No Defense Can Be Claimed Under FEMA For Enforcement Of Foreign Arbitral Awards Enforcing Put Options: Delhi HC [Read Judgment]

Vanita Bhatnagar

16 April 2017 3:59 PM GMT

  • No Defense Can Be Claimed Under FEMA For Enforcement Of Foreign Arbitral Awards Enforcing Put Options: Delhi HC [Read Judgment]

    In Cruz City 1 Mauritius Holdings v. Unitech Limited, Justice Vibhu Bakhru held that foreign arbitral award can be enforced in India pertaining to put options, exit at assured return, and guarantee arrangements and the provisions of FEMA and related regulations cannot be claimed as defense by Indian parties.In this matter, an investor Cruz City (Mauritius Company) sought to enforce a...

    In Cruz City 1 Mauritius Holdings v. Unitech Limited, Justice Vibhu Bakhru held that foreign arbitral award can be enforced in India pertaining to put options, exit at assured return, and guarantee arrangements and the provisions of FEMA and related regulations cannot be claimed as defense by Indian parties.

    In this matter, an investor Cruz City (Mauritius Company) sought to enforce a foreign arbitral award against Unitech (an Indian company) and its wholly owned subsidiary Burley Holdings Ltd. (a Mauritius company).

    By way of a Shareholders’ Agreement (SHA), Cruz City had invested in Kerrush Investments Limited to undertake some real estate projects. Under the SHA, Cruz City was entitled to exercise a put option by which it could call upon Burley to purchase its shares in Kerrush at a “post tax IRR of 15% on the capital contributions made by Cruz City in the event commencement of construction of was delayed before the specified period”.

    Due to the delays in execution of real estate project, Cruz City exercised the put option in 2010.

    Burley and Unitech failed to comply with the same and Cruz City initiated anLCIA arbitration and obtained an award against them.

    However, when that award was sought to be enforced before the Delhi High Court, Unitech claimed that the enforcement of award is impressible under FEMA as it is against public policy.

    The Delhi High Court rejected the contentions forwarded by Untitech and clarified that any payments to be made by Unitech would be subject to the provisions of FEMA, including where required based on permissions from the Reserve Bank of India (RBI) but in no sense enforcement of these awards is against public policy.

    In arriving at this conclusion, the Delhi High Court critically examined the scope of the “public policy” exception under section 48 of the Arbitration & Conciliation Act, 1996 and considered  “whether violation of any regulation or any provision of FEMA would ipso jure offend the public policy of India”.

    The held that “the width of the public policy defense to resist enforcement of a foreign award, is extremely narrow. And the same cannot be equated to offending any particular provision or a statute.” It went on to note:

    It plainly follows from the above that a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the principles and the legislative policy on which Indian Statutes and laws are founded. The expression "fundamental policy" connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. The expression "fundamental policy of law" must be interpreted in that perspective and must mean only the fundamental and substratal legislative policy and not a provision of any enactment.”

    Read the Judgment here.

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