Arbitral award must justify defying ‘public policy’ under Indian law; mere violation not enough: Delhi High Court

Arbitral award must justify defying ‘public policy’ under Indian law; mere violation not enough: Delhi High Court

The matter will be placed before the appropriate roster Bench on 13 August

The Delhi High Court has dismissed the contentions challenging the enforceability of an arbitral award passed by the Singapore International Arbitration Centre (SIAC). It ruled that the award did not come under Section 48(2)(b)(ii) of the Arbitration and Conciliation Act, 1996. It was, therefore, enforceable in law.

The single Judge Bench of Justice Yashwant Varma noted that to violate 'public policy', an award must contravene the fundamental policy of Indian law, interests of India, or basic notions of justice. A mere violation of the law was not sufficient.

The Court found the arguments of Educomp Professional Education of illegality and monetization as misconceived. It held that the award did not contravene Indian public policy and allowed its enforcement.

The matter pertained to the legal dispute between Raffles Education Investment and Educomp over the enforcement of an arbitration award granted by the SIAC in favor of Raffles. Educomp resisted the enforcement arguing that the award violated Indian public policy.

The dispute originated from a Share Purchase Agreement (SPA) signed by the parties in 2015. Raffles sought to buy Educomp's shares in their joint venture (JV) and gain control of Jai Radha Raman Education Society (JRRES), a not-for-profit society registered under Indian laws.

Educomp argued it would allow Raffles to gain control of the society in violation of Indian law. The challenge was based on the assertion of Educomp that the award resulted in the recognition and enforcement of SPA, which amounted to a for-profit entity taking control of a charitable society, and the educational institution established and administered by it.

Furthermore, Educomp asserted that the award would not just result in the monetization of the assets of JRRES, but also result in the commercialization of the activities of the institution, which was prohibited by law. It added that in terms of the various prescriptions forming a part of SPA, Raffles would take control of JRRES. This was also proscribed by law since Raffles was a foreign entity.

Meanwhile, the arbitral tribunal refused the relief of specific performance stating that while companies could not be members of JRRES, for-profit entities could be involved in educational institutions under the All-India Council for Technical Education Regulations (AICTE). Holding that SPA did not involve monetization of JRRES assets and the damages were not based on JRRES land valuation, it awarded damages to Raffles for Educomp's breach of SPA.

The Bench stated, “All that needs to be observed with respect to public and fundamental policy of Indian laws is that an objection must travel beyond a mere violation of a statutory enactment or a piece of subordinate legislation. That objection must establish a patent violation of a foundational precept, an inviolable principle adopted by our Courts and one which can neither be ignored nor condoned. The fundamental policy of Indian law must be a rule or a principle, which forms part of the core values of our jurisprudence itself and a violation of which would be considered abhorrent and shocking to the conscience of the Court.”

It added, “A challenge to an award on the grounds of violation of ‘public policy’ or ‘fundamental policy of Indian law’ would be liable to be countenanced, provided it is established that its enforcement would run contrary to well-established legal tenets, which brook of no exception. Public policy would thus be liable to be recognized as referring to that broad set of overarching principles considered inviolable and form the very soul of the legal principles, which the Courts in India enforce and uphold. These would be the threads that hold together the fabric constituting our legal philosophy.”

On the various provisions of the Societies Registration Act (SRA), 1860, the Court found no provision which may be construed as either restricting or hindering the right of a for-profit entity being involved or engaged in the affairs of a society or nominating or inducting its affiliates on that not-for-profit body.

It stated, “The Indian law does not prohibit a for-profit entity setting up a society or trust, which may be entrusted with implementation of charitable or philanthropic measures. It could always be open for a for-profit entity to incorporate a trust or a society for pursuing charitable objectives. In fact, the for-profit entity may well be justified in incorporating such an entity and thus ensure effective administration and the implementation of philanthropic schemes by an independent entity. If such a course is adopted, it would not fall foul of any fundamental principle of laws prevalent in India. Thus, the incorporation of such a society or trust cannot be recognized to be violative of any basic or foundational legal principle.”

The Court further explained, “Apart from there being no statutory bar, Educomp has woefully failed to establish how the involvement of a foreign national in the affairs of a charitable society would be contrary to public policy. The tribunal also appears to be justified in refusing to place any credence on the Expert Group Report, which suggested certain amendments to be introduced in the SRA. This, as the tribunal observed, remained merely a recommendation and could not have been accepted as an iteration of the fundamental policy of Indian law. The recommendations of the Expert Group were in favor of the representation of foreign nationals in societies. This is another indicator of the involvement of such individuals not being abhorrent to public policy.”

The Judge said that the argument of a foreign entity obtaining membership of JRRES was equally meritless since no corporate entity could become a member of that society. The induction of a corporate entity would have been contrary to the Articles of Association of JRRES. Thus, the question of the SRA-sanctioned incorporated entities becoming members of society did not arise. In the absence of any statutory injunct embodied in the SRA and which may have disqualified foreign nationals from being members of a society, the Court said it was unable to sustain the submissions.

The Court ruled that the exclusion of foreign nationals from membership in society could not be termed as part of the core or fundamental legal principles prevalent in India.

The Bench further elucidated, “The management and administration of a charitable society is regulated by the various provisions of the SRA. Notwithstanding the members being nominees or affiliates of a corporate entity, they remain bound to administer the affairs of the society strictly in accordance with the SRA. This is evident from the SRA clearly requiring societies registered, which are engaged in literary, scientific, or charitable purposes. The members of JRRES notwithstanding being nominees or affiliates of Raffles and Educomp, are thus bound to conduct the affairs of the society in accordance with the principles. They would be obliged in law to administer the affairs of the society in accordance with its avowed charitable objectives. What needs to be emphasized is that while members may have owed their initial nomination in the society to their affiliation with either Raffles or Educomp, they as well as JRRES, would still be bound by the MoA and the charitable objectives enshrined therein.”

The Judge reiterated that the field of education had undergone a paradigm shift in the past few decades. While it was true that an educational institution could not indulge in commercialization or profiteering, its efforts to generate a reasonable surplus and the utilization for augmenting the quality of education and the institution, was no longer criticized.

He added that it would be incorrect to accept the submission that the involvement of a foreign entity or a foreign national in the education sector was contrary to the fundamental policy of Indian laws.

The Bench noted that the tribunal had also taken note of the conceded stand of the respondents who accepted the existence of an educational institution set up by various participants in the oil and gas industrial sector of the country.

Justice Varma said, “As is evident from the provisions in the Appendix, a for-profit entity is entitled to establish an educational institution through a not-for-profit entity. Appendix 3.4 thus clearly indicates that if the for-profit entity is interspaced by a not-for-profit body, which manages and administers the educational institution, the same would be permissible. This too indicates that the involvement of a for-profit entity is not abhorrent to public policy.”

The single Judge Bench described, “Educomp invited Raffles to enter into a JV and develop educational institutions in the country. The appointment of Raffle‘s affiliates in JRRES was in accordance with amendments to which they were a party. Educomp cannot disavow the steps taken by the JVs merely to avoid enforcement.

“The Court is thus constrained to observe that the stand taken in these proceedings by Educomp clearly answers the dishonest defence aspect, which was alluded to in Cruz City. On balance and bearing in mind the discretion that Section 48 confers with respect to enforcement, the Court is inclined to recognize the award and ensure its execution in accordance with the law.”