ARBITRAL & JUDICIAL DECISIONSJURISDICTION TO SET ASIDE A FOREIGN ARBITRAL AWARD, IN
PARTICULAR AN AWARD BASED ON AN ILLEGAL CONTRACT: A
REFLECTION ON THE INDIAN SUPREME COURT’S DECISION IN
VENTURE GLOBAL ENGINEERING
Koji Takahashi *I.

PURPOSE OF THIS ARTICLE

In the judgment delivered in January 2008 in the case of Venture Global
Engineering v. Satyam Computer Services,1 the Supreme Court of India held that
the Indian courts had jurisdiction to set aside a foreign arbitral award, i.e. anaward rendered outside India.2 Drawing inspiration from this decision, this article
will examine whether setting aside a foreign arbitral award produces any negative
effect and will explore what useful purpose, if any, could be served by exercisingsuch jurisdiction.
II. JURISDICTION TO SET ASIDE A FOREIGN
ARBITRAL AWARD: HOW COMMON?
Before embarking on the analysis, it should be noted that the setting asideof a foreign arbitral award is not a commonly encountered practice.3 Thus, inInternational Standard Electric v. Bridas Sociedad Anonima Petrolera,4 theplaintiff invited the U.S. District Court for the Southern District of New York to
set aside a Mexican award. The award had been rendered by the application of
Mexican law to the procedure and New York law to the substance. In its
submission, the plaintiff relied on the New York Convention on the Recognition*

Professor of Law, Doshisha Law School, Japan. This article originates from thesymposium “Economic Development and Role of Arbitration in India” which I organizedon December 14, 2008 under the aegis of the Doshisha University Research Center for
Worldwide Business. I would like to record my gratitude to Messrs Shishir Dholakia,
Yasuhei Taniguchi, and Naoki Iguchi for their contributions to the symposium which haveimmensely facilitated my understanding of Indian arbitration law.
1
(2008) 4 SCC 190.
2
There is a precedent at the lower court level: the Gujarat High Court judgment in
Nirma v. Lurgi Energie und Entsorgung, Dec. 19, 2002, 2 ARB L.R. 241 (2003), XVIII
Y.B. COM. ARB. 790 (2003) concerning the setting aside of a London arbitration award.
3
For details, see e.g., GARY BORN, INTERNATIONAL COMMERCIAL ARBITRATION:
COMMENTARY AND MATERIALS 757 (2nd ed. 2001) and authorities cited therein.
4745 F. Supp. 172 (S.D.N.Y. 1990).
The American Review of International Arbitration (ARIA), v19/no 1, 173-186, copyright 2009 ©JurisNet LLC

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THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION[Vol. 19and Enforcement of Foreign Arbitral Awards of 1958.5 Though the Convention
contains no provision enumerating grounds for setting aside an arbitral award, theplaintiff invoked Article V(1)(e), which provides that the recognition andenforcement of an award may be rejected if it has been set aside by a court of thecountry in which, or under the law of which, it was made. The plaintiff argued thatthe law under which the award was made referred not to the law governing thearbitral procedure (curial law) but to the law governing the substance. Therefore
the New York Convention presupposed, so the plaintiff argued, that an award
could be set aside in the country whose law had been applied to the substance ofthe dispute. The District Court rejected this argument and accordingly declined
jurisdiction. It held that the words in question referred not to the substantive
governing law, such as the law of contract, but to the law governing the arbitralprocedure. The court came to this conclusion on the ground, inter alia, thatreopening the merits (révision au fond) should be impermissible to set aside anaward. The governing law of arbitral procedure is, under the New York
Convention, supposed to be the law of the country where the arbitration takes
place.6 On that interpretation, Article V(1)(e) would mean that the recognition andenforcement of an award may be rejected if it has been set aside in the country
where the arbitration took place, a reading which presupposes that an arbitralaward may be set aside in the country where it was made. From this, it might beinferred that the Convention does not approve its contracting states to set aside a
foreign arbitral award. It cannot be stated unequivocally, though, since theConvention contains no express provision setting forth grounds of vacating an
arbitral award.
The position under the UNCITRAL Model Law is clearer: it is only the courtsof the place (seat) of arbitration that have the power to set aside an award.7
Vacating a foreign arbitral award is, therefore, impermissible in the countries
which have followed the Model Law in this respect. For example, under the
Arbitration Act 2003 (Japan), most of its provisions, including those laying down
the grounds for setting aside an award, are applicable only where the place ofarbitration is in Japan.8 It follows that the Japanese courts are empowered to set
aside only a domestic award, i.e. an award made in Japan.
Turning to India, Part I of the Arbitration and Conciliation Act 1996 (India)
largely follows the UNCITRAL Model Law. The Act as a whole, however, does
not reproduce the structure of the Model Law, as its Part II contains provisions to
implement the New York Convention and the Geneva Convention9 on theenforcement of foreign arbitral awards. The Indian Supreme Court held in an
5

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21
U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38.
6
See id. Art. V(1)(d), which also allows the parties to derogate from the law byagreement.
7
See UNCITRAL MODEL LAW, Arts. 1(2) and 34.
8
See Arbitration Act 2003 (Jap.), Art. 3(1) and Ch. 7.
9Geneva Convention on the Execution of Foreign Arbitral Awards of 1927.

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earlier case of Bhatia International v. Bulk Trading10 that Part I, which covers
Articles 2 through 43, was applicable to foreign, as well as domestic, arbitration
when it ruled that Article 9 (provision on interim measures) could be invoked tosupport foreign arbitral proceedings. The Supreme Court followed that reasoning
in Venture Global Engineering to arrive at the conclusion that Article 34(provision on setting aside an award)11 was also applicable to a foreign arbitralaward. Granting an interim measure in support of foreign arbitral proceedings isalso permitted under the UNCITRAL Model Law.12 But the Indian Supreme Court
deviated from the Model Law when it extended the reasoning to Article 34.
There may be other countries that, in a deviation from the international norm,
will allow their courts to exercise jurisdiction to set aside a foreign arbitral award.
Thus, the rest of the present analysis may have relevance beyond the Indian
context.
III. DOES THE SETTING ASIDE OF A FOREIGN ARBITRAL AWARDPRODUCE ANY NEGATIVE EFFECT?
The decision of the Indian Supreme Court in Venture Global Engineering has
been roundly condemned.13 Apart from the fact that the decision is
unconventional, is there any merit in the criticism?
Under the UNCITRAL Model Law14 and the national arbitration laws thathave adopted it,15 an arbitral award will generally16 be denied recognition or
enforcement if it has been set aside in the country where the award was made or in
the country whose law was applied to the arbitral procedure. This position isderived from the interpretation of the expression “the country . . . under the law ofwhich, that award was made” used in Article V(1)(e) of the New York Convention
10(2002) 4 SCC 105.
It is substantively the same as Article 34 of the UNCITRAL Model Law though it
is couched in slightly different wording.
12
See UNCITRAL MODEL LAW, Arts. 1(2) and 9.
13
See, e.g., Dipen Sabharwal, Another Setback for Indian Arbitration (and Foreign
Investors), WHITE & CASE INT’L DISPUTES Q. 6 (Spring 2008); Nina Nariman,International Arbitration in the Indian Context: Challenge to Foreign Awards under
Section 34 of the Indian Arbitration and Conciliation Act 1996, 12 VINDOBONA J. INT’L
COM. L. & ARB. 195, 200 (2008); Dharmendra Rautray, India: Venture Global
Engineering v. Satyam Computer Services Ltd – Foreign Awards Are Open To Challenge
on the Merits as Domestic Awards – Ntpc v. Singer Co Case Revisited, 11(2) INT’L A.L.R.
29 (2008).
14
UNCITRAL MODEL LAW, Art. 36(1)(a)(v).
15
See, e.g., Art. 45(2)(vii) of the Japanese Arbitration Act 2003.
16
Exceptionally, though, there are cases in which an arbitral award which had been
set aside at the place of arbitration was enforced: see, e.g. the decision of the French Courde Cassation in Société Hilmarton v. OTV (Bulletin civil 1994 I N°104, p. 79) and thedecision of the U.S. District Court for the District of Columbia in Chromalloy
AeroServices v. Egypt, 939 F. Supp. 907 (D.D.C. 1996).
11

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THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION[Vol. 19and Article 36(1)(a)(v) of the UNCITRAL Model Law, both of which set forth
grounds for refusal to recognize or enforce an award. That provision is commonlyinterpreted as referring to the country whose law is applied to the arbitralprocedure, as illustrated by the decision in the Bridas case, discussed above. The
law applicable to the arbitral procedure is the law of the place of arbitration (lexloci arbitri) unless otherwise agreed by the parties.17 It follows that the setting
aside of a foreign arbitral award usually does not prevent the award from being
recognized or enforced in other countries. Any concern that it may undermine thefinality of arbitration is, therefore, largely unfounded. Its only negative effectwould be a possible confusion which might be brought about by the unfamiliarityof the measure.
IV. WHAT USEFUL PURPOSE COULD BE SERVED BY ENTERTAINING
AN ACTION TO CHALLENGE A FOREIGN ARBITRAL AWARD?
Having observed that the setting aside of a foreign arbitral award produces
little negative effect, the remainder of the present article will consider what useful
purpose, if any, could be served by accepting jurisdiction over a challenge to aforeign arbitral award. It will be concluded that it may serve a useful purpose in alimited situation: Accepting jurisdiction over a challenge to a foreign arbitralaward may, if the challenge is made in a country closely connected with theunderlying contract, provide the court with an opportunity to make findings under
its own legal system as to whether the underlying contract is illegal, howsignificant the illegality is, and whether such illegality has the effect of rendering
the contract unenforceable. Thus, the court in another country seized ofproceedings to set aside, recognize or enforce the same award would be able totake notice of such findings and thereby form an accurate view concerning such
illegality if that court, in scrutinizing the compatibility of an arbitral award with
its own public policy, needed to take into account the illegality of the underlying
contract under the law of countries which were closely connected with thecontract. This process, then, may serve the further useful purpose of promoting,albeit indirectly, the legal policy of countries closely connected with theunderlying contract, which may otherwise be by-passed. To illustrate the point, it
will be useful to examine the facts of Venture Global Engineering.
A. Facts of Venture Global Engineering
In this case, an Indian company (“S”) and a Michigan company (“V”) set up a
joint venture company (“SV”) in India in which each had a 50% equity
shareholding in accordance with their shareholders’ agreement. The agreement
was subject to the law of Michigan. S alleged that a default under the agreement
had occurred, triggering the obligation of V to transfer its shares to S. To enforce
17

See New York Convention, Art. 5(1)(d); UNCITRAL MODEL LAW, Arts.
34(2)(a)(iv) and 36(1)(a)(iv).

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the obligation, S filed a request for arbitration in London in accordance with anarbitration clause in the agreement. Upon obtaining an award directing V totransfer the shares to S, S filed a petition to enforce the award in Michigan. V
objected to enforcement, arguing that the transfer would violate Indian law, inparticular the Foreign Exchange Management Act 1999. V also broughtproceedings in India seeking to set aside the award.
The U.S. Court of Appeals for the 6th Circuit,18 on appeal from the District
Court for the Eastern District of Michigan,19 held that there is an establishedprinciple that an arbitral award ordering an act which was illegal under the law of
the country of performance could be denied enforcement as contrary to public
policy. On the facts of the present case, it affirmed the finding of the District
Court that the award did not require the performance of an illegal act under thelaw of India. This finding was made on the showing by S that the permission of
the Reserve Bank of India had been granted on the transfer.
One year later, S filed before the District Court for the Central District ofMichigan a motion for contempt of court,20 contending that V had failed to abideby the judgment of the Court of Appeals. V resisted the motion, arguing that it had
in good faith taken the steps necessary under Indian law to transfer the shares. As
it would take the court significant time to research and apply Indian law, the court
and the parties agreed to appoint a Special Master under Article 53(a)(1) of theFederal Rules of Civil Procedure.21 The District Court examined and adopted thereport and recommendation of the Special Master in which it was found that the
failure of V to effect the transfer was not due to the law of India. Upon thatfinding, the court ordered V to take necessary steps to transfer the shares andimposed a daily fine until V complied with the order.
One week prior to this Michigan judgment the proceedings in India
culminated in the judgment of the Supreme Court. The court held, as examined
above, that the Indian courts had jurisdiction to set aside a foreign arbitral award
and remanded the case to the lower court to decide whether setting aside theaward was warranted on the facts of the instant case.
What developments took place thereafter is not known to the author. But itwould be possible to make the following observation from the above facts.
Throughout the U.S. proceedings, the focal point was the illegality of the transfer
under Indian law. After the Indian Supreme Court remanded the case, the lower
court, in considering whether to set aside the award, might have made findings as
18

Venture Global Engineering v. Satyam Computer Services, 233 Fed.Appx. 517,
523; 2007 WL 1544160 (6th Cir. 2007).
19
Satyam Computer Services v. Venture Global Engineering, which is unreported but
is available at 2006 WL 2571581 (E.D. Mich. Aug. 1, 2006).
20
Satyam Computer Services v. Venture Global Engineering, 2008 WL 190362(E.D.Mich.).
21
A Special Master is appointed to assist the court in exceptional cases where thecourt does not possess the requisite knowledge to perform its function. Following the2003 revision of the Rules, he or she is now simply called “Master.”178

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to whether the transfer was illegal under Indian law, whether the illegality wassignificant, and whether such illegality had the effect of rendering the parties’
shareholders’ agreement null and void. If, contrary to the actual case, suchfindings had preceded the suit in Michigan,22 it would have been easier for the
courts in Michigan to form a view on the illegality under Indian law without
having to appoint a Special Master or to rely on the evidence submitted by theparties. Furthermore, through such a process, albeit indirectly through the decisionof the U.S. courts, the Indian legal policy behind any prohibition against thetransfer might have been realized.
B. Analysis
A contract may be tainted with illegality in a variety of ways. Thus, it may
require the performance of an illegal act as alleged in Venture Global
Engineering. It may, on the other hand, simply condone the performance of anillegal act, as in the case of an insurance contract providing for indemnification
against any fine which might be imposed for illegal conduct. The types of law
which may be infringed by a contract are also diverse: they may include, forexample, competition law, anti-corruption law, export/import control law, or
foreign exchange control law.
The consequences of illegality, too, are complex. An illegal contract is notnecessarily treated as unenforceable23 and therefore may require a party toperform an illegal act while at the same time being subject to punishment. Some
illegal contracts may be enforceable by one party but not by the other. In all cases,
it is the governing law of the contract that determines whether the contract isrendered unenforceable by its illegality. It must be noted here that a contract may
be illegal under a legal system that is different from its governing law. It is again
the governing law of the contract which determines whether illegality underanother legal system has any legal consequence. In such a case, illegality under aforeign law will be treated as a fact. Thus, the threat of punishment under aforeign law may constitute “force majeure” under the governing law of thecontract. Or, it may make the defaulting party faultless under the governing law
which adopts a fault-based liability. Equally, a contract vitiated by illegality under
22

What in reality happened was that the District Court handed down the judgment
without being aware of the judgment of the Indian Supreme Court which had beendelivered one week earlier. See Satyam Computer Services v. Venture Global
Engineering, 2008 WL 190362 at n. 6.
23
In Japan, there is a series of Supreme Court judgments holding that illegality had
no bearing on the private rights of the parties involved: e.g. judgment on March 18, 1960
(14-4 Minshu 483) upholding the enforceability of a contract of sale of foodstuffs
concluded by a person without a licence required by the Food Hygiene Act (Jap.);
judgment on Dec. 23, 1965 (19-9 Minshu 2306) upholding the enforceability of a contract
contravening the Foreign Exchange Control Act (Jap.); judgment on March 6, 1975 (29-3
Minshu 220) upholding the enforceability of a contract of sale infringing the Protection ofCultural Property Act (Jap.).

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a foreign law may be deemed immoral (contra bonos mores) and hence
unenforceable under its governing law.
If litigation is brought on a contract which is illegal under the law of the forum,
the court is likely to take the illegality into account in applying the governing law of
the contract.24 If a contract is illegal under another legal system, there is thepossibility that the illegality will be taken into account.25 For example, an insurance
contract covering goods imported from a foreign country without obtaining anexport licence may be held contra bonos mores and hence unenforceable.26
The likelihood that a court will take into account illegality under a foreign
legal system will depend on how close is the nexus of that other country with thecontract. The nexus is strong if, for example, it is the country where theperformance of the contract is to take place entirely or partially. Another relevant
factor will be the significance of the illegality, which may be indicated by whether
the illegal act is subject to criminal or administrative sanctions. Thus, the Tokyo
High Court in its decision of February 9, 200027 enforced an insurer’s obligation
to pay on its insurance policy covering losses arising from the carriage of Iraniancarpets from Japan to the United States in circumstances where the insured hadomitted to obtain from the U.S. authority a licence required for the import of
Iranian carpets. The court held that illegality under import regulations did notnecessarily render related contracts null and void, reasoning that the significance of
the illegality could be different depending, for example, on the items imported.
Observing that the U.S. import restrictions on Iranian carpets, unlike those forweapons and drugs, were only a temporary measure and also noting that it was notclear whether the insurer paying out on the policy would be subject to any criminal
sanctions, the court concluded that on the facts of the case, the illegality under the
U.S. law was not sufficient to render the insurance policy, governed by Japaneselaw, unenforceable.
If arbitration is brought on an illegal contract, since the arbitrators are, unlike
judges, private persons, they owe no allegiance to any particular legal system.
Rather, they may be concerned with preserving the efficacy of their award. Morespecifically, arbitrators may consider it their responsibility to make sure that theiraward is not vulnerable to a challenge at the place of arbitration and do their best
to ensure that their award can be recognized and enforced in the countries whererecognition or enforcement is likely to be sought.28 Accordingly, the arbitrators
24

See, e.g., Art. 9(2) of the EC Regulation No. 593/2008 on the Law Applicable toContractual Obligations (Rome I Regulation).
25
See, e.g., Art. 9(3) of the Rome I Regulation.
26
E.g. the judgment of the German Bundesgerichtshof on June 22, 1972. See
comment by Kurt Siehr, International Art Trade and the Law, 243 (1993) RECUEIL DES
COURS 9, 190.
27
1749 Hanrei Jiho 157.
28
See, e.g. the RULES OF ARBITRATION OF THE INTERNATIONAL CHAMBER OFCOMMERCE (Jan. 1, 1998) Art. 35, which provides that “the Arbitral Tribunal . . . shallmake every effort to make sure that the Award is enforceable at law.”

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THE AMERICAN REVIEW OF INTERNATIONAL ARBITRATION[Vol. 19may, in the context of applying the governing law of the contract, give due regard
to illegality under the law of the place of arbitration since otherwise the award, if
challenged there, might be defeated as repugnant to public policy.29 Equally, they
may give due consideration to illegality under the law of the country whererecognition or enforcement is likely to be sought in anticipation that the award
might otherwise be denied recognition and enforcement as contrary to public
policy.30 It should be noted, however, that neither the country in which the placeof arbitration is situated nor the countries where recognition or enforcement issought necessarily have a close connection with the underlying contract. The placeof arbitration could be freely agreed on by the parties31 and thus may be, forexample, a neutral place having no nexus with the underlying contract. The
countries in which enforcement is sought may be those in which the defeatedparty happens to have assets. It means that arbitrators do not necessarily have an
incentive to take into account illegality under the law of the countries that actually
have a close nexus with the underlying contract, for example, the country where
the contract is to be performed. It will be recalled that the Indian Supreme Court
in Venture Global Engineering took the view that in obtaining an award in
England and attempting to enforce it in Michigan, S was motivated by an intent toevade scrutiny under the law of India, i.e. the country where the performance had
to be effected.32
It might be thought that jurisdiction to enforce an award should be declined incountries other than those closely connected with the underlying contract, possibly
on forum non conveniens grounds, so that arbitrators do not disregard illegality
29

See UNCITRAL MODEL LAW, Art. 34(2)(b)(ii). Here, an award giving effect to an
illegal contract should be distinguished from an award rendered by a wrongful applicationof the governing law of the contract. A simple error in the application of the governing
law would not constitute a ground for defeating the award since the reopening of thesubstance (révision au fond) is impermissible. The illegality of the underlying contract, on
the other hand, could make the award repugnant to public policy, especially where theillegality is considered to be significant, and have the effect of rendering the underlying
contract unenforceable. It must, however, be noted that public policy is a wider concept
than just illegality as it encompasses values that are not expressly articulated in the formof statutory provisions.
30
See New York Convention, Art. V(2)(b) and UNCITRAL MODEL LAW, Art.
36(1)(b)(ii).
31
UNCITRAL MODEL LAW, Art. 20(1).
32
The Indian Supreme Court held in the prior case of Oil and Natural Gas Corp. v.
Saw Pipes, (2003) 5 SCC 705 that an award patently illegal under Indian law was contrary
to public policy and fell to be set aside. The Court reaffirmed in Venture Golobal
Engineering (para. 21) that a foreign arbitral award would be subject to the same
principle. Some commentaries are critical of the Saw Pipes judgment as undermining thefinality of arbitration. See e.g., Sumeet Kachwaha, The Arbitration Law of India: A
Critical Analysis, 1-2 ASIAN INT’L ARB. J. 105 (2005). Cf. O.P. MALHOTRA & INDU
MALHOTRA, LAW & PRACTICE OF ARBITRATION & CONCILIATION para. [I]34-56) (2nd ed.
2006).

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under the law of such countries. The Indian Supreme Court in Venture Global
Engineering might have been sympathetic with such a view when it opined that S
should have sought enforcement in India rather than in Michigan since the award
had an intimate and close nexus with India and its law in view of the fact that theshares to be transferred were those of an Indian company and that the transfer
would require steps to be taken in India under the law of India. The Court fearedthat Indian public policy might be by-passed if an arbitral award in respect ofproperties situated in India (referring apparently to the shares of SV in the instantcase) were sought to be enforced abroad (in Michigan in the instant case) and a
debtor (V in the instant case) residing in that foreign country were to personallycomply with the award for fear of sanctions for contempt of court. The reality is,however, that jurisdiction to enforce an arbitral award may be exercised in the
countries where an effective enforcement can be expected by virtue of, forexample, the threat of sanctions for contempt of court against the residents thereeven if such countries have no nexus with the underlying contract. And it shouldrightly be so. The district court in Michigan in Venture Global Engineering did infact reject V’s plea that it decline jurisdiction to enforce the award on the basis of
the principle of forum non conveniens.33 In the case of an award ordering paymentof money, enforcement jurisdiction will be accepted in countries where the party
against whom the award has been rendered has sufficient assets since enforcement
can be effective there even if the underlying contract has no connection with thosecountries.
The consequence is that the legal policy of the countries closely connectedwith a contract may be flouted if the party seeking to evade the legal hurdles
erected by such countries shies away from those countries when deciding theplace of arbitration and the place to enforce the ensuing award. There is, however,a remaining possibility that the legal policy of such countries would besafeguarded if the court seized of proceedings to set aside or recognize or enforce
the same award takes into account, in the context of public policy scrutiny, notonly illegality under the law of the forum but also illegality under the law of othercountries closely connected with the underlying contract. That this is not an
unrealistic possibility has been demonstrated by the fact that the U.S. Court ofAppeals for the Sixth Circuit in Venture Global Engineering held that it was“well-settled that in the interest of international comity, this Court should notenforce an award in a country that would result in the violation of the law of thatcountry.”34 It must be pointed out, however, that the authorities cited by the court,
U.S. v. Ross35 and Hilton v. Guyot,36 do not seem to lend strong support for that
proposition. Query then whether that proposition is accepted in other countries. In
33

Satyam Computer Services v. Venture Global Engineering, No. 06-CV-50351-DT,
2006 WL 2571581 (E.D. Mich. July 13, 2006) (order granting in part and denying in part
VGE’s motion for a stay pending appeal), aff’d, 233 Fed. Appx. 517 (6th Cir. 2007).
34
Venture Global Engineering, 233 Fed. Appx. at 523.
35
302 F.2d 831, 834 (2d Cir. 1962).
36
159 U.S. 113, 163-64 (1895).

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England, for example, it has been established that the courts will refuse to enforce
a contract requiring an act which is illegal under the law of the place ofperformance (lex loci solutionis) on the basis that English public policy requires
international comity.37 But where the enforcement of an arbitral award is sought, atension emerges between two competing concerns of public policy: consideration
against giving effect to an illegal contract and consideration in favor of the finalityof arbitration. Reflecting this tension, the English authorities are divided onwhether the enforcement of an arbitral award should be refused because of theillegality of the underlying contract.38 Reconciling those authorities is notstraightforward.39 For present purposes, suffice it to say that illegality under thelaw of a foreign country having a close nexus with the underlying contract may betaken into account, resulting in the award being considered as contrary to public
policy, although the precise circumstances in which that may happen will varydepending on the country where the proceedings to set aside or recognize or
enforce the award are pending. Apart from the closeness of the nexus, among
relevant factors will be the significance of the illegality, which may be indicatedby the availability of criminal or administrative sanctions. Another material factor
will be whether the illegality would have the effect of rendering the contract
unenforceable under the legal system that has been infringed.
By way of a caveat it should be pointed out that if illegality affecting theunderlying contract is to be taken into account in proceedings for setting aside orrecognition or enforcement, the purpose would not be to rescue the party required
to perform an illegal act but to respect the legal policy of the country whose law isviolated by the contract. It is true that where an arbitral award requires theperformance of an illegal act, the defeated party may be caught in the middle:
37

See Regazzoni v. Sethia, [1958] AC 301 (H.L.). In that case, an English company
entered into a contract to sell a quantity of jute to a Swiss party. The delivery was to bemade in Italy. Both parties were aware that the jute could be procured only in India andthat the buyer’s intention was to tranship it to South Africa. Under Indian law, the exportof jute was illegal if the final destination was South Africa. The English court rejected thebuyer’s claim based on the contract, notwithstanding that the contract was governed by
English law.
38
For an authority in which enforcement was refused, see Soleimany v. Soleimany,[1999] Q.B. 785 (CA) (Waller L.J. delivering the judgment of the whole court). For
opposite authorities, see Soinco SACI v. Novokuznetsk Aluminium Plant (No 1), [1998] 2
Lloyd's Rep. 337 (CA) (Waller L.J. joined by concurring judgments of Phillips L.J. and
Chadwick L.J.); Westacre Investments v. Jugoimport-SPDR Holding, [1998] 3 W.L.R.
770, 767 (Colman J.) and [2000] Q.B. 288 (CA) (a majority opinion by Mantell L.J. andHirst L.J, with Waller L.J. dissenting.); Omnium de Traitement et de Valorisation v.
Hilmarton, [1999] 2 Lloyd’s Rep 222 (Walker J.).
39
Commentaries differ in detail as to how they fit with each other: see, e.g., Nelson
Enonchong, The Enforcement of Foreign Arbitral Awards Based on Illegal Contracts,
2000 LLOYD’S MARITIME & COM. L. Q. 495; ROBERT MERKIN, ARBITRATION LAW paras.
19.76-19.79 (2004); FAWCETT & CARRUTHERS, CHESHIRE, NORTH & FAWCETT PRIVATEINTERNATIONAL LAW 658 et seq. (2008).

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either he may have to comply with the award while being punished for performing
an illegal act or disobey the award at the risk of being punished for contempt of
court. No sympathy may, however, be due him in circumstances where, forexample, he was already aware of the illegality at the time of concluding theunderlying contract. The opposing party, on the other hand, has a legitimate
expectation that the favorable award will be recognized and enforced. The
question is, therefore, not one of balancing the private interests of the parties
involved. It is rather about respecting the public interest of the country whose
legal policy is at risk of being flouted by an award based on an illegal contract.
This point is clearer in those cases where the award condones, rather than requires,the performance of an illegal act. In such cases, the only interest at stake is that ofthe public, since the party against whom the award is made, e.g., the insurer
ordered to pay on a policy to indemnify against a fine for an illegal act which has
been committed, is not caught in the middle.
For the court seized of proceedings to set aside, recognize, or enforce anarbitral award, it may be difficult to discover whether the underlying contract isillegal under the law of a foreign country. It would be even more difficult toascertain in the context of that foreign legal system how significant is the illegality
and whether such illegality would have the effect of rendering the contract
unenforceable. It would therefore be helpful if a court of that foreign country had
an opportunity to make findings on those points so that those could be pleaded as
evidence of the foreign law. Such an opportunity may present itself if a challenge
is made to the award in that foreign country. In the course of hearing thechallenge, the court may find, for example, that the underlying contract is not justillegal but is also unenforceable and may further find that the illegality is serious
enough to make the award repugnant to public policy. The same opportunity
equally arises in the cases where the award has been made outside the country inwhich the challenge is made, that is to say where a challenge is made to a foreign
arbitral award in the country whose legal system has been violated by theunderlying contract.
From the forgoing analysis, it could be concluded that accepting jurisdiction
over a challenge to a foreign arbitral award may, if the challenge is made in acountry closely connected with the underlying contract, serve a useful purpose ofproviding the court with an opportunity to make findings under its own legal
system as to whether the underlying contract is illegal, how significant theillegality is, and whether such illegality has the effect of rendering the contract
unenforceable. This would allow the court in another country seized ofproceedings to set aside, recognize or enforce the same award to take notice ofsuch findings and thereby form an accurate view concerning such illegality if thatcourt, in scrutinizing the compatibility of an arbitral award with its own public
policy, needed to take into account the illegality of the underlying contract under
the law of countries which were closely connected with the contract. Through thisprocess may be served a further useful purpose of promoting, albeit indirectly, thelegal policy of countries closely connected with the underlying contract, which
may otherwise be by-passed.

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The forgoing conclusion should not be taken as an endorsement of the rulingof the Supreme Court of India in Venture Global Engineering. Though the facts ofthe case provide a nice illustration of the point made above, the reasoning andconclusion of the Court are unsatisfactory. The Court came to the conclusion that
the Indian courts had jurisdiction to set aside a foreign arbitral award simply byfollowing the reasoning of its earlier decision, Bhatia International,40 regarding
the scope of Part I of the Indian Act 1996, and not as a result of a conscious quest
for an appropriate measure to attain the useful purpose described above. To
achieve that purpose, accepting jurisdiction over a challenge to a foreign arbitralaward is not a well-targeted measure. It is broader in scope than necessary tocover the situation where that useful purpose may be served, that is to say, where
the challenge is brought on the basis that the underlying contract is illegal under
the law of the forum and proceedings to set aside or recognize or enforce the same
award have been, or are expected to be brought before a court of another country
which will take into account, in the context of scrutinizing the compatibility of theaward with its own public policy, the illegality of the underlying contract under
the law of countries closely connected with the contract.
There are better-targeted procedures to achieve the same purpose, which may
also be available in the majority of countries where, as under the UNCITRAL
Model Law, no jurisdiction exists over a challenge to a foreign arbitral award.
Such procedures must be able to provide a court with an opportunity to makefindings under its own legal system as to whether the underlying contract isillegal, how significant the illegality is and whether such illegality has the effect ofrendering the contract unenforceable. One such procedure is an action brought by
the party defeated in a foreign arbitration to seek a declaration that it owes noobligation under the underlying contract. In such an action, the defendant, in
whose favor the award was made, would rely on the award to plead its binding
force of res judicata. Then, the court would, when considering whether the award
is eligible for recognition, have an opportunity to make findings concerning its
illegality under its own legal system.
Another possible procedure is an action for a declaration that a foreign arbitralaward is null and void. The procedural rules of some countries may not allow adeclaratory action merely to solicit a legal consultation from the court, but may
allow such an action only if the plaintiff has some legitimate interest in obtaining
the declaration. In such countries, an action for a declaration that a domestic
arbitral award is null and void may not be admissible since an alternative
procedure, namely the procedure for challenging the award, is available to set
aside such an award.41 No equivalent procedure is available, however, for a40(2002) 4 SCC 105.
Neither may an action for a declaration that a domestic judgment is null and void be
admissible since alternative procedures, namely the procedures for ordinary and extraordinary appeals, are available to set aside such a judgment. It was so held in Japan: theSupreme Court judgment on Feb. 26, 1965 (19-1 Minshu 166) and the first instance decisionof the same case by the Kushiro District Court on July 6, 1962 (19-1 Minshu 172).
41

2008]JURISDICTION TO SET ASIDE A FOREIGN ARBITRAL AWARD

185

foreign arbitral award at least in the Model Law compliant countries, as has been
discussed above. Accordingly, an action for a declaration that a foreign arbitralaward is null and void may be admissible if it is shown that the plaintiff has some
legitimate interest in requesting such a declaration. Such interest may be deemed
to exist42 if, for example, it has been shown that the forum country has a close
nexus with the underlying contract and that the court in another country seized ofproceedings to set aside, recognize or enforce the same award would, in
scrutinizing the compatibility of an arbitral award with its own public policy, take
into account the illegality of the underlying contract under the law of countries
having a close nexus with the contract.
V. CONCLUSION
The courts do not have jurisdiction to set aside a foreign arbitral award under
the UNCITRAL Model Law. But the Indian Supreme Court’s judgment in
Venture Global Engineering has demonstrated that a deviation from the position
under the Model Law can occur in those countries that have not faithfully adopted
the Model Law. That ruling has attracted critical commentaries. Instead of simply
echoing them, this article has ventured to suggest that any concern that the setting
aside of a foreign award may undermine the finality of arbitration is largely
unfounded and that its only negative effect would be a possible confusion thatmight be brought about by the unfamiliarity of such a measure.
This article has further endeavoured to show what useful purpose, if any,
could be served by accepting jurisdiction over a challenge to a foreign arbitralaward. It has come to an affirmative conclusion, albeit in a limited situation. Thus,
accepting such jurisdiction may, if the challenge is made in a country closely
connected with the underlying contract, serve the useful purpose of providing thecourt with an opportunity to make findings under its own legal system as towhether the underlying contract is illegal, how significant is such illegality, andwhether the illegality has the effect of rendering the contract unenforceable, sothat the court in another country seized of proceedings to set aside, recognize or
enforce the same award would be able to take notice of such findings and thereby
form an accurate view concerning such illegality if that court, in scrutinizing thecompatibility of an arbitral award with its own public policy, needed to take into
account the illegality of the underlying contract under the law of countries whichwere more closely connected with the contract. This process may serve the further
42

With respect to a foreign judgment, such interest may be deemed to exist if it has
been shown that the judgment pretends to have an erga omnes effect and, therefore, adeclaration affirming or denying its effect and binding all interested parties would
promote legal stability. Thus, in Japan, there have been cases in which an action for adeclaration that a foreign divorce decree is null and void was held admissible. See, e.g.,
Tokyo District Court judgment on Nov. 30, 1973 (26-10 Kasai Geppo 83); Utsunomiya
District Court judgment on Feb. 28, 1980 (34-1~4 Kaminshu 201). Cf. Tokyo Family
Court judgment on Sep. 11, 2007 (60-1 Kasai Geppo 108).

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useful purpose of promoting, albeit indirectly, the legal policy of countries closely
connected with the underlying contract that may otherwise be by-passed. The factsof Venture Global Engineering provide a nice illustration of the point, although
the reasoning and conclusion of the Indian Supreme Court are not satisfactory.
Accepting jurisdiction over a challenge to a foreign arbitral award could serve theabove-mentioned purpose but is not a well-targeted measure. There are a few
better-targeted procedures that could achieve the same purpose.
In the course of clarifying the ramifications of setting aside a foreign arbitralaward, this article has brought into focus the issue of how to deal with the evasionof law in arbitration, in particular the law of countries which are closely connectedwith the underlying contract but which are not the country where the seat of thearbitration is situated nor the countries in which recognition or enforcement islikely to be sought. This issue forms part of a wider question on the application of
mandatory rules in arbitration.43 It is hoped that this article has been useful in
shedding some light on that notoriously difficult question.

43

For various views on that wider question, see the articles contained in a special
issue of this Review containing the papers presented at a Colloquium on Mandatory Rulesof Law in International Arbitration held at Columbia Law School in June 2007: 18 AM.
REV. INT’L ARB. (2007). See also views canvassed in Daniel Hochstrasser, Choice of Law
and “Foreign” Mandatory Rules in International Arbitration, 11(1) J. INT’L ARB. 57(1994).