The Section 48 Public Policy Paradigm: Shareholders Dispute Arbitrability and Shashoua Precedent

[Shreya and Aaryan are students at NALSAR University of Law.]

The enforcement of foreign arbitral awards in India operates within a carefully calibrated framework designed to balance international commercial arbitration principles with domestic policy imperatives. Section 48 of the Arbitration and Conciliation Act 1996 (Arbitration Act), which mirrors Article V of the New York Convention, establishes narrow grounds upon which Indian courts may refuse enforcement of foreign awards. Central to this framework is the public policy exception under Section 48(2)(b), which permits refusal where awards contravene the “fundamental policy of Indian law” or violate “justice or morality”. 

The recent Delhi High Court judgment in Roger Shashoua and Others v. Mukesh Sharma and Others (Shashoua) presents sophisticated analysis of how these public policy boundaries operate in shareholders dispute arbitration, where contractual arrangements intersect with statutory company law protections.

Complications Pertaining to Arbitrability of Shareholders Disputes and their Treatment qua Section 48

The Supreme Court’s landmark decision in Renusagar Power Company Limited v. General Electric Company established the foundational principle governing public policy challenges to foreign award enforcement. The court’s narrow interpretation confines public policy violations to three categories: “fundamental policy of Indian law,” “interests of India,” or “justice or morality”. This restrictive approach reflects judicial recognition that “there is a basic distinction between what is contrary to public policy and what is contrary to our laws,” establishing that mere violation of Indian statutes does not automatically trigger public policy bars to enforcement.

The subsequent refinement in Shri Lal Mahal Limited v. Progetto Grano Spa proved particularly significant, explicitly distinguishing between broader public policy scope applicable to domestic awards under Section 34 and the narrower scope governing foreign award enforcement under Section 48. Most crucially, the judgment categorically held that “patent illegality” -- a ground recognized for setting aside domestic awards - has no application in foreign award enforcement proceedings.

Traditional arbitrability doctrine in Indian corporate law has drawn sharp distinctions between contractual disputes amenable to private arbitration and statutory claims requiring specialized tribunal adjudication. The Supreme Court’s decisions in Haryana Telecom Limited v. Sterlite Industries (India) Limited and Rakesh Malhotra v. Rajinder Kumar Malhotra established that oppression and mismanagement disputes involve rights in rem affecting all shareholders, requiring National Company Law Tribunal (NCLT) intervention beyond arbitral tribunals’ contractual mandate.

However, this creates complex jurisdictional boundaries in modern commercial arrangements where sophisticated shareholders agreements incorporate comprehensive dispute resolution mechanisms. The intersection between contractual arbitrability and statutory non-arbitrability principles generates particular tensions in enforcement contexts, where courts must determine whether foreign awards addressing shareholding restructuring contravene fundamental policy principles or merely resolve contractual disputes through permissible mechanisms.

The Peculiarities of Shashoua

The Shashoua dispute exemplifies modern cross-border joint venture complexity, arising from a 1998 Shareholders Agreement between British investor Roger Shashoua and Indian entrepreneur Mukesh Sharma for developing an exhibition centre through International Trade Expocentre Limited (ITEL). The SHA’s sophisticated structure provided for equal 50% shareholding, balanced board representation, and comprehensive deadlock resolution mechanisms culminating in International Chamber of Commerce (ICC) arbitration.

The commercial relationship’s deterioration followed familiar patterns in equal partnership disputes. Shashoua alleged systematic dilution of his shareholding from 50% to approximately 25% through unauthorized share allotments to Sharma-affiliated entities, despite substantially larger investment contributions. This factual matrix raised fundamental questions about whether such conduct constitutes contractual breach amenable to arbitration or statutory oppression requiring NCLT intervention.

The ICC tribunal’s ultimate resolution - directing complete transfer of ITEL shares to Shashoua’s control at predetermined valuations - represented sophisticated commercial problem-solving but generated intense public policy scrutiny. The tribunal’s approach demonstrated nuanced understanding of deadlocked joint ventures, providing structured exit mechanisms rather than monetary compensation or conventional specific performance remedies.

Crucially, the tribunal’s remedial framework remained anchored in contractual interpretation rather than pure equity jurisdiction. The award’s detailed analysis of the SHA’s assignment provisions, deadlock resolution mechanisms, and third-party induction clauses demonstrated careful attention to contractual foundations while addressing commercial realities through creative but legally grounded solutions.

Respondents’ public policy challenges encompassed multiple dimensions: jurisdictional excess, statutory encroachment, and commercial unfairness. The core argument centered on the tribunal’s alleged lack of authority to order corporate restructuring, traditionally considered within NCLT’s exclusive domain under company law. Additionally, respondents argued that share transfer orders at predetermined valuations constituted “expropriation” violating fundamental fairness principles.

Analysis

Justice Singh’s analysis in Shashoua demonstrates sophisticated understanding of Section 48’s public policy boundaries through careful application of established precedential frameworks. The court’s finding that enforcement of the arbitral award would advance “commercial morality rather than violating it” reflects nuanced appreciation for public policy as encompassing broader commercial fairness principles rather than mere statutory compliance.

The court’s observation that “it would be within the public policy of India to allow a foreign investor, who has invested in an Indian joint venture company and has been in effect, been duped of the entire investment, to be allowed to take over the business and turn it into a successful venture” demonstrates sophisticated policy analysis that considers India’s broader commercial interests alongside formal legal principles.

Central to the court’s analysis was the determination that the arbitral tribunal’s authority derived from contractual rather than statutory sources. The detailed examination of the SHA’s assignment provisions, particularly the definition of parties to “mean and include their respective successors and assigns,” provided the contractual foundation for extending arbitral jurisdiction to subsequently inducted shareholders.

The court’s emphasis on contractual interpretation principles, drawing from Khardah Company Limited v. Raymon Company India Private Limited, emphasized that arbitration agreement interpretation must consider “the conduct of the parties, the exchange of correspondence between the parties and the surrounding circumstances”. This approach demonstrates judicial recognition that modern commercial arrangements require flexible interpretation to accommodate complex corporate structures.

Perhaps most significantly, the court’s analysis transcended formalistic legal categories to embrace broader commercial morality considerations. The finding that the arbitral award provided “clean exit mechanisms to ensure business continuity” rather than perpetuating deadlocked dysfunction demonstrates judicial appreciation for arbitration’s commercial utility in resolving complex business disputes.

The court’s detailed examination of respondents’ conduct - including systematic share dilution, manipulative contract awards, and procedural forum shopping - provided factual foundation for concluding that enforcement would advance rather than undermine commercial morality. This approach suggests judicial willingness to consider substantive fairness within public policy analysis while maintaining appropriate deference to arbitral determinations.

The court’s application of the Renusagar framework demonstrates continued commitment to narrow public policy interpretation in foreign award enforcement. The rejection of respondents’ arguments that share transfer orders constitute per se public policy violations reflects understanding that contractually grounded remedies, however innovative, do not automatically contravene fundamental policy principles.

The court’s observation that Section 48 enforcement standards require proof that awards violate “fundamental policy of Indian law, interests of India, or justice and morality” emphasizes the restrictive nature of public policy exceptions. The detailed analysis of why the Shashoua award satisfied rather than violated these standards provides valuable guidance for future enforcement proceedings involving complex commercial arrangements.

The Court’s treatment of arbitral tribunals’ equitable considerations within contractual frameworks represents important doctrinal development. While acknowledging that Section 28(2) of the Arbitration Act restricts tribunals from acting as amiable compositeur absent express authorization, the Court recognized legitimate equitable considerations within contractual interpretation.

The tribunal’s approach to share valuation - “pegging the market value at INR 96.189 ignoring any increase that may have happened thereafter” while allowing “the benefit of any increase beyond INR 96.189 per share to inure to the benefit of the claimants” - exemplifies permissible equitable considerations within contractual boundaries rather than unauthorized equity jurisdiction.

Conclusion

The Shashoua judgment represents a watershed moment in the evolution of Section 48 public policy jurisprudence, particularly in its application to complex shareholders dispute arbitration. The court’s sophisticated analysis validates contractual deadlock resolution mechanisms while maintaining necessary boundaries between arbitral authority and statutory regulation. Most significantly, the decision demonstrates that well-structured commercial arrangements can successfully establish enforceable arbitral jurisdiction even in contexts traditionally considered non-arbitrable, provided such arrangements respect legitimate public policy constraints.

The precedent’s broader significance extends beyond shareholders disputes to fundamental questions about the relationship between contractual freedom and regulatory protection in contemporary commercial contexts. The court’s emphasis on commercial morality rather than formalistic compliance suggests growing judicial sophistication in navigating complex public policy questions while maintaining commitment to international arbitration principles established in Renusagar and refined through subsequent jurisprudence.

The decision ultimately affirms that Section 48’s public policy framework, properly applied, can accommodate sophisticated commercial innovation without compromising essential regulatory objectives. For practitioners structuring cross-border commercial arrangements, the Shashoua precedent provides valuable guidance on establishing effective arbitral jurisdiction while ensuring enforcement prospects in Indian courts. The judgment’s nuanced approach to public policy analysis demonstrates that principled application of established frameworks can successfully resolve complex jurisdictional challenges while advancing both commercial certainty and policy coherence in India’s evolving arbitration landscape.