Part I of the Arbitration and Conciliation Act 1996 (1996 Act) was originally intended to apply to arbitrations conducted in India. Part II relates to the enforcement of foreign awards made in countries which are signatories to the New York Convention and the Geneva Convention, and which have been separately notified by the Central Government of India.

Section 48(2)(b) of the 1996 Act provides that the enforcement of an arbitral award may be refused if the court finds that "the enforcement of the award would be contrary to the public policy of India."

Section 26 of the Sale of Goods Act 1930 (1930 Act) states that the risk associated with the goods prima facie passes with property. The first proviso provides that, where delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in default as regards any loss which might not have occurred, but for such default.

Section 23 of the Contract Act 1872 (1872 Act) covers all transactions where:

An Indian export company, Phulchand Exports Limited (appellant), entered into a Cost, Insurance and Freight contract (contract) with a Russian company, OOO Patriot (respondent) with respect to the export of long grain polished rice (goods) to the port of Novorossiysk (port of destination). The appellant shipped the goods 16 days late and the vessel left the port of loading 38 days later than the departure time stipulated in the contract.

The vessel carrying the goods failed to reach the port of destination due to an engine failure. The vessel was rescued and taken to the sea port of Eregli, Turkey. The owner of the rescue vessel claimed compensation for the rescue mission and was duly compensated by selling off the cargo on the vessel.

The respondent lodged a claim with the United India Insurance Company Limited (insurers) for non-delivery of goods to the port of destination. However, the insurers denied liability and stated that the risk of detention was not covered under the insurance policy for the loss of goods. Subsequently, the respondent filed claims against the appellant for recovery of the paid amount in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation (arbitral tribunal). The appellant contended that the risk of the goods had passed to the respondent upon shipment. The arbitral tribunal found merit in the respondent's claim and stated that the appellant did not prove the fact of force majeure, which could discharge them from liability. However, the arbitral tribunal also found that there was a delay on the part of the respondent, in:

Therefore, the arbitral tribunal split the amount of losses equally between the respondent and appellant and ordered the appellant to pay an amount to the respondent.

The respondent filed an arbitration petition before the High Court of Bombay (High Court) for the enforcement of the award under section 48 of the 1996 Act. The appellant contested the petition on the ground that the award was contrary to principles of public policy and therefore unenforceable. The Single Judge bench of the High Court overruled the objections. On appeal, the Division Bench of the High Court, relying on the Supreme Court's decision in Renusagar Power Co Ltd v General Electric Co (AIR 1994 SC 860), dismissed the appeal. This decision was then appealed before the Supreme Court.

The Supreme Court dismissed the appeal.

With regard to the appellant's argument that, according to the contract, the risk in goods was passed on to the buyers (that is, the respondent) upon shipment of the goods, along with the property documents, the Supreme Court held that the appellant was at fault, firstly by delaying the shipment of goods and then in shipping the goods in a vessel that was not headed to the correct port of destination as stipulated by the contract. Hence, according to the first proviso to section 26 of the 1930 Act, the goods continued to be at the risk of the appellant.

Furthermore, the Supreme Court stated that whether a particular transaction is contrary to public policy, as provided for under section 23 of the 1872 Act, would ordinarily depend upon the nature of the transaction. This is especially the case where experienced businessmen are involved in a commercial contract and the parties are of unequal bargaining power. However, the Supreme Court pointed out that the appellant and the respondent in the present case were business people with equal bargaining powers, who had agreed on all terms of the contract, which were in conformity with international trade and commerce.

The appellant further contended that the wider meaning attributed by the Supreme Court in Oil Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705 (Saw Pipes), to the definition of "public policy" for setting aside domestic awards (under section 34 of the 1996 Act), should also be applied in the context of setting aside foreign awards under section 48(2)(b) of the 1996 Act. The Supreme Court, relying on its own decision in Saw Pipes, held that a foreign award can be set aside if it is "patently illegal" under section 48(2)(b) of the 1996 Act. However, in this case, the arbitral award was not patently illegal.

By assigning a wider meaning to the expression "against public policy in India" for setting aside foreign arbitral awards, the Supreme Court's decision may, in our view, give rise to the filing of vexatious applications and also increase judicial intervention.