The Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) by way of the Statement of Objects and Reasons encompassed therein, sets in motion its primary objectives which drive the very process of alternate dispute resolution processes, endeavoured to be taken recourse of, much more frequently than it has been since the enactment of the Act. In view of the aforesaid, the Act specifically confines the broader goals that it aims to achieve in the following perspective: –
“An Act to minimise supervisory role of courts in the arbitral process”;
“to provide that every final arbitral award is enforced in the same manner as if it were a decree of the Court”.
Thus, the scope of intrusion by the Courts has been extremely restricted in the dispute resolution process. However, the inherent scope for restricting the intrusion of the Courts also comes along with certain limits, beyond which, it becomes necessary for the Court to intervene upon being approached by the parties involved and accordingly, there are certain grounds on which an Arbitral Award can be set aside and the same find their place under Sections 34 and 48 of the Act. The present article attempts to highlight one of the grounds vis-a-vis the public policy of India which is provided under Section 34(2)(b)(ii) and Section 48(2)(b) of the Act.
Before adverting to the scope of Public Policy within the ambit of the Act, it becomes imperative to discuss the concept of “Public Policy”. While the Act does not define the expression “Public Policy”, nevertheless, there have been numerous judgments which have interpreted the said expression as something concerning the public good or the public interest. Public Policy is synonymous with public good and the elements constituting public good do not change.[i]
According to Section 34(2)(b)(ii), an arbitral award can be set aside if the court finds that “the arbitral award is in conflict with the public policy of India”. The same provision has been entirely reiterated in Section 48(2)(b)(ii) of the Act. In view of the aforesaid, it becomes pertinent to mention that the Act derives its colour from the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 or the New York Convention (“New York Convention”), wherein relevant conditions were laid down for the refusal of execution of awards in certain situations where the award was found to be in contravention to the public policy of the Signatory Country. [ii] While the New York Convention did not lay down a universally accepted definition of “Public Policy’, it allowed the States to create their own standards to interpret the expression in accordance with the laws of the land. In this context, public policy has been aptly described as an “unruly horse and when once you get astride it, you never know where it will carry you”[iii]. This description has been given because of the unexpected interpretation that might be arrived at while the domestic courts are dealing with the question of their respective State’s public policy.
In the Indian context, there has been a lot of controversy with respect to “public policy”, thereby giving rise to two conflicting positions viz. the “narrow view” and the “broad view”, especially given the fact that the Act deals with domestic as well as foreign arbitrations, thus leading to a varied scope of public policy in both kinds of arbitrations. While, under the narrow view, the Courts are restricted to not creating any new heads of public policy, whereas, on the other hand, the “broad view” permits the courts to dive into judicial law-making. A series of precedents have shaped the doctrine of “public policy” as it stands today with regard to setting aside the arbitral award. For the purpose of attaining better clarity on the two views, this discussion is divided into three sections, one is the law as it stood at the time before the enactment of the 1996 Act, the second is after the enactment of the Act, however, prior to the 2015 Amendment of the Act and the third section deals with the evolution of the expression post the 2015 Amendment.
Before the 1996 Act:
The first case of the Indian Jurisprudence that dealt with the concept of “Public Policy” was Renusagar Power Co. Ltd. vs General Electric Co. [iv] wherein the Supreme Court deliberated on whether a narrow or wide interpretation should be applied to the expression of “public policy” as regards to foreign arbitrations. The Supreme Court gave it a narrow interpretation whilst stating that the application of foreign law was a purely municipal legal issue. It was interpreted by the Apex Court that contravention of the Indian Law would not alone attract the bar of public policy and something more than that was required. The Supreme Court further stated that enforcement of a foreign award could be held to be against the public policy only if such enforcement was contrary to (i) the fundamental policy of India, (ii) the interests of India, (iii) justice or morality.
Before the 2015 Amendment
It was after the Renusagar[v] case that the Act of 1996 was enacted wherein Part I dealt with the aspect of domestic awards and Part II dealt with foreign awards. This Act was a means to bring Indian law under the ambit of the International Regulatory framework.[vi] However, public policy was retained as a common ground in both the parts dealing with domestic as well as foreign awards.
After almost 10 years since the Renusagar Case, the next decision with respect to foreign public policy came up in ONGC Limited vs Saw Pipes Ltd.[vii] wherein the Supreme Court dealt with the question of public policy under Section 34 of the Act which was in Part I. This decision broadened the scope of public policy as was laid down in the Renusagar case, thereby removing the distinction between violation of public policy from the enforcement of the award and other components of the award. The Supreme Court, in this decision, added another ground for contravention of public policy i.e., patent illegality. It was held that the illegality must go to the core of the matter to be against public policy.
While the ONGC Case was considered to be a good law with respect to Part 1 of the Act, the question arose on its applicability to Part II of the Act and whether the concept of patent illegality would apply to Section 48 of the Act as well. This issue was dealt with in the case of Phulchand Exports Ltd. vs O.O.O. Patriot[viii]. In a much-criticised judgment, the Supreme Court decided that there was no requirement to hold different standards of public policy in the context of foreign and domestic awards. It was held that the wide interpretation as given in the ONGC Case vis-à-vis the award being patently illegal, would apply to foreign awards as well. In its attempt to provide an expansive interpretation of the definition of public policy, the Supreme Court indirectly increased the judicial intervention in the enforcement of foreign arbitral awards.
This issue of applicability of the wide interpretation of public policy to foreign awards under Section 48 of the Act again came up in the case of Shri Lal Mahal Ltd. vs Progetto Grano Spa.[ix] While overruling the decision of Phulchand, the Supreme Court in a full bench decision stated that the additional ground of patent illegality would not apply to foreign awards. The Supreme Court while distinguishing the stage of proceedings under Section 34 and Section 48 of the Act, wherein one was a setting aside proceeding and the second was at the stage of enforcement, significantly reduced the ability of Indian Courts to accept invitations to interfere with foreign awards and preventing a reopening of the case in enforcement proceedings. [x]
Post-2015 Amendment of the Act- Narrow Approach
The 2015 Amendment brought about significant changes in the concept of public policy under the Act, wherein suggestions were taken from the 246th Law Commission Report. Considering the plethora of judgments which supported the expansive interpretation of judicial policy and their impact thereof on the pro-arbitration stance of the country, these amendments have underlined the legislative intent of limited judicial interference[xi] thereby restricting the scope of public policy. The Amendments clarified the concept and laid down explicit standards for an award to be against the public policy of India which included (i) the award is vitiated by fraud or corruption; (ii) the award is in contravention to the fundamental policy of Indian law; and (iii) the award is conflict with the basic notions of morality and justice. The amendments further clarified that the ground of “patent illegality” could not be taken in Part II of the Act and the same was solely applicable to domestic arbitrations.
The 2015 Amendment had a major impact on Indian jurisprudence wherein the Indian judiciary was confronted with an opportunity to correct their approach while dealing with applications to set aside an arbitral award in the domestic as well as foreign context. A few important judgments are discussed briefly in this part.
In November 2017, the Supreme Court in Venture Global Engg. LLC vs Tech Mahindra Ltd.[xii] clarified that an award could be set aside only basis of the grounds stated in Section 34 of the Act and no other. It further held that the Courts were not to act as an appellate forum while examining the legality of the arbitral award. In another case of Sutlej Construction Ltd. vs State (UT of Chandigarh)[xiii], the Supreme Court held that where an arbitrator had taken a reasonable view, the Courts were barred from substituting the view with their own just because there was a difference in the opinion. It was further held that an award could be set aside on the grounds of public policy only if the award shook the conscience of the court.
Another significant case post the 2015 amendment was Ssangyong Engg. & Construction Co. Ltd. vs NHAI[xiv], wherein the Supreme Court held that the broad interpretation of “fundamental policy of Indian law” as given earlier in ONGC Ltd. v. Western Geco International Ltd.[xv] failed the provisions as inserted by the 2015 Amendment of the Act. The Court in the Western Geco Case was of the opinion that the fundamental policy of Indian law shall include all such fundamental principles as providing a basis for the administration of justice and enforcement of law in this country.[xvi] While relying on the Renusagar Case, the Supreme Court held that “fundamental policy of Indian law” would not entail (i) contravention of a law protecting national interest; (ii) principles of natural justice.[xvii] The Court further observed that the other heads of public policy would no longer warrant a place in our jurisprudence, however, at the same time preserving the head of “justice or morality” which would now be construed as a conflict with the “most basic notions of morality or justice”. Thus, the expression “public policy” only applied to those awards that shocked the conscience of the Court. This judgment also dealt with the aspect of “patent illegality”, while enumerating that this ground would be invoked only if (i) the arbitrator fails to give reasons in the award in violation of Section 31(3) of the Act; (ii) the arbitrator has taken an impossible view in construing the contract; (iii) the arbitrator transgresses his jurisdiction; (iv) if the arbitrator has made a perverse finding based on no evidence or while over-looking vital evidence[xviii]. The Court further affirmed the prospective applicability of the 2015 Amendment of the Act.
Current Approach of the Indian Courts in Interpreting “Public Policy”
The above-mentioned cases after the 2015 Amendment of the Act are proof that the Courts have refused to examine the arbitral awards on merits, thereby following the legislative approach as stated in the Statement of Objects and Reasons of the Act i.e. “minimal intervention of the Courts in the arbitral process”. However, it becomes imperative to discuss the current/recent approach of the Indian Courts vis-à-vis several notions of public policy as enumerated in Sections 34 and 48 of the Act. For this purpose, this article reflects on certain recent judgments by the Supreme Court as well as several High Courts in interpreting the concept of “public policy” as a ground to set aside an arbitral award.
i. Making of Award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81:
One of the recent judgments dealing with this aspect is Antrix Corporation vs Devas Multimedia Pvt. Ltd.[xix], wherein the High Court of Delhi set aside an arbitral award passed against Antrix and directed it to pay USD 562,200,000 to Devas for wrongful termination of the contract between them. The Court set aside the Award on the grounds of patent illegality and fraud. The said decision was based on three aspects, firstly the reliance of the arbitral tribunal on the International Bar Association Rules of Taking Evidence in International Arbitration to exclude evidence as to pre-contractual negotiations while interpreting the contract was patently illegal. The arbitral tribunal completely neglected the fact that the IBA rules were only to be applicable in international arbitration and that too with party consent. Secondly, the Court took notice of the findings of the judgments of NCLT, NCLAT and the Supreme Court, wherein the operations of Devas were directed to be wound up on the basis of its incorporation for the commission of fraudulent activities, thereby ultimately holding that the Award contravened the public policy of Indian Law since it was in conflict with the most basic notions of justice and contrary to national economic interest.
ii. Making of the award was in contravention of the fundamental policy of India:
In the case of Vijay Karia vs Prysmian Cavi E System SRL[xx], the Supreme Court took a pro-enforcement outlook while holding that merely a contravention of the provisions of a particular act would not amount to a contravention of the public policy of India. A major reliance was placed on the Renusagar judgment, thereby deciding that a mere breach of legislation would be in conflict with the fundamental policy of India only if it is “so basic to the Indian Law that it is not susceptible to be compromised”[xxi]. It further went on to observe that fundamental policy would refer to the core values of India’s public policy as a nation, which may find expression not only in statutes but also in principles which have been reiterated by the Courts spanning over several years.
However, within a span of two months after the Vijay karia Judgment, the Supreme Court in the case of National Agricultural Co-operative Marketing Federation of India vs Alimenta, S.A., held that the enforcement of the arbitral award could not be allowed since it would be against the fundamental policy of India. This decision was rendered on the basis of the contract being contingent under Section 32 of the Contract Act, 1872, wherein it was held unenforceable on account of lack of permission from the Government to fulfil the contract. The Supreme Court in this case treated the contravention of an export policy as a contravention to the public policy of India, however, completely neglected to state the reasons for this conclusion. The Supreme Court, whilst completely neglecting the precedents set by them, delved into the facts and merits of the case, thereby setting a risky precedent with respect to the interventionist approach of the Indian judiciary.
iii. Award is conflict with the most basic notions of morality and justice:
One of the first cases to discuss this concept was Associate Builders vs Delhi Development Authority[xxii], wherein the Supreme Court clarified the terms “morality” and “justice”. It was held that an award could be said to be against justice only when it shocks the conscience of the court. On the other hand, while dealing with the concept of “morality”, the Court relied upon Section 23 of the Indian Contract Act, 1872 to hold that the term would cover such agreements as are not only illegal but would not be enforced given the prevailing customs of the day. However, the same would again attract interference only when it shocks the conscience of the Court. This judgment, however, was decided prior to the 2015 amendment and is still a good law when it comes to the interpretation of “morality and justice” as a part of the public policy of India.
This case was recently relied upon by the High Court of Bombay in the case of Thomas Cook (India) Limited vs Red Apple Chandarat Travel[xxiii], wherein it was held by the Court that any ground of challenge to an award needed to be in contravention with the most basic notions of morality and justice and therefore, dismissed the challenge since the same was only made on the ground of the claims of the Respondent being barred by limitation. The Court refused to entertain the appeal since the same entailed re-appreciation of the entire evidence.
It will not be too far-fetched a statement that while the Act in India was put in place to echo the New York Convention and fulfil its international obligations, however, the Indian judiciary while dealing with the domestic as well as International arbitrations in the same Act has faced certain obstacles. As observed in this article, while some cases have led to a state of confusion and chaos for the stakeholders, nonetheless, it seems that the Supreme Court has maintained a positive approach towards the development of principles of public policy and its scope under the Arbitration Act. Further, the pro-arbitration stance of the legislature has been protected by the Supreme Court in numerous judgments, which limit the scope of interference by the Indian Judiciary. The amendments made by the Legislature and the Judiciary have paved the way for better conditions and a reduction in the reliance of the parties on the adjudicatory procedures, undertaken by the parties post the arbitration proceedings. This being said, there is still scope for stringent policies that can be introduced in order to limit the frivolous petitions and applications, being filed by the parties to ensure that the sanctity of the arbitration proceedings is maintained throughout the country.
References:
[i] Dharmvir Brahmbhatt, Public Policy- the Unruly Horse (August 25, 2020), https://ibclaw.in/public-policy-the-unruly-horse-by-dharmvir-brahmbhatt/#:~:text=Mellish%20famously%20said%20%E2%80%9CPublic%20policy,where%20it%20will%20carry%20you%E2%80%9D.
[ii] Article V(2)(b) of the New York Convention
[iii] Richardson v. Mellish, (1824) 130 Eng. Rep. 294, 303
[iv] 1994 AIR 860
[v] Supra 4
[vi] Supra 4
[vii] (2003) 5 SCC 705
[viii] (2011) 10 SCC 300
[ix] (2014) 2 SCC 433
[x] Nicholas Peacock, Vikas Mahendra, Shri Lal Mahal Ltd v Progetto Grano Spa: Supreme Court of India overrules Phulchand and reduces court interference in enforcement of foreign awards (July 22, 2013)
[xi] Department of Legal Affairs, Report of the High Level Committee to Review the Arbitration Mechanism in India (issued on July 30, 2017)
[xii] (2008) 4 SCC 190
[xiii] (2018) 1 SCC 718
[xiv] (2019) 15 SCC 131
[xv] (2014) 9 SCC 263.
[xvi] Rupal Pangati, Setting Aside of Domestic Arbitral Award in Conflict with Public Policy of India (July 28, 2021) https://www.scconline.com/blog/post/2021/07/28/domestic-arbitral-award/
[xvii] Supra 14
[xviii] Supra 14
[xix] 2023 SCC OnLine Del 1608
[xx] 2020 SCC OnLine SC 177
[xxi] Id.
[xxii] 2014 SCC OnLine SC 937
[xxiii] Commercial Arbitration Petition No. 332 of 221, Bombay High Court (January 13, 2023)
