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]