PUBLIC POLICY UNDER INDIAN ARBITRATION

This article has been written by Falak Sawlani & Mosam Desai, 4th year Students pursuing B.COM. LL.B (Hons) from Institute of Law Nirma University, Ahmedabad.




INTRODUCTION

The main goal of arbitration is to resolve disputes in a cost effective and a timely manner as well as eliminating several rounds of litigation process by rendering an arbitral award as permanent, thus aiming at a system wherein there is ‘minimal court intervention’ in dispute resolution. This article basically talks about how the judiciary has set aside the arbitral awards in the name of public policy and how the contours of Indian public policies have evolved with time in the field of arbitration.


Today public policy has become an excuse to oppose the application of arbitral awards in International Arbitration and it is yet an intensely contested, divisive and nuanced issue today. This is due to the different approaches of the national courts of international arbitration to the principle of foreign policy. While arbitration laws and traditions have attempted over time to bring the principle of public order together in such a way that the parties can benefit from a consensual definition of public order, the different mindsets of national courts have made this challenge nearly impossible.


Even then the public policy plays a very important role, especially in the international arbitration as it includes parties, lawyers and arbitrators from different cultures and legal backgrounds and different jurisdictions and thus it becomes important for the international companies, the companies working with Indian companies, to be aware of Indian public policy and the impact it has on the arbitral awards.


Arbitration today is growing at a fast pace, with the increase in the parties opting for arbitration as a dispute resolution process, cases even in the field of competition law are increasing. With this even the law is evolving and there stands a difference between the legitimate claims of the nation and the final award granted in International arbitration. Since the arbitration hearings require a legal process by providing testimony and giving applicants the opportunity to be heard, why should the court at this stage intervene in the decision that undermines the very subject matter of the arbitration? When conflicts inevitably end in court, there is no reason for the parties to engage in arbitration at all. How great should the judicial involvement in such awards be and when should roadblocks occur? To promote an effective arbitration mechanism within permissible or judicial limits, the courts should adopt a welcoming and non-interventionist attitude without undue interference.[1]


DEFINITION OF PUBLIC POLICY.

The provision that talks about the grounds under which arbitral awards can be set aside is section 34, [2] of the Arbitration and Conciliation Act. Though, the act does not define “public policy” explicitly but lays down certain grounds which are against the “public good” or “public interest.”


Public policy is equal to the “Policy of law”. Thus, the acts that have the tendency to be against the public interest or harm the public good would not only be against the public policy but also against the “policy of law”.


Section 34(2)(b)(ii),[3] of the act states that the court may set aside an award if it finds that the award is against the public policy of India. Clause 1 of Section 34(b) sets out three conditions for the setting aside of an arbitral award based on “public policy”[4]: whether the award was caused by fraud, corruption, or a violation of Sections 75 or 81; or if it violates basic policy of Indian law; or when it goes against the most basic notions of morality and justice. The second and the third grounds are vague and subject to various interpretations and thus the Supreme Court has widened the scope of public policy.


In the case of, Renusagar Power co. Ltd Vs. General Electric Co.,[5] Supreme Court stated the grounds for an award to be against the public policy which would be the following:

  • The fundamental policy of Indian law.

  • Interests of India.

  • Justice and Morality.[6]

The scope of this definition was further widened by the Supreme Court in the case of ONGC Ltd. Vs. Saw Pipes Ltd[7]., apart from the grounds stated in the case of Renusagar, the court added “patent illegality” as one of the grounds for an arbitral to be set aside as being against the public policy. Further in this case, the court interpreted the ground “fundamental policy of Indian law” in order to clarify it and further divided in into three different heads, which are as follows:

  • Duty (of the tribunal) to adopt a judicial approach

  • Adhering to the principles of natural justice (by the tribunal)

  • The decision (of the tribunal) should not be perverse or so irrational that no reasonable person would have arrived at the same

Yet again in the case of Associate Builders Vs. Delhi Development Authority[8], the Supreme Court interpreted the most basic norms of “justice and morality” and the court stated that an award that shocks the conscience of the court would be set aside on the grounds of it beings against the public policy.


Very recently the court in the Venture Global Engineering LLC Vs. Tech Mahindra Ltd and Ors.[9] , the court declared section 34 of the AAC Act to be the only ground for setting aside the awards[10] thus making it possible for the courts to intervene as less as possible in arbitral proceedings.


Yet, the scope of “Public Policy” is vastly interpreted and hence it had become a matter of concern, as looking at the trend, the international companies hesitated to enter India. Thus, it was decided to amend the scope of Public policy in order to limit its permissibility for the courts.[11]


CHANGING CONTOURS OF PUBLIC POLICY

The words of J Burrough aptly justify the unpredictability of the interpretation of the term ‘public policy’. He says,

Public Policy is an unruly horse where once you stride on it you do not know where it’s going to take you.”

The Arbitration and Conciliation (Amendment) Act 2015 made significant changes to Section 34. These changes were proposed in the 246th Report of the Indian Legal Commission on Amendments to the Arbitration and Conciliation Act of 1996 of August 2014 an amendment to the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act of 1996 of February 2015. These were the Changes aimed at preventing the courts from disrupting arbitral awards on "public order" grounds.


Therefore the amendment "Explanation 2" has been added to Section 34 (2) and Section 2A. Explanation 2 of Section 34 (2) states: "For the avoidance of doubt, the examination of whether there has been a violation of the fundamental policy of Indian law must not include an examination of the merits of the dispute." In Associate Builders v Delhi Development Authority[12], the Hon'ble Supreme Court also clarified the scope of the interpretation of most of the basic concepts of morality and justice. Accordingly, if the "award" were to shock the conscience of the Court, an arbitral award could be overturned in fairness. Furthermore, an award against morals was viewed as something contrary to the morals of the day and which would shock the conscience of the court.


Therefore, this declaration has significantly limited the scope of interpretation of ONGC/Western GECO8. With this change in place, the courts could no longer interfere with the arbitrator's award. The declaration makes it particularly clear that a court would in no way be obliged to examine the arbitral award on the merits. Similarly, Section 2A further limits the scope of interpretation of the phrase "manifestly illegal" used in ONGC / Saw Pipes9. Section 2A states -

"An award resulting from any arbitration other than international commercial arbitration may also be overturned by the Court if the Court finds that the award is invalid because of a patent infringement on the award"

As a result, courts are no longer allowed to re-examine evidence or set aside arbitral awards just because the arbitral tribunal made mistakes in handling it. It should also be understood that the amendment made no changes to the interpretation of "justice and morality" as set out in Associate Builders.


Since the change, the courts have avoided interpreting "public order" in a comprehensive manner or interfering with the merits of the case. In November 2017, the Hon'ble Supreme Court in Venture Global Engineering LLC and Ors against Tech Mahindra Ltd. and Ors[13] states that -

"The award of an arbitral tribunal can only be set aside for the reasons set out in Section 34 of the AAC Act and for no other reason. The Tribunal cannot act as a court of appeal to examine the legality of the award, nor can it examine the merits of the claim by entering the arena of fact like an appeals court. "

These rulings are evidence of the recent tendency to interpret "public policy", in which the courts have refused to examine the merits of the arbitral awards, following the legislative intention of "minimal intervention by the courts in the arbitration" the amendments to the Arbitration and Conciliation Act (amendment) of 2015.


In the MMTC v M/s Vedanta Ltd[14] case, the Court of Justice ruled that under section 34 of the 1996 Act, the court cannot appeal the award and can only intervene on the matter for the reasons set out in section 34 (2) (b ) (ii), namely if the award is inconsistent with Indian public order. However, after the 2015 reform, the situation has changed after the 2015 amendment. In which the Explanation –I was inserted in section 34(2) and also it was observed that permissibility laid down under section 37 would not exceed the limits laid under section 34.

In another case of Steel Authority of India Vs. Primetals Technologies Ltd[15]. It was observed by the court that the interpretation of the terms of the contract would be done by the arbitrators only and the court would have no say in the same.


THE WAY FORWARD

From the above judgements and the discussions, it can be seen that the interference of the court in arbitral proceedings had been vast. On the grounds of public policy[16], many arbitral awards has been set aside by the Indian courts thus setting a trend of the Indian public policies being rigid. But with the changing times the contours of the public policy has also been changing. The intervention of courts is decreasing and the horizons of the courts accepting the decisions of the arbitral tribunals is also expanding, yet there is a long way to go. The government must adopt a stance that encourages foreign companies to invest in India. In order to achieve India's dream of a global arbitration center, courts must also create an arbitration environment in which they can intervene selectively in enforcing international arbitration awards.[17]


References

[1] Matti S. Kurkela & Santtu Turunen, Due Process in International Commercial Arbitration (2 ed. 2010). [2] Sec. 34, Arbitration and Conciliation Act (1996). [3] Sec. 34 (2)(b)(ii), Arbitration and Conciliation Act (1996). [4] Jahnavi Sindhu, PUBLIC POLICY AND INDIAN ARBITRATION: CAN THE JUDICIARY AND THE LEGISLATURE REIN IN THE 'UNRULY HORSE'?, 58 Journal of the Indian Law Institute (2016) [5] Renusagar Power Co. v. General Electric Co., A.I.R. 1994 S.C. 860. [6] Sidharth Sharma, Public Policy Under the Indian Arbitration Act: In Defence of the Indian Supreme Court's Judgment in ONGC v. Saw Pipes, 26 J. INT'L ARB. 133, 140 (2009). [7] Oil and Natural Gas Ltd. v. Saw Pipes Ltd., (2003) 5 S.C.C. 705 (India). [8] Associate Builders v. Delhi Development Authority, (1995) 60 D.L.T. 317. [9] Venture Global Engineering v. Satyam Computer Services Pvt. Ltd., A.I.R. 2010 S.C. 3371. [10] Section 34 provides the grounds on which a party may seek to have an arbitral award set aside by the courts. Specifically, section 34(2)(b) provides that a Court may set aside an arbitral award if it is found to be “in conflict with the public policy of India”. [11] Lalive Pierre, Transnational (or Truly International) Public Policy and International Arbitration, Kluwer Law and Taxation Publication, 257-318 (1987). [12] Associate Builders v. Delhi Development Authority, (1995) 60 D.L.T. 317. [13] Venture Global Engineering LLC and Ors vs Tech Mahindra Ltd. and Ors, 2017 [14] MMTC v M/s Vedanta Ltd, 2019 [15] Steel Authority of India Vs. Primetals Technologies Ltd, 2020 [16] MARK A. BUCHANAN, PUBLIC POLICY AND INTERNATIONAL COMMERCIAL ARBITRATION, 26 American Business Law Journal, 511-531 (1988). [17]Emmanuel Gaillard, ENFORCEMENT OF ARBITRATION AGREEMENTS AND INTERNATIONAL ARBITRAL AWARDS, NEW YORK CONVENTION IN PRACTICE (2008).

17 views0 comments