Public Policy and setting aside of Arbitral Awards: A never-ending challenge for practitioners

THIS ARTICLE WAS WRITTEN BY SRISHTI MUKHERJEE A STUDENT OF JINDAL GLOBAL LAW SCHOOL.

[Public policy is] a very unruly horse, and when once you get astride it, you never know where it will carry you.”

  ~ Judge Borrough

Among the various grounds for setting aside an arbitral award under section 34,[1] “public policy” has not been specifically defined and has often been left open to judicial interpretation. In common parlance, it refers to that principle of law according to which no subject can lawfully do an act, which may have the tendency to be injurious to the public or against public good. In other words, it refers to principles and standards, which are fundamental for the welfare of society. In the context of arbitration, it additionally comprises “fundamental principles of justice”.[2] The Supreme Court has recognized the narrow as well as wide view of public policy wherein the former disallows creation of new heads of public policy and the latter envisages judicial law making.[3]

In Renusagar Power Company v. General Electric Company (“Renusagar”)[4] the Supreme Court, narrowly construed this expression in the context of foreign arbitral awards and concluded that since the underlying object of the Arbitration Act was to facilitate international trade and commerce, giving the term a broad meaning would defeat this objective. The Court recognized three heads of public policy – fundamental policy of Indian law, interest of India and justice and morality; and also clarified that mere contravention of law would not attract the bar of public policy.

Despite precedent suggesting that “public policy” be construed in a narrow sense, the Supreme Court, in ONGC v. Saw Pipes (“Saw Pipes”)[5] interpreted the same in its broadest sense by adding “patent illegality” to the existing grounds. In its conclusion that the arbitral award was legally flawed, the Court held that an award could be challenged on account of contravention of the Act[6] or any other substantive law governing the parties. In addition, an award, which is “so unfair and unreasonable that it shocks the conscience of the court”, could also be set-aside through judicial intervention.

Subsequently, in ONGC v. Western Geco International (Western Geco”)[7] the Apex Court took a retrograde step and intervened to widen the ambit of ‘fundamental policy of India’ and held that while a tribunal or court should follow principles of natural justice as well as Wednesbury’s principle of reasonableness[8], it should not act in an arbitrary or capricious manner or be influenced by extraneous considerations while determining the rights and liabilities of citizens or corporations.

This pro-judicial intervention continued in Associate Builders v. Delhi Development Authority (“Builders”)[9] where the Supreme Court clarified each of the grounds mentioned in Saw Pipes. First, a case could be re-opened on merits when an award is against the ‘fundamental policy of Indian law’. This included cases of violation of foreign exchange laws, ignorance of binding precedent, failure to adhere to principles of natural justice or disregard of superior court orders. Further, ‘interests of India’ was construed to mean that which concerns itself with India as a member of the world community in its relations with foreign powers and an award would be contrary to ‘justice and morality’ when it “shocked the conscience of the court”. In case of patent illegality, the court noted three circumstances – (a) when the award contravenes the substantive law of India – such illegality must go to the root of the matter; (b) when the award contravenes the Arbitration Act and (c) when the arbitrator fails to decide the dispute in accordance with the terms of the contract.[10] In addition to expansion of the term, the court noted that while considering whether an award is indeed contrary to public policy, due weight must be given to the arbitrators’ decision as it is he who is aware of the facts and evidence adduced.

Although this decision is heavily criticized for it expands the scope of public policy, it also clarifies the meaning of the term “patent illegality”. In light of the decision in Western Geco, which could potentially open the floodgates of challenge to arbitral awards, this judgment provides the much-needed clarity by narrowing the boundaries of challenge. Moreover, the finding that an award cannot be set-aside on an error of facts is laudable as it diminishes the scope of judicial intervention.

In the absence of provisions in the Arbitration and Conciliation Act, 1996, foreign arbitral awards may be set-aside in the country in which or under the laws of which such award was made.[11] In Bhatia International,[12] the Supreme Court held that even though there is no explicit provision in Part II of the Act, a petition to set aside the same would lie under section 34, thereby applying the domestic standards in case of foreign awards. The Court went a step further in the Venture Global[13] case in creating a new procedure, which required a person seeking enforcement of a foreign award to not only pass the New York Convention grounds under section 48[14] but also pass the expanded public policy test incorporated under section 36.[15] However, this judgment is per incuriam as a larger bench in Renusagar holds the contrary. Further, this expanded test is only applicable to domestic arbitral awards.[16] While the Supreme Court failed to notice this self-created limitation, there is still no clarification, thereby rendering the enforcement mechanism for foreign awards dubious and inefficient.

Interestingly, there have been conscious efforts to water down the view taken in Saw Pipes. In McDermott International,[17] it was held that the Act provides for a supervisory role of courts to ensure fairness and court intervention is justified only in extraordinary circumstances like fraud and bias. Judicial intervention cannot be justified where an arbitral tribunal has, in the opinion of a court, adopted an unsatisfactory view.[18] The Bombay High Court has correctly adopted the narrow view in holding that a literal construction of the decision in Saw Pipes would radically and substantially alter the “judicially circumscribed limits to the court’s jurisdiction to interfere with arbitration awards”.[19]

It is important to remember that arbitration law stands on two pillars – party autonomy and finality of award. If these fundamental principles are distorted by unwarranted judicial intervention, arbitration law will fail to realize its ultimate objective. In this regard, serious concerns have been raised as to whether the inclusion of additional grounds such as patent illegality is really necessary. The question is answered in the negative as it reinstates the position under the 1940 Act.[20]

The Arbitration and Conciliation Act encapsulates the UNCITRAL Model law and attempts to reduce the supervisory role of the already over-burdened judiciary. However, the term ‘public policy’ having undergone a paradigm shift since its enactment from Renusagar to Builders, appears to have negated this effort. Given the dodgy position with respect to foreign arbitral awards[21] there have been suggestions to define “international public policy”[22] so that domestic considerations do not adversely affect enforcement of foreign awards. Additionally, it is suggested that the international arbitration community could reach a consensus regarding the definition of “exceptional circumstances” which would justify judicial intervention in terms of setting aside foreign arbitral awards. In this regard, the endeavor of the Indian Supreme Court to limit judicial intervention by curtailing the scope of public policy under section 48(2)(b)[23] is appreciated.

As a malleable concept, ‘public policy’ will always be open to various judicial interpretations. Given that arbitration was meant to be a speedy dispute resolution mechanism, the obvious object of avoiding vexation and delay in “access to justice” is defeated through such judicial intrusion. Where arbitral finality is inimical to public policy, it is important to balance conflicting claims by exercising a fair amount of judicial restraint. Therefore, it is imperative to balance this concept between standards of morality as well as justice and equity. In what seems to be an increasingly global milieu, a narrower definition must be accorded to the term to ensure facilitation of transnational commercial relationships vis-à-vis promotion of an efficacious means of dispute resolution.

[1] Section 34, The Arbitration and Conciliation Act, 1996.

[2] UNCITRAL Model Law Commission Report. It was understood that this term, extensively used in the New York Convention (1958) and several other treaties, extended to fundamental principles of law and justice in substantive and procedural aspects.

[3] Central Inland Water Transport Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr. A.I.R.1986 SC 1571; See also Gherulal Parakh v. Mahadeodas Maiya & Ors. A.I.R. 1959 SC 781.In the former case, the Court adopted a wider meaning by interpreting the term on the pillars of public conscience, public good and public interest, while in Gherulal, the court gave a narrow meaning and laid down specific heads.

[4] (1984) 4 SCC 679.

[5] (2003) 5 SCC 705.

[6] The Arbitration and Conciliation Act, 1996.

[7] (2004) 9 SCC 263.

[8] Where a decision by a court or tribunal is so perverse or irrational that no reasonable person would have arrived at it.

[9] (2005) 3 SCC 49.

[10] ‘Supreme Court of India Clarifies the Scope of Public Policy’, available at http://hsfnotes.com/arbitration/2015/02/09/supreme-court-of-india-clarifies-the-scope-of-public-policy-grounds-for-challenging-a-domestic-arbitration-award-under-section-34-of-the-arbitration-and-conciliation-act/ last visited on April, 20, 2016.

[11] Section 18(1)(e), The Arbitration and Conciliation Act, 1996. See also, Article V(e), New York Convention, 1958.

[12] 2002 (4) SCC 105.

[13] Venture Global Engineering v. Satyam Computer Services Ltd. & Anr. (2008) 4 SCC 190.

[14] Section 48, The Arbitration and Conciliation Act, 1996.

[15] Section 36, The Arbitration and Conciliation Act, 1996.

[16] Supra note 5.

[17] McDermott International Inc. v. Burn Standard Company (2006) 11 SCC 181.

[18] Sumitomo Heavy Industries Ltd. v. ONGC  (1998) 1 SCC 305.

[19] 2004 (3) Arb LR 568.

[20] Section 30 of the 1940 Arbitration Act establishes grounds for setting aside the award and includes invalidity of awards.

[21] In Bhatia International, Part I of the Act was made applicable to Part II unless expressly excluded by parties.

[22] The International Law Association as floated a narrower concept of “transnational public policy” which comprises rules of natural law, principles of universal justice, jus cogens norms and general principles of morality. See Laxmi Mathur v. Chief General Manager MTNL 2000 (2) ArbLR 684 (Bom).

[23] Section 48(2)(b), The Arbitration and Conciliation Act, 1996. See also Phulchand Exports Ltd. v. OOO Patriot (2011) 10 SCC 300.