issue and the date of the receipt
of the sale proceeds by the decree-holder. It was also pointed out that at
times the judgment debt is not recovered in full when the attached property is
sold in execution and further application for execution may become necessary
and this would lead to an anomalous position for the Court would have to fix
the rate of exchange, which may be different from each application for execution.
A further difficulty that was pointed out by the court was that execution can
only issue for a sum expressed in Indian currency and it cannot be for a sum
which would be determined and fixed by the executing court at the time of
granting an execution application. With regard to the fifth date, namely, the
date of payment, the Court felt that there were three practical and procedural
703 difficulties namely, payment of court fees, the pecuniary limits of the
jurisdiction of courts and execution. Keeping in view the considerations
referred to above, this Court declined to adopt the rule laid down in Miliangos
case 43 and held that it would be fair to both the parties to take the date of
passing the decree, i.e., the date of judgment.
The
said date was also held applicable to a case where a decree is made in terms of
an award made in a foreign currency.
120.
The practice which ought to be followed in suits in which a sum of money
expressed in a foreign currency can legitimately be claimed by the plaintiff and
decreed by the court, has been thus indicated:
"...
the plaintiff, who has not received the amount due to him in a foreign currency
and, therefore, desires to seek the assistance of the court to recover that
amount, has two courses open to him. He can either claim the amount due to him
in Indian currency or in the foreign currency in which it was payable. I f he
chooses the first alternative, he can only sue for that amount as converted
into Indian rupees and his prayer in the plaint can only be for a sum in Indian
currency. For this purpose, the plaintiff would have to convert the foreign
currency amount due to him into Indian rupees. He can do so either at the rate
of exchange prevailing on the date when the amount became payable for he was
entitled to receive the amount oil that date or, at his option, at the rate of
exchange prevailing on the date of the filing of the suit because that is the
date on which he is seeking the assistance of the court for recovering the
amount due to him. In either event, the valuation of the suit for the purposes
of Court-fees and the pecuniary limit of the jurisdiction of the court will be
the amount in Indian currency claimed in the suit. The plaintiff may, however,
choose the second course open to him and claim in foreign currency the amount
due to him. In such a suit, the proper prayer for the plaintiff to make in his
plaint would be for a decree that the defendant do pay to him the foreign
currency sum claimed in the plaint subject to the permission of the concerned authorities
under the Foreign Exchange Regulation Act, 1973, being granted and that in the
event of the foreign exchange authorities not granting the requisite permission
or the defendant not wanting to make payment in foreign currency even though
such permission has been granted or the defendant not making payment in foreign
currency or in Indian rupees, whether such permission has been granted or not,
the defendant do pay to the plaintiff the rupee equivalent of the foreign
currency sum claimed at the rate of exchange prevailing on the date of the
judgment. For the purposes of court- fees and jurisdiction the plaintiff
should, however, value his claim in the suit by converting the foreign currency
sum claimed by him into Indian rupees at the rate of exchange prevailing on the
date of the filing of the suit or the date nearest or most nearly preceding
such date, stating in his plaint what such rate of exchange is. He should
further give an undertaking in the plaint that he would make good the
deficiency in the court-fees, if any, if at the date of the judgment, at the
rate of exchange then prevailing, the rupee equivalent of the foreign currency
sum decreed is higher than that mentioned in the plaint for the purposes of
court-fees and jurisdiction. At the hearing of such a suit, before passing the
decree, the court should call upon the plaintiff to prove the rate of exchange
prevailing on the date of the judgment or on the date nearest or most nearly
preceding the date of the judgment. If necessary, after delivering judgment on
all other issues, the court may stand over the rest of the judgment and the
passing of the, decree 704 and adjourn the matter to enable the plaintiff to
prove such rate of exchange. The decree to be passed by the court should be one
which orders the defendant to pay to the plaintiff the foreign currency sum
adjudged by the court subject to the requisite permission of the concerned
authorities under the Foreign Exchange Regulation Act, 1973, being granted, and
in the event of the Foreign Exchange authorities not granting the requisite
permission or the defendant not wanting to make payment in foreign currency
even though such permission has been granted or the defendant not making
payment in foreign currency or in Indian rupees, whether such permission has
been granted or not, the equivalent of such foreign currency sum converted into
Indian rupees at the rate of exchange proved before the court as aforesaid.
In the
event of the decree being challenged in appeal or other proceedings and such appeal
or other proceedings being decided in whole or in part in favour of the
plaintiff, the appellate court or the court hearing the application in the
other proceedings challenging the decree should follow the same procedure as
the trial court for the purpose of ascertaining the rate of exchange prevailing
on the date of its appellate decree or of its order on such application or on
the date nearest or most nearly preceding the date of such decree or order. If
such rate of exchange is different from the rate in the decree which has been
challenged, the court should make the necessary modification with respect to
the rate of exchange by its appellate decree or final order. In all such cases,
execution can only issue for the rupee equivalent specified in the decree,
appellate decree or final order, as the case may be. These questions, of
course, would not arise if pending appeal or other proceedings adopted by the
defendant the decree has been executed or the money thereunder received by the
plaintiff." (pp.
587-589)
121. Referring to arbitrations, this Court has held that, on principle, there
can be and should be no difference between an award made by arbitrators or an
umpire and a decree of a court and has observed:
"In
the type of cases we are concerned with here just as the courts have power to
make a decree for a sum of money expressed in a foreign currency subject to the
limitations and conditions we have set out above, the arbitrators or umpire
have the power to make an award for a sum of money expressed in a foreign
currency. The arbitrators or umpire should, however, provide in the award for
th e rate of exchange at which the sum awarded in a foreign currency should be
converted in the events mentioned above. This may be done by the arbitrators or
umpire taking either the rate of exchange prevailing on the date of the award
or the date nearest or most nearly preceding the date of the award or by
directing that the rate of exchange at which conversion is to be made would be
the date when the court pronounces judgment according to the award and passes
the decree in terms thereof or the date nearest or most nearly preceding the
date of the judgment as the court may determine. If the arbitrators or umpire
omit to provide for the rate of conversion, this would not by itself be
sufficient to invalidate the award. The court may either remit the award under
Section 16 of the Arbitration Act, 1940, for the purpose of fixing the date of
conversion or may do so itself taking the date of conversion as the date of its
judgment or the date nearest or most nearly preceding it, following the
procedure outlined above for the purpose of proof of the rate of exchange
prevailing on such date. If however, the person liable under such an award 705
desires to make payment of the sum in foreign currency awarded by the
arbitrators or umpire without the award being made a rule of the court, he
would be at liberty to do so after obtaining the requisite permission of the
concerned authorities under the FERA." (pp. 589-590) 122. While passing
the decision in terms of U.S. dollars the learned Single Judge has not
considered the matter of conversion of US dollars into Indian currency. The
Division Bench has, however, adverted to this aspect and applying the law laid
down in Forasol case4 the decree has been passed in terms of US dollars as well
as Indian rupees on the basis of the rupee-dollar exchange rate prevailing on
the date of the decree passed by the learned Single Judge. The said date was
applied for the reason, that according to the Division Bench the letters patent
appeal filed by Renusagar was not maintainable.
123.
It appears that both the parties are not satisfied with said view of the
Division Bench of the High Court in applying the decision in Forasol case4 to
the present case.
124.
Shri Venugopal has urged that in Forasol case4 this Court was dealing with the
enforcement of an award governed by the Indian Arbitration Act and that the
principles laid down in the said decision cannot be applied to the present case
arising out of a foreign award which is not governed by the provisions of the
Indian Arbitration Act but is" governed by the provisions of the Foreign
Awards Act. It is no doubt true that in the Forasol case4 this Court was
dealing with an award governed by Indian Arbitration Act but that does not
affect the applicability of the said decision to proceedings for enforcement of
a foreign award in Indian courts because the matter of conversion of foreign
currency into Indian currency at the stage of enforcement of an award is
governed by the same principle irrespective of the fact whether the award is
governed by the Indian Arbitration Act or a foreign award governed by the
Foreign Awards Act.
Moreover
the position has been made clear by Section 4(1) of the Foreign Awards Act
which lays down that a foreign award shall subject to the provisions of this
Act be enforceable in India as if it were an award made on a matter referred to
arbitration in India. The said provision equates a foreign award to an Indian
award for the purpose of enforcement with the exception that such enforcement
will be subject to the provisions of the Foreign Awards Act. There is nothing
in the provisions of the Foreign Awards Act which excludes the applicability of
the principles laid down in Forasol case4 with regard to enforcement of foreign
awards. In our opinion, therefore, the enforcement of the award in the instant
case is governed by the law laid down in Forasol case4.
125.
Shri Venugopal has further urged that the matter of conversion of foreign
currency and the rate of exchange for such conversion is not a matter of
procedure but is a matter of substance and it is governed by the proper law and
that since the contract as well as performance of the contract are both
governed by the New York law, the breach-date rule which was applicable in the
State of New York at the relevant time, should be applied for the purpose of
ascertaining the exchange rate for conversion of U.S.
dollars
into Indian rupees and that the rule in Forasol case4 can have no application
to the present case. Shri Venugopal has in this regard placed reliance on
certain observations in Legal Aspects of Money by F.A. Mann, 5th Edn. at pp.
326-327 and The Conflict of Laws by Dicey & Morris, 11th Edn., Vol. II, p.
1454. We are unable to agree with this submission of Shri Venugopal. The manner
in which the court should 706 pass the decree in a case where a foreign award
is sought to be enforced is a matter of procedure and not of substance and is
governed by lex fori, i.e., the law of the forum.
The
rule laid down in Miliangos case43 has been described as a rule of procedure.
(See : Services Europe Atlantique Sud (Seas) of Paris v. Stockholms
Rederiaktiebolag Svea of Stockholms45 at p. 704; Cheshire & North, Private
International Law, 12th Edn., p. 100). For the same reasons, the principles
laid down in Forasol case4 must be held to be rule of procedural law and would
be applicable to the proceedings for enforcement of a foreign award under the
Foreign Awards Act.
126.
The passage from Legal Aspects of Money by F.A. Mann, on which reliance has
been place d by Shri Venugopal reads thus:
"This
situation involves two distinct questions: which is the legal system that
determines whether there exists a right or a duty to convert the money of
account into the (local) money of payment? Which is the legal system that
governs the mechanics of the conversion (the type of the rate of exchange to be
employed, tile date and the place with reference to which the rate is to be
ascertained)? As regards the first point it is necessary to repeat that, except
in unusual circumstances, the creditor suffers no prejudice from payment in the
moneta loci solutionis. It is suggested, therefore, that in general, i.e.,
where no problem of construction arises, the question of the right or duty of
conversion may be treated as one relating to the mode of performance and,
consequently, subject to the lex loci solutionis. The decision on the second
point, however, is liable to encroach severely upon the substance of the
obligation:
whether
the creditor who is entitled to be paid 1000 Spanish pesetas in Gibraltar must
accept the pound equivalent calculated at the rate of peseta notes or of cable
transfers to Madrid, or calculated with reference to the rate prevailing at the
date of maturity or payment, or calculated at the Gibraltar or Madrid rate
these are substantial matters on which the quantum eventually received by the
creditor depends, if payment is not made in actual pesetas. These aspects,
therefore, cannot be described as relating merely to the mode of performance,
but ought to be subject to the proper law of the contract." (pp. 326- 327)
127. We find that in the said passage which falls in Chapter XI relating to
"The Payment of Foreign Money Obligations" the learned author is
dealing with the conversion of the money of account to the money of payment and
he has not considered the matter of convertibility of the foreign currency at
the stage of enforcement of a judgment or award.
We
have already indicated that convertibility of the money of account into the
money of payment involves determination of the liability and is a matter of
substance governed by tile proper laws of contract. This question arises prior
to the stage of the judgment or award. Here we are dealing with a case where
the award has already been made and is sought to be enforced in India and the
question is about the conversion of the foreign currency in which the award has
been made into Indian currency. This question has been dealt with by Dr F.A.
Mann in Chapter XII relating to "The Institution of Legal Proceedings and
its effect upon Foreign Money Obligations" and the learned author has
stated:
"
It is now clear that English law does not require any foreign money obligation
to be converted into sterling for the purpose of instituting 707 proceedings or
of the judgment; on the contrary, where the plaintiff claims a sum of foreign
money, he is both entitled and bound to apply for judgment in terms of such
foreign money and it is only at the stage of payment or enforcement that
conversion into sterling at the rate of exchange then prevailing takes place.
This is so whether the claim is for payment of a specific sum contractually due
or for damages for breach of contract or tort or for a just sum due in respect
of unjustified enrichment or for restitution. Nor does it matter whether the
contract sued upon is governed by English or by foreign law. Nor is it
necessary to ask for specific performance rather than payment: in either case
the defendant will be ordered to pay foreign money. Moreover an award in an
English arbitration may be expressed and enforced in foreign currency and a
foreign award or judgment so expressed may be enforced like the English award
or judgment." (p. 352) 128. The entire position has been thus summed up by
Dr Mann:
"As
regards the date with reference to which the rate of exchange is to be
ascertained, the law is to a large extent settled. In connection with
conversion for the purpose of proceedings the payment-date rule is firmly
established. Outside proceedings the date depends on the construction of the
contract, but there exists a strong tendency to apply the payment-date
rule." (p. 436) 129. Same is the position with regard to the passage at p.
1454 of The Conflict of Laws by Dicey & Morris, 11th Edn., Vol. II, which
reads thus:
"The
quantum of money tokens to be tendered is, however, always a matter of
substance and not a question of the manner of performance.
Hence
it should always be governed by the proper law, irrespective of the place of
payment." (p. 1454) 130.The said passage falls under Rule 210 relating to
discharge of foreign currency obligations which is in following terms:
"210.
Irrespective of the currency in which a debt is expressed or damages are
calculated (money of account), the currency in which th e debt or liability can
and must be discharged (money of payment) is determined by the law of the
country in which such debt or liability is payable, but (semble) the rate of
exchange at which the money of account must be converted into the money of
payment is determined by the proper law of the contract or other law governing
the liability.
If a
sum of money expressed in a foreign currency is payable in England, it may be
paid either in units of the money of account or in sterling at the rate of
exchange at which units of the foreign legal tender can, on the day when the
money is paid, be bought in London in a recognised and accessible market,
irrespective of any official rate of exchange between that currency and
sterling. Quaere, whether this rate of exchange also applies if English law is
not the proper law of the contract." At the beginning of the comment on
the said rule, it has been stated: "This Rule deals with the question
whether a debtor has, by making a payment in a given currency discharged the
debt. The effect of proceedings in English court on a foreign currency
obligation is not considered in this rule but in Rule 21 1." (pp.
1453-54). This would indicate that the observations relied upon (at p. 1454)
which follow this statement have no bearing to the proceedings in a court on
708 foreign currency obligations and have to be confined to payments by a
debtor in discharge of the debt.
Reconsideration
of Forasol Case 131. Shri Shanti Bhushan also does not wish to go by the
principles laid down in Forasol case4 and has submitted that the exchange rate
for conversion of foreign currency to Indian currency should be that prevailing
on the date of actual payment and that the law laid down in Forasol case4 that
the conversion should be on the basis of exchange rate prevailing on the date
of judgment does not lay down the correct law and that it needs
reconsideration. In this regard Shri Shanti Bhushan has urged that the purpose
of the rule relating to conversion of foreign currency into Indian rupees at
the stage of enforcement of a foreign award should be to ensure that the amount
that has been awarded under the award in foreign currency is available in full
to the creditor and this can be achieved only if the exchange rate for the
purpose of such conversion is that prevailing on the date of payment as held by
the House of Lords in Miliangos case43. According to Shri Shanti Bhushan the
practical and procedural difficulties pointed out by this Court for rejecting
the date of, payment rule are not of such significance so as to render the said
rule inapplicable.
Shri
Shanti Bhushan has also relied on the following passage from The Conflict of
Laws by Dicey & Morris:
"If
a debt or other liability expressed in a foreign currency is payable in
England, the debtor may tender pounds in discharge. This is 'primarily a rule
of construction' which was 'understandable at a time when foreign exchange was
freely obtainable'. Where this is not the case, the rule may defeat the
intention of the parties, and it may therefore 'require reconsideration.
Despite a number of dicta to the contrary, the debtor may also discharge his
liability by tendering the foreign currency in specie, but the creditor cannot
compel him to do so. The rate of exchange to be applied is that of the day when
the debt is paid." (11th Edn., Vol. II, p.
1454)
132. These observations have been made in comment under Rule 210 and, as
pointed out earlier, the said rule relates to payment made by a debtor in discharge
of the debt and does not deal with proceedings in courts for enforcement of
foreign currency obligations which have been dealt with in Rule 211, which is
in following terms:
"211.
(1) An English court can give judgment for an amount expressed in foreign
currency.
(2)
For procedural reasons the amount of the judgment must be converted into
sterling before execution can be levied. The date for conversion will be the
date of payment, i.e., the date when the court authorises enforcement of the
judgment, unless some other date is prescribed by statute." 133. As
regards the submissions of Shri Shanti Bhushan assailing the correctness of the
decision in Forasol case4 it may be stated that even Miliangos case43 does not
provide for conversion on the basis of the exchange rate prevailing on the date
of actual payment and it postulates conversion on the basis of the date when
the court authorises enforcement of the judgment. The rule in Miliangos case43
has not been adopted in Section 27 of the Judiciary Act of New York, as amended
in 1987 and it provides that a judgment or decree in foreign currency shall be
converted into currency of the United States at the rate 709 of exchange
prevailing on the date of entry of the judgment or decree. "The Legislature's
concern of how this could be effected by a sheriff' appears to be the reason
for not adopting the date of execution of the judgment in the amended
provision. The practical and procedural difficulties pointed out by this Court
in Forasol case 4 against adopting the date of payment cannot, therefore, be
ignored. As at present advised, we are not satisfied that the decision in
Forasol case4 calls for reconsideration.
Since
this is the only question raised in C.A. No. 379/92 filed by General Electric,
the said appeal must fail.
VIII.
Interest pendente lite and future interest 134. In an international commercial
arbitration, like any domestic arbitration, the award of interest would fall
under the following periods:
(i)
period prior to the date of reference to arbitration;
(ii)
period during which the arbitration proceedings were pending before the
arbitrators;
(iii)
period from the date of award till the date of institution of proceedings in a
court for enforcement of the award;
(iv)
period from the date of institution of proceedings in a court till the passing
of the decree; and (v) period subsequent to the decree till payment.
135.
The interest in respect of the period covered by item (i), namely, prior to the
date of reference to arbitration would be governed by the proper law of the
contract and the interest covered by items (ii) and (iii), i.e., during the
pendency of the arbitral proceedings and subsequent to the award till the date
of institution of the proceedings in the court for the enforcement of the award
would be governed by the law governing the arbitral proceedings. These are
matters which have to be dealt with by the arbitrators in the award and the
award in relation to these matters cannot be questioned at the stage of
enforcement of the award. At that stage the court is only required to deal with
interest covered by items (iv) and (v). The award of interest in respect of
these periods would be governed by lex fori, i.e., the law of the forum where
the award is sought to be enforced. According to Alen Redfern and Martin Hunter
"once an arbitral award is enforced in a particular country as a judgment
of a court, the arbitral post-award interest rate may be overtaken by the rate
applicable to civil judgments." [See : Redfern & Hunter, Law and Practice
of International Commercial Arbitration, 2nd Edn., p. 406.] 136. Moreover,
Section 4(1) of the Foreign Awards Act lays down that the foreign award shall,
subject to the provisions of this Act, be enforceable in India as if it were an
award made on a matter referred to arbitration in India. The provisions of the
Arbitration Act, 1940 would, therefore, apply in the matter of enforcement of
awards subject to the provisions of the Foreign Awards Act. With regard to
interest, the following provision is made in Section 29 of the Indian
Arbitration Act:
"Interest
on Awards.- Where and insofar as award is for the payment of money the Court
may in the decree order interest, from the date of the decree at such rate as
the Cour t deems reasonable, to be paid on the principal sum as adjudged by the
award and confirmed by the decree." 137. Unlike Section 34 of the Code of
Civil Procedure, whereunder the Court can award interest for the period of
pendency of the suit as well as for the 710 period subsequent to the decree
till realisation, Section 29 of the Arbitration Act empowers the court to award
interest from the date of decree only. It has, however, been held that while
passing a decree in terms of the award, the Court can award interest for the
period during which the proceedings were pending in the Court, i.e., the period
from the date of institution of proceedings for the enforcement of the award in
the court till the passing of the decree in cases arising after the Interest
Act, 1978. (See : Gujarat Water Supply & Sewerage Board v. Unique Erectors
(Gujarat) (P) Ltd. 58 138. In the instant case, the Arbitral Tribunal has
awarded interest by way of compensatory damages in respect of the period prior
to the date of reference as well as for the period covered by the arbitral
proceedings up to March 31, 1986. In respect of the period subsequent to March
31, 1986, the Arbitral Tribunal has awarded interest only on item No. 1
(regular interest), item No. 3 (delinquent interest) and item No. 5 (costs of
spare parts) until the payment. No direction with regard to the payment of
interest pendente lite, i.e., for the period the proceedings were pending in
the Bombay High Court till the date of decree as well as for the period
subsequent to the decree, has been given either by the learned Single Judge or
by the Division Bench of the High Court. Taking into consideration the facts
and circumstances of the case we are not inclined to interfere with that part
of judgment of the High Court and to award interest for the period the
proceedings for enforcement of the award were pending in the Bombay High Court
and in this Court.
139.
Shri Shanti Bhushan has, however, placed reliance on the interim order passed
by this Court on February 21, 1990 whereby this Court stayed the operation of
decree and order under appeal subject to Renusagar depositing the sum
equivalent to one-half of the decretal amount calculated as on date and
furnishing security to the satisfaction of the High Court in respect of the
balance of the decretal amount and further directed that interest in respect of
the rest of the one-half of the decretal amount which was not recoverable by
General Electric by virtue of the said order would be @ 10 per cent per annum
calculated from this day on the entirety of the balance irrespective of the
terms as to the rate and mode of calculation of interest granted in or
permitted by the decree under appeal. Shri Shanti Bhushan has urged that in
view of the said order passed by this Court on February 21, 1990, General
Electric is entitled to award of interest @ 10 per cent per annum on the
decretal amount after deducting the amounts deposited by Renusagar in pursuance
to the orders dated February 21, 1990 and November 6, 1990. The order dated
February 21, 1990 was, in our opinion, in the nature of an interlocutory order
and the directions contained therein were also interlocutory in nature which
are subject to the final orders that are passed in the appeals. We ought, here,
to take notice of the developments in the international monetary exchange
system insofar as Indo American currencies are concerned. The effect of these
changes in the exchange rates made a landslide change in the size of the
financial obligations of Renusagar under the Award. The liability thereunder in
terms of Indian rupees virtually became double. It is, however, true that that
so far General Electric is concerned, it secures no more than what the Award
gave it in terms of U.S. dollars. This judgment assures to General Electric
that quantum of U.S. 58 (1989) 1 SCC 532, 541-42: (1989) 1 SCR 318, 328 711
currency. But the area of the discretion of the court is in the interlocutory
dispensation. We are, therefore, not inclined to award interest pendente lite,
i.e., during the pendency of the proceedings for enforcement of the award in
the High Court as well as this Court and we hereby recall the directions
contained in the order dated February 21, 1990 as regards payment of interest
on the balance of the decretal amount. The award of interest for the period
subsequent to the date of passing of the award till the passing of this
judgment in these appeals is, therefore, confined to the period till the date
of institution of the proceedings for enforcement of the Arbitration Award in
the Bombay High Court i.e. up to October 15, 1986.
140.
As regards future interest, we are inclined to take the view that for the
period subsequent to the date of this judgment Renusagar should pay interest @
18 per cent on the decretal amount that remains due after adjusting the sum of
Rs 10,69,26,590 paid by Renusagar to General Electric in pursuance to the
directions given by this Court on February 21, 1990 and November 6, 1990 till
the payment of the said balance amount.
IX.
Adjustment of the sum of Rs 10,69,26,590 deposited by Renusagar against the
decretal amount:
141.
As indicated earlier, in pursuance to the orders of this Court dated February
21, 1990, Renusagar deposited a sum of Rs 9,69,26,590 on March 20, 1990 and a
further amount of Rs 1,00,00,000 was deposited by Renusagar in pursuance to the
order dated November 6, 1990 on December 3, 1990. These amounts have been
withdrawn by General Electric. The question is how and at what rate the said
amount should be adjusted against the decretal amount. It is not disputed that
on the date when the said deposits were made by Renusagar and were withdrawn by
General Electric, rupee- dollar exchange rate was Rs 17 per dollar. Shri Shanti
Bhushan has, however, submitted that although General Electric had withdrawn
the amount deposited by Renusagar, it was not able to use the same because the
Reserve Bank of India did not grant the permission to General Electric to remit
the amount by converting the same into U.S. dollars on account of the pendency
of these appeals in this Court. In this regard, Shri Shanti Bhushan has placed
before us copies of the letters dated April 30, 1990, June 25, 1990, September
10, 1990 and November 29, 1990 of the Reserve Bank of India. On the basis of
the said letters, Shri Shanti Bhushan has submitted that out of a sum of Rs
10.69 crores which was received by General Electric it was permitted by the
Reserve Bank of India to utilise only Rs 3.52 crores for meeting administrative
and operational expenses of the Liaison Office of General Electric and the rest
of the amount would be converted only after the decision in these appeals. Shri
Shanti Bhushan has, therefore, submitted that the amounts deposited by
Renusagar should be converted from Indian rupees into U.S. dollars at the
exchange rate prevalent on the date of the judgment of this Court and not on
the basis of the rate of exchange prevalent at the time of the said payments by
Renusagar. We are unable to agree with this submission. The convertibility into
U.S. dollars of money paid by Renusagar in Indian rupees is not the condition
for discharge of the decree and as laid down in Forasol case the decree can be
discharged by payment in Indian rupees and it is for General Electric to obtain
the necessary permission from the Reserve Bank of India for such conversion of
Indian rupees to U.S. dollars and the transfer thereof to the United States. If
General Electric were finding a difficulty in such transfer on 712 account of
the pendency of these appeals in this Court they could have moved this Court
and obtained necessary clarification in this regard. They did not choose to do
so.
In
these circumstances, the amount of Rs 10,69,26,590 which has been paid by
Renusagar in pursuance to the orders dated February 21, 1990 and November 6,
1990 has to be converted into U.S. dollars on the basis of the rupee-dollar
exchange rate of Rs 17.00 per dollar prevalent at the time of such payment and
calculated on that basis the said amount comes to US $ 6,289,800.00.
142.
The judgment of the High Court passing a decree in terms of the award is,
therefore, affirmed. This would cover the amount awarded by the Arbitral
Tribunal in U.S. dollars and interest on amounts awarded under item Nos. 1, 3
and 5 for the period from April 1, 1986 to October 15, 1986, the date of filing
of the petition by General Electric for enforcement of the award in the Bombay
High Court. The amount paid by Renusagar during the pendency of these appeals
will have to be adjusted against the said decretal amount and the present
liability of Renusagar under this decision has to be determined accordingly.
Calculating on this basis the amount payable by Renusagar under the decree in
terms of U.S. dollars is:
Amount
awarded by the Arbitral Tribunal : 12,215,622.14 Interest on US $ 2,716,914.72
(the total amount awarded under item Nos. 1, 3 and 5) @ 8% per annum from
1-4-1986 to 15-10-1986 in terms of theaward 117,733.00 ------------
12,333,355.14 Less: Amount paid by Renusagar in pursuance of the orders dated
21-2-1990 and 6-11-1990 during the pendency of the appeals in this Court
6,289,800.00 ------------- 6,043,555.14 143.In accordance with the decision in
Forasol case the said amount has to be converted into Indian rupees on the
basis of the rupee-dollar exchange rate prevailing at the time of this
judgment. As per information supplied by the Reserve Bank of India, the
Rupee-Dollar Exchange (Selling) Rate as on October 6, 1993 was Rs 31.53 per
dollar.
144.At
this stage it may be mentioned that after the arguments were concluded and the
judgment had been reserved, an application [I.A. No. 9 of 1993 in C.A. Nos. 71
and 71-A of 1990] was filed on behalf of Hindalco Industries Ltd. for amendment
of the cause title to substitute the applicant as appellant in C.A. No. 71 of
1990 in place of Renusagar. The said application has been moved on the ground
that after the filing of the said appeal the Bombay High Court, by its order
dated April 22, 1993, has sanctioned a scheme of amalgamation of Renusagar with
Hindalco Industries Ltd. and the said scheme has also been sanctioned by the Allahabad
High Court by its order dated March 26, 1993. A true copy of the said scheme of
amalgamation has been filed along with the said application. In clause (i) of
para 4 of the scheme, it is stated:
"(i)
If any suit, appeal or other proceedings of whatever nature (hereinafter called
'the proceedings') by or against the Transferor Company be pending, the same
shall not be abate, be discontinued or be in any way prejudicially affected by
reason of the transfer or the undertaking of the Transferor Company or of
anything contained in this Scheme but the said 713 proceedings may be
continued, prosecuted and enforced by or against the Transferor Company as if
this Scheme had not been made." 145.In view of the aforesaid provision in
the scheme, all pending suits, appeals or other proceedings of whatever nature
by or against the transferor company, viz., Renusagar shall not abate or be
discontinued or in any way be prejudicially affected by reason of the transfer
of the undertaking of Renusagar and that the said proceedings may be continued,
presented and enforced by or against Renusagar as if the scheme had not been
made. The scheme of amalgamation does not, therefore, in any way affect the
continuance of the proceedings in the above appeals in this Court by Renusagar
and in these circumstances, we find no ground for substituting the name of
Hindalco Industries Ltd.
as the
appellant in place of Renusagar in C.A. No. 71 of 1990. The said application
is, therefore, rejected.
146.In
the result, C.A. Nos. 71 and 71-A of 1990 and C.A. No. 379 of 1992 are
dismissed and the decree passed by the High Court is affirmed with the
direction that in terms of the award an amount of US $ 12,333,355.14 is payable
by Renusagar to General Electric out of which a sum of US $ 6,289,800.00 has
already been paid by Renusagar in discharge of the decretal amount and the
balance amount payable by Renusagar under the decree is US $ 6,043,555.14 which
amount on conversion in Indian rupees at the rupee-dollar exchange rate of Rs
31.53 per dollar prevalent at the time of this judgment comes to Rs
19,05,53,293.56. Renusagar will be liable to pay future interest @ 18 per cent
on this amount of Rs 19,05,53,293.56 from the date of this judgment till
payment. The parties are left to bear their own costs.
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