2025 (10) TMI 1256 - HC - Indian Laws

Enforcement of foreign arbitral award upheld; objections deemed merits re-examination beyond Section 48; enforced under Sections 47-49

PI OPPORTUNITIES FUND - I, MILLENNA FVCI LTD., NYLIM Jacob Ballas India (FVCI) III LLC, Versus FINANCIAL SOFTWARE AND SYSTEMS PVT. LTD., NAGARAJ V. MYLANDLA, SHARADA MYLANDLA, RUDHRAAPATHY J, FSS Employees' Welfare Trust

Madras HC allowed enforcement of the foreign arbitral award against the private respondents, holding the award enforceable under Sections 47-49 of the ... Seeking for enforcement of the foreign arbitral award - Whether the foreign arbitral award amounts to “buyback of shares” - Doctrine of Election Objections - disregard of prohibition under Section 16(b) of the Specific Relief Act - Respective petitioners having pursued the split sale have waived their rights for strategic sale - Failure to consider the material issue that the unauthorized delegation of power must relate to a specific Affirmative Vote Matter (AVM) listed in annexure IV of the SASHA - Award contrary to Section 10(b), Section 14(1)(a) and Section 20 of the Specific Relief Act - Failure to consider the material issue of whether the investors' interpretation of the limitation of liability in Clause 22 of the SASHA contradicted their own case - Award vitiated by fraud purportedly committed by the respective petitioners based on the purported concealment of the findings of a report prepared by Ernst & Young - HELD THAT:- Tthe Honourable Supreme Court in Vijay Karia's case [2020 (2) TMI 628 - SUPREME COURT] held that a failure to consider a material issue would not fall within the contours of Section 48(1)(b) of the Act. However, a failure to consider a material issue, which went to the root of the matter or failure to decide a claim in its entirety may shock the conscience of the Court, and could be set aside under Section 48(2)(b) of the Arbitration and Conciliation Act. Whether the foreign arbitral award amounts to “buyback of shares”? - HELD THAT:- As seen from the relevant portion of the award, which is relevant to the buyback issue, as extracted supra, it is clear that the award does not direct any “buyback of shares” by the first respondent company, and the award only directs that on payment of damages by the respondents 1 to 3, the respective petitioners shall surrender all their respective shares without specifying the entity/persons to whom such surrender is to be made. A breach that is procedural or rectifiable, such as a technical violation of regulatory laws, does not amount to a breach of fundamental policy. Infact, even non-rectifiable breaches have been held to be not in violation of fundamental policy of India. Section 48 of the Act deals with the enforcement of an award, not its validity, and the scope for factual investigation is limited. This distinction underscores the narrow approach to deny enforcement on the basis of public policy and restricts it to violations that are unquestionably contrary to the basic tenets of Indian Law. The respondents 2 and 3 have attempted to contend that this Court must appreciate the substance of the transaction over its form to argue that any surrender of shares by the respective petitioners will result in a buyback - the buyback issue raised by the respondents 2 and 3 once again before the enforcement Court, i.e., this Court, has to be summarily rejected. Doctrine of Election Objections - case of respondents 2 and 3 is that the foreign arbitral award is contrary to the fundamental policy of the Indian Law, since the doctrine of election does not permit the respective petitioners to seek both termination of rights as well as strategic sale under Clause 24.6 read with Clause 19.6 of the SASHA - HELD THAT:- At no point in the past the petitioners exercised their rights under Clause 24.6 of the SASHA to elect or give up one right over the other. Therefore, the conclusion of the Arbitral Tribunal that the petitioners had invoked both rights and based on the fact that they did not make an election as both rights were invoked on the same date, cannot be found fault with. The Arbitral Tribunal has also come to the right conclusion that the respective petitioners have claimed both reliefs, i.e., strategic sale and termination, but, they have not exercised any option to seek termination of the promoters' right at the expense of the right to force a strategic sale, which has been the core relief sought by the respective petitioners in the arbitration. It is also to be noted that the ground of election was never raised by the respondents 2 and 3 in their challenge to the award before the Singapore High Court. If the respondents 2 and 3 genuinely believed that the Arbitral Tribunal had failed to consider the issue of election properly or violated the principles of natural justice, such a challenge ought to have been raised before the Singapore High Court, which is the Curial Court. Notably, the doctrine of election, which is the time-honoured principle of Indian Law and their central aspect of argument, was not even alluded in the correction proceedings, indicating the belated and opportunistic nature of the present objection. By resisting the enforcement of the award on the ground of non-consideration of the doctrine of election, the respondents 2 and 3 are essentially seeking a reconsideration of the merits of the dispute, which cannot be permitted under Section 48 of the Act. Award disregards the prohibition under Section 16(b) of the Specific Relief Act - HELD THAT:- There is no violation of the fundamental policy of India as contended by the respondents 2 and 3. They have contended that the Arbitral Tribunal had disregarded the prohibition under Section 16(b) of the Specific Relief Act, 1963, which states that a party that has breached an essential term of the contract cannot obtain specific performance. The breach of the essential term of the SASHA, as per the respondents, is in contravention of Clauses 10.1 and 10.3 of the SASHA by terminating the rights of the respondents under Clause 24.6(c) of the SASHA. This argument however fails as it is based on a premise that is not only unproven but directly contradicting by the findings of the Arbitral Tribunal. There is no determination by the Arbitral Tribunal that the respective petitioners were in breach of any essential term of the SASHA - the objections raised by the respondents 2 and 3 that the Arbitral Tribunal did not consider the doctrine of election, which, according to the respondents 2 and 3, is a core issue, has to be rejected by this Court. Respective petitioners having pursued the split sale have waived their rights for strategic sale - HELD THAT:- The Arbitral Tribunal found that the conduct of the investors including any participation in split sale discussions or Credit Suisse presentations, pointed out to the consistent pursuit of the petitioners' rights under Clause 19.1 of the SASHA - In the case on hand, the Arbitral Tribunal took note of Clause 29.5 of the SASHA, extracted supra, and undertook a detailed analysis of the conduct of the parties as also the contemporaneous correspondence to conclude that the petitioners were always seeking a secondary sale under Clause 19.1 of the SASHA and just by participating in a split sale, they had in fact not waived their rights to seek an exit under Clause 19.1 of the SASHA - the objection raised by the respondents 2 and 3 that the petitioner had waived their rights to pursue a secondary sale by participating in the split sale process, has to necessarily fail. Accordingly, the objection raised by the respondents 2 and 3 with regard to waiver is rejected by this Court. Failure to consider the material issue that the unauthorized delegation of power must relate to a specific Affirmative Vote Matter (AVM) listed in annexure IV of the SASHA - HELD THAT:- This Court being an enforcement Court under Section 48 of the Act, cannot re-appreciate and re-examine the merits of the award. It is therefore not open to the respondents 2 and 3 now to resist the enforcement of the award by reopening the assessment of the merits of the dispute under the guise that the Arbitral Tribunal did not consider the material issue. The Arbitral Tribunal has appropriately interpreted Clause 13.4, Clause 24.4(e) along with Annexure 4(aa) of the SASHA, and also arrived at a correct finding that the breach of Clause 13.4(e) in itself is the material breach while also relying on documents and evidence placed before it to find the improper delegation of authority and to render a finding that the respondents are in material breach of Clause 13.4, in particular Clause 13.4(e) read with Clause 24.4(e) of the SASHA. By raising this objection, the respondents 2 and 3 are essentially seeking a complete reassessment of the interpretation of the SASHA as rendered by the Arbitral Tribunal and a re-appreciation of the evidence under the guise of a breach of natural justice and failure to consider a material issue, while there was no such denial of natural justice, cannot be permitted by this Court under Section 48 of the Act. Therefore, the Arbitral Tribunal has not failed to consider any material issue and has rendered a detailed award considering all contentions, hence, there is no justification for the respondents 2 and 3 to raise this objection under Section 48 of the Act. Award is contrary to Section 10(b), Section 14(1)(a) and Section 20 of the Specific Relief Act - HELD THAT:- The grant of damages and a mode of recovery of damages is merely a compensatory methodology adopted by the tribunals to compensate parties and the same does not amount to execution of the order. In the case on hand, the Arbitral Tribunal ascertained the right of the petitioners to effect a strategic sale from an interpretation of the SASHA and granted such relief to recover the damages awarded - the respondents 2 and 3 have also relied on the report of the Expert committee on Specific Relief Act, 1963, to demonstrate the reasons for amendment of the Specific Relief Act. This is of no assistance to the respondents 2 and 3. As stated above, the 2018 Specific Relief Act makes specific performance the norm as opposed to an exception and does away with the requirement of establishing damages as an inadequate remedy to obtain specific performance. Failure to consider the material issue of whether the investors' interpretation of the limitation of liability in Clause 22 of the SASHA contradicted their own case - HELD THAT:- The Arbitral Tribunal had considered the contention of the respondents 2 and 3 and rightly rejected the same. Therefore, there is no non-consideration of an issue, let alone a material issue, as contended by the respondents 2 and 3. This objection seeks a re-interpretation of the SASHA and it is settled law that this ground is not permitted in a petition filed under Section 48 of the Act. Award vitiated by fraud purportedly committed by the respective petitioners based on the purported concealment of the findings of a report prepared by Ernst & Young dated 15.12.2022 (EY report), and certain email correspondences between the employees of the first respondent company where the petitioners are not copied - HELD THAT:- The various statements made by the respondents 2 and 3 alleging fraud for the first time in this enforcement proceedings would require a trial and a finding, and therefore, the same cannot be assumed to be true or proved. The respondents 2 and 3 in a malafide manner and to scuttle the enforcement proceedings are attempting to resort to an unsubstantiated and threadbare allegation of fraud for the first time in this proceeding under Section 48 of the Act, which is wholly unsubstantiated. The respondents 2 and 3 did not also choose to raise the argument with regard to fraud before the Singapore High Court, that shows that the said objection has been raised only as an afterthought to scuttle the enforcement proceedings before this Court under Section 48 of the Act. The doctrine of transnational issue estoppel is grounded in the principle of finality of litigation. In other words, if a party was able to reopen issues that had already been fully argued and finally dealt with by a court in a later fresh action, this would open the door for an abuse of process. When applying the issue of estoppel in a transnational setting, this Court being the enforcement court has to give due consideration with balancing competing considerations of comity (due respect and deference for decisions of foreign courts) and the court's constitutional role as the guardian of the rule of law within its own jurisdiction. The respondents 2 & 3 are individuals against whom the arbitral award has been passed, which runs to more 1400 Crores of Indian Rupees. Since the award amount is a huge one and the award has been passed against two individuals, this Court had to give a patient hearing running to several days only to ensure that the respondents 2 & 3's objections were given utmost consideration by this Court in the ends of justice. But, despite giving the utmost consideration for the objections raised by the respondents 2 & 3 resisting the enforcement of the foreign award, this Court has come to the conclusion that the objections raised by the respondent 2 & 3 are untenable objections, which do not deserve any merit. The respondents 2 & 3 have not satisfied the requirements of Section 48 of the Act by raising objections, which enables this Court to refuse enforcement of the foreign arbitral award. The foreign arbitral award dated 05.07.2024 read with the clarification order dated 22.08.2024 passed by the Arbitral Tribunal is declared to be enforceable by this Court against the respondents 2 & 3 as per the provisions of Sections 47 to 49 of the Act - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether enforcement of a foreign arbitral award should be refused under Section 48(2)(b) of the Arbitration and Conciliation Act on the ground that enforcement would be contrary to the public policy of India (including fraud, violation of fundamental policy of Indian law, or basic notions of justice or morality). 2. Whether the award's directions (damages against Promoters/Company and surrender of shares on payment) amount to an unlawful buyback of shares in contravention of statutory provisions of company law (notably Sections 66-70 of the Companies Act) and thereby violate the fundamental policy of Indian law. 3. Whether the arbitral award is contrary to the doctrine of election (i.e., investors could not legitimately seek both termination of rights and strategic sale under contract provisions read together). 4. Whether participation in or pursuit of a split-sale process constituted waiver of the investors' contractual right to a secondary sale under the shareholders' agreement. 5. Whether the arbitral tribunal failed to consider a material issue relating to Affirmative Vote Matters (AVMs) such that the award is vitiated for want of natural justice or public policy. 6. Whether granting damages and permitting specific performance in the form of a strategic sale is contrary to the Specific Relief Act (pre-2018 and post-2018 law) and thus to the fundamental policy of Indian law. 7. Whether the arbitral tribunal misapplied or ignored the limitation of liability clause (cap on liability) in the agreement so as to render the award unenforceable. 8. Whether the award is vitiated by fraud (non-disclosure/concealment of an internal report and related documents), sufficient to defeat enforcement under Section 48(2)(b)(i). 9. Whether matters decided by the supervisory/seat court should have preclusive effect in enforcement proceedings (application of transnational issue estoppel) and the extent to which enforcement court may re-litigate issues determined at the seat. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of Section 48 / Public Policy in enforcement of foreign awards Legal framework: Section 48(2)(b) (with statutory explanations) circumscribes public policy grounds to (i) fraud/corruption/violation of specific Act provisions, (ii) contravention of fundamental policy of Indian law, or (iii) conflict with most basic notions of morality or justice; Explanation 2 forbids merits review to decide fundamental policy breach. Precedent treatment: Adopted narrow, pro-enforcement approach in line with Renusagar, Shri Lal Mahal, Vijay Karia and related decisions; rejected patent-illegality approach for foreign awards; domestic doctrines (Wednesbury, patent illegality) limited to domestic awards; supervisory court findings afforded deference. Interpretation & reasoning: The Court reiterated that foreign awards engage private international law and that enforcement must be refused only in exceptional, well-defined circumstances; Section 48 is to be strictly construed; courts must not re-examine merits or re-interpret contractual provisions merely because they disagree with tribunal's view. Ratio vs. Obiter: Ratio - enforcement court's jurisdiction under Section 48 is narrow; Explanation 2 prohibits merits review; fraud must be egregious and proved on admitted documents. Obiter - policy observations on international comity and deference. Conclusion: Section 48 permits refusal only on the statutorily enumerated narrow grounds; general dissatisfaction with tribunal's interpretation or factual findings is insufficient. Issue 2 - Buyback v. Surrender: whether award effects unlawful buyback Legal framework: Distinction between statutory buyback (company-initiated purchase governed by Companies Act thresholds/procedures) and shareholder surrender/return of shares; award reliefs framed as damages against Promoters/Company with investors' undertaking to surrender shares to avoid double recovery; award did not nominate Company as buyer. Precedent treatment: Applied Renusagar and later cases that a mere statutory contravention does not equate to breach of fundamental policy; relied on authorities holding transactional form matters and that enforcement should not be defeated by mere regulatory non-compliance unless core policy is offended. Interpretation & reasoning: Tribunal's award grants damages and, to prevent double recovery, requires surrender of shares on payment - not a compelled statutory buyback by the Company. The Court emphasised contractual construction in the award, the tribunal's explicit distinction between Clause 19.1 (secondary sale/damages) and Clause 19.2 (buyback), and practicable mechanisms (capital reduction, compliance with Companies Act) to effect surrender if needed. Reliance on supervisory court rejection of buyback challenge strengthened this view. Ratio vs. Obiter: Ratio - surrender direction does not equate to statutory buyback and therefore does not, per se, violate fundamental policy; merits of alternate structuring cannot defeat enforcement. Obiter - mechanics (capital reduction/complying with Companies Act) noted. Conclusion: Buyback objection fails; award is not contrary to fundamental policy merely because an eventual corporate step might invoke company-law formalities. Issue 3 - Doctrine of election (simultaneous invocation of termination and strategic sale) Legal framework: Contractual clause provided alternative remedies; doctrine of election prevents obtaining inconsistent alternative remedies where party has elected one to detriment of other; natural justice limited in enforcement stage. Precedent treatment: Tribunal and supervisory court found both remedies were invoked contemporaneously and that remedies were disjunctive/alternative; enforcement court will not re-open factual/construction determinations already addressed by tribunal/seat court. Interpretation & reasoning: The tribunal analysed notices and pleadings and found invocation of both remedies on same date; correction order clarified remedies are alternative so only one operative relief obtains ultimately; respondents failed to show any denial of opportunity to address the election issue at arbitration. The enforcement court refused to relitigate the merits of that construction. Ratio vs. Obiter: Ratio - where tribunal has considered election issue and made factual/construction findings, enforcement court will not upset that finding absent a narrow Section 48 ground. Obiter - admonition that belated election objections at enforcement stage are impermissible. Conclusion: Election objection rejected; no public policy breach. Issue 4 - Waiver by participation in split sale Legal framework: Waiver under contract requires meeting the contractually stipulated form (here, clause requiring waivers be in writing); waiver is a merits/fact question ordinarily for tribunal; enforcement court not to reassess unless denial of fair hearing or other Section 48 ground. Precedent treatment: Tribunal and seat court found no waiver; contemporaneous documents and tribunal's factual findings supported that investors continually sought a secondary sale despite participating in discussions; enforcement court declined to reassess. Interpretation & reasoning: Tribunal reviewed correspondence, minutes and witness evidence (including promotor testimony) and concluded no waiver; clause 29.5 required written waiver. Enforcement court held that respondent's late reliance on waiver/contractual statutory provisions cannot be revived to defeat enforcement; supervisory court had rejected waiver argument. Ratio vs. Obiter: Ratio - waiver objection amounts to merits and is not a ground to refuse enforcement absent exceptional circumstances. Obiter - procedural note that unpleaded grounds cannot be shoehorned into enforcement proceedings. Conclusion: Waiver objection fails; award enforceable. Issue 5 - Affirmative Vote Matter (AVM) and alleged failure to identify specific AVM Legal framework: Contractual protection for AVMs; alleged unauthorized delegation or action must relate to AVM to constitute material breach under clause cited; tribunal's factual finding that unauthorized delegation and bypassing approval constituted breach. Precedent treatment: Tribunal interpreted clause broadly and held AVM identification was not a prerequisite to establish material breach; enforcement court deferred to tribunal's construction and factual findings. Interpretation & reasoning: Tribunal's reasoning explained that unauthorized board actions without consent fall foul of the clause even if a particular AVM resolution was not pleaded; respondent did not show denial of opportunity to meet this case in arbitration; supervisory court not disturbed. Ratio vs. Obiter: Ratio - tribunal's interpretation and material-breach finding on AVM-related complaint stands and is not open to re-appreciation in enforcement proceedings. Obiter - note that re-opening merits is impermissible under Section 48. Conclusion: AVM complaint does not defeat enforcement. Issue 6 - Specific Relief Act and availability of specific performance alongside damages Legal framework: Specific Relief Act (as amended) makes specific performance the norm and allows awards of specific performance and damages to co-exist (post-amendment position considered retrospective by Court); prior statutory bar (pre-2018) addressed but held not to preclude award. Precedent treatment: Relying on Supreme Court jurisprudence endorsing limited review at enforcement stage and on authorities recognising retrospective operation of the 2018 amendments (and decisions holding specific performance can coexist with damages), tribunal's grant of damages plus strategic sale upheld. Interpretation & reasoning: Tribunal's relief of damages with contingent strategic sale was a contractual remedy, not an impermissible or novel equitable overreach; enforcement court found no breach of fundamental policy; respondents' reliance on pre-2018 law rejected in light of amendment and supporting case law. Ratio vs. Obiter: Ratio - award permitting damages and a contractual remedy to recover them (strategic sale) is not contrary to Specific Relief Act or public policy. Obiter - commentary on retrospective application of amendments. Conclusion: Specific Relief Act objection fails. Issue 7 - Limitation of liability (cap) under contract Legal framework: Contractual liability cap construed by tribunal to apply to certain representations/warranties/covenants but not to the investors' claim for damages for breach of exit obligation; enforcement court limits itself to checking whether tribunal considered the point. Precedent treatment: Tribunal expressly considered cap argument and rejected expansive application; enforcement court deferred to that analysis and declined merits re-examination. Interpretation & reasoning: Tribunal's reasoning (that cap relates to representations/warranties, not to breach of Clause 19.1) was plausible and supported by contractual context; no Section 48 ground established to revisit. Ratio vs. Obiter: Ratio - contractual limitation clause interpretation by tribunal stands for enforcement stage absent narrow statutory ground. Obiter - none. Conclusion: Limitation of liability objection fails. Issue 8 - Fraud (non-disclosure of EY report / alleged manipulation) Legal framework: Fraud or corruption that induced the award can defeat enforcement; threshold is high - fraud must be egregious and proved on admitted documents; enforcement court will not admit new evidence that could have been produced at arbitration. Precedent treatment: Enforcement court emphasised that respondents were aware of EY report well before filing defences, failed to seek production/discovery/arbitral relief on that basis, did not raise fraud before seat court, and both parties' experts did not rely on the report to challenge valuation; supervisory court did not allow fraud challenge. Interpretation & reasoning: Chronology showed respondents knew of report early, yet did not raise material impact during arbitration or before supervisory court; allegations of concealment, quid-pro-quo and manipulation were unsubstantiated, post-hoc and would require trial; enforcement court cannot admit fresh evidence nor reopen findings absent clear manifest fraud affecting tribunal's decision. Ratio vs. Obiter: Ratio - belated, unproven allegations of fraud that could and should have been raised at the seat are insufficient to resist enforcement; evidence not placed before tribunal cannot be used to defeat enforcement. Obiter - guidance that fraud must be proved on the basis of admitted documents and be causally linked to arbitral outcome. Conclusion: Fraud objection rejected. Issue 9 - Transnational issue estoppel and preclusive effect of seat court determinations Legal framework: Doctrine limits re-litigation of issues finally decided at the seat; enforcement court may give preclusive effect to seat court findings unless matters of local public policy or arbitrability are at stake. Precedent treatment: Applied transnational estoppel where seat court (supervisory court) considered and rejected same objections (buyback, waiver, others); enforcement court declined to re-adjudicate those issues. Interpretation & reasoning: Court balanced international comity, finality and India's role as enforcement forum; concluded that issues decided by seat court and not implicating Indian public policy should be accorded preclusive effect; parties cannot re-raise identical challenges absent special circumstances. Ratio vs. Obiter: Ratio - transnational issue estoppel applies in enforcement proceedings to prevent re-litigation of issues finally determined at the seat, subject to narrow exceptions. Obiter - exposition on comity and abuse of process. Conclusion: Seat court findings bind enforcement court; respondents estopped from re-litigating those issues. Relief, Costs and Concluding Findings Enforcement court's conclusions (ratio): The foreign arbitral award is enforceable under Sections 47-49; none of the respondents' objections fall within the narrow compass of Section 48; issues raised (buyback, election, waiver, AVMs, Specific Relief Act, limitation cap, fraud) were either considered and rejected by the tribunal and/or the supervisory court or constitute impermissible merits review; transnational issue estoppel applies; fraud allegation not proved with requisite material; costs awarded against resisting respondents for abuse/delay.