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Analysis of Public Policy with respect to The Indian Arbitration and Conciliation Act, 1996

Justice Burroughs once described 'public policy' as an unruly horse; when once you get astride it you never know where it will carry you. The Indian position on 'public policy' as a ground for setting aside an arbitral award befits this description.

The scope and width of the concept of 'public policy' as a ground for setting aside an arbitral award has been the source of much debate across all jurisdictions, but India has been perceived to be a forerunner in stirring the debate. The two landmark decisions in Saw Pipe and Phulchand (which distinguished Renusagar) caused significant uproar in India and the international arbitral community. Perhaps as a result of the severe criticism received, there was an attempt by the Indian Courts in subsequent decisions to water down the effects of these decisions. Just when India was beginning to receive some praise for having 'tamed the unruly horse 'the decision in Associate Builders and Western Geco have breathed new life in the debate. Also, post the 2015 amendment the decisions given in cases thereafter have narrowed down the scope of public policy.
In this article, would analyse these decisions and their impact on both domestic and foreign awards.
Doctrine of Public Policy:-

The Arbitration and conciliation Act, 1996 or the Contract Act, 1872 does not define the expression "Public Policy" or "opposed to public policy." "Public Policy" is not the policy of a particular Govt. It connotes some matter which concerns the public good or the public interest. 'Public Policy' is equivalent to the "Policy of Law." Therefore any acts that have a mischievous tendency so as to be injurious to the interest of the state or the public is stated to be against "Public Policy" or against the 'Policy of Law."

Doctrine of 'Public Policy' is somewhat open textured and elastic, and this elasticity has been the cause of judicial contempt of the doctrine. There is a general agreement that the courts may extend existing 'Public Policy' to new situations and the difference between extending on existing principle as opposed to creating a new one will often be wafer thin. 'Public Policy' is not absolute. In the broader view, the doctrine of "Public Policy" is equivalent to the "Policy of Law," whatever leads to obstruction of justice or violation of a statute or is against the good morals when made the object of contract would be against 'Public Policy of India" and being void, would not be susceptible to enforcement.

Though misconduct of Arbitral Tribunal or of the proceedings before an arbitral tribunal by themselves are not made as grounds for recourse against an arbitral award under section 34 of the 1996 Act. Interpreting the doctrine of public policy of India in its broader view, courts of law may intervene permitting recourse against an arbitral award based on irregularity of a kind which the court considers has caused or will cause substantial injustice to the applicant. Extreme cases where arbitral tribunal has gone so wrong in its conduct of arbitration that justice calls out for it to be corrected may justifiably fall within the ambit of the doctrine of 'Public Policy of India" to enable courts of law in India to intervene under section 34 of the 1996 Act permitting recourse against arbitral award.

Judicial Pronouncements and Public Policy:
Renusagar Power Electric Company v. General Electric Company[1]–
A pre 1996 Act case involving an enforcement of an ICC Award. The SC held that the expression Public Policy in section 7 (1) (b) (ii) ofthe Foreign Awards (Recognition and Enforcement) Act, 1961.The court stated that the term public policy has been used in narrow sense and in order to attract the bar of public policy the enforcement of the award must involve something more than the violation of the Indian Law. Applying the said criteria, enforcement of a foreign award would be refused on the ground of public policy if such enforcement would be contrary to:
1) Fundamental Policy of Indian Law; or
2) The interests of India; or
3) Justice or morality.

Post that we move to the judgement given in ONGC v. Saw pipes Limited [2]which widened the horizons of public policy .The facts of the said case -Oil and Natural Gas Commission had placed an order on Saw Pipes for supply of equipment for off shore exploration, to be procured from approved European manufacturers. The delivery was delayed due to general strike of steel mill workers in Europe. Timely delivery was the essence of the contract. ONGC granted extension of time, but it invoked the clause for recovery of Liquidated Damages by withholding the amount from the payment to the supplier. ONGC deducted from the payment $3,04,970.20 and Rs 15,75,557 towards customs duty, sales tax and freight charges. Saw pipes disputed the deduction and matter was referred to arbitration. While the arbitral tribunal rejected Saw Pipe's defence of force majure, it required ONGC to lead evidence to establish the loss suffered by breach and proceed to hold, in absence of evidence of financial losses, that the deduction of Liquidated damages was wrongful. The award was challenged by ONGC; inter alia as being opposed to public policy. ONGC's case was that the arbitral tribunal failed to decide the dispute by not applying the prevailing substantive law, ignoring the terms of the contract and customary practices of usage of trade in such transactions. ONGC challenged the award as being patently illegal. The single judge and division bench of Bombay High Court dismissed the challenge. The Supreme Court set aside an arbitration award directing ONGC to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages retained by it while making payment to the company.

The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was similar to an appellate/revision court, therefore, it had wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated in Renusagar Power Co. Ltd; under which the arbitral award could be set aside.

"Therefore, in our view, the phrase 'Public Policy of India' used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice."

This opened a floodgate of litigation under S. 34 as every award where there was an alleged error of application statutory provisions could now be challenged.

Moving further, inPenn Racquet Sports v Mayor International, Delhi HC[3]the Delhi High Court held that the term 'public policy' in the context of enforcement of a foreign award under Section 48 is to be construed more narrowly than the context of setting aside under Section 34.

In 2011, the Supreme Court inPhulchand[4]while deciding the meaning of 'public policy' under Section 48 of the 1996 Actheld that the test laid down inSaw Pipesmust be followed in case of foreign awards as well, thereby allowing Indian Courts to deny enforcement of a foreign award on additional grounds of "patent illegality".Notably however, the Supreme Court expounded no reasons for ignoring the distinction drawn between foreign awards and domestic awards inSaw Pipesitself or for departing fromRenusagarwhich although dealt with a separate statute, had in fact interpreted a provision identical in text and intention to that of Section 48.

Phul chand came to be overruled by the Supreme Court in 2013 in Lal Mahal [5].The Court reinstated the Renusagar position with respect to enforcement of foreign awards and confirmed that theRensuagartest shall apply for refusal of enforcement of a foreign award on the grounds of conflict with public policy of India.The wider import of the term as laid down inSaw Pipestherefore ceased to apply to Section 48 and the possibility of an attack to a foreign award in India at the stage of enforcement was limited.

In 2014, the two Supreme Court decisions, Associate Builders and Western Geco, once again tangled the interpretation with respect to the meaning and scope of the term 'public policy' under Section 34 of the Act.

Western Geco[6]:
It was widely anticipated that the three-judge bench hearing this case, which had the opportunity of reviewing the interpretation of 'public policy' under S. 34 of the 1996 Act might overrule the wide interpretation given by Saw Pipes, which was a decision of the division bench. However, the larger bench of the Supreme Court referred to the Saw Pipes ratio, and went a few steps further to add additional vague terminologies.

In order to appreciate the decision, a brief factual background would be helpful. In this case, the Appellant (ONGC) invited offers for the upgrade of a seismic survey vessel for which one of the main items required were 'steamers' fitted with 'hydrophones'. Western Geco (the Respondent) submitted a bid offering to supply steamers with hydrophones of U.S. origin. The Respondent did not deliver the vessel back to the Appellant by the due date and, notably, made an application for obtaining a licence from the U.S authorities for the sale of US origin hydrophones only after the due date. Due to certain problems with obtaining licence from U.S. authorities for the sale of the hydrophones, the Respondent intimated to the Appellant that it would not be able to supply U.S. origin hydrophones and proposed to replace the same with Canadian hydrophones a few months later. After several months of communication between both parties, the Appellant acceded to the replacement on the condition that the Appellant would deduct liquidated damages and damages for excess engagement of the vessel. The Appellant accordingly made deductions from the Respondent's invoice on account of liquidated damages which the Respondent contended were inflated.

The arbitrator inter alia held that deductions made by the Appellant for delay after the intimation that Respondent was not seeking to pursue the request for licence before the U.S. authorities was unjustified. Aggrieved by the award, the Appellant challenged the award under section 34 of the 1996 Act before the Bombay High Court, which was rejected. The Appellant then preferred an appeal before the Supreme Court.

The Apex Court was required to decide whether the award violated the public policy of India. The Court while agreeing with ratio of Saw Pipes, went a step further to elaborate the meaning of 'fundamental policy of Indian law'. It determined that three 'distinct and fundamental juristic principles' form a part and parcel of fundamental policy of Indian law: first, the court or adjudicating authority must adopt a 'judicial approach' when determining the rights of a citizen. This implies that it cannot act in an' arbitrary, capricious or whimsical manner'; second, the court or quasi-judicial authority must determine rights and obligations of parties in accordance with principles of natural justice which encompasses that the authority deciding the matter must apply its mind to the attendant facts; and third, a decision which is perverse or so irrational that a reasonable person could not have reached such a conclusion may not be sustained in a court of law.

On such expansive interpretation of the concept 'fundamental policy of India', the Court concluded that in the instant case the decision reached by the arbitrators could not have logically flowed from the proved facts, and that the tribunal erroneously clubbed the entire period since intimation for holding the Appellant responsible for the delay. The Court went on to reduce the period for which the deductions were held to be invalid, thereby partly allowing the Appellant's contention.

Associate Builders[7]:
The latest decision concerning public policy, is the Associate Builders case by a division bench of the Apex Court. While on facts, the court reinstated the award set-aside by the lower court, the probably unnecessary and elaborate exposition of the law in this case has added further fuel to fire in what now seems to be an ever expanding scope of the public policy ground in India.

In this case, the Appellant entered into a works contract with the Respondent for construction of a residential colony. There was a delay in the completion of the project which the Appellant attributed to the Respondent. The arbitrator held that the entire delay of 25 months was attributable to the Respondent. Aggrieved by the decision, the Respondent challenged the award before a Single Judge of the High Court of Delhi where the application was dismissed. An appeal was preferred to the Division Bench where the judgment of the Single Bench was set aside. The Appellants then came before the Supreme Court in appeal against the order of the Division Bench.

The Court in Associate Builders not only referred to Saw Pipesand Renusagar, but also relied on the Western Geco decision. It further elaborated on the concept of fundamental policy of Indian law, interest of India, justice, morality and patent illegality as held in several prior decisions and in particular further expounded the position of law laid down inWestern Geco.As a result, Associate Builder has accelerated the expansion of challenge jurisdiction, despite having upheld the award on facts.

The Court however, also stated that" while applying the public policy test to an arbitration award, it [the court] does not act as a court of appeal and consequently errors of fact cannot be corrected "and that" the arbitrator is the ultimate master of the quantity and quality of evidence relied upon when he delivers the arbitral award. "Whilst on one hand, the Apex Court held that the Division Bench had exceeded its jurisdiction by interfering with a possible view of the Arbitrator; on facts the Apex Court upheld the award based on its own assessment that the arbitrator's views were indeed correct.

Impact on Foreign Awards
The Saw Pipes decision has been widely slammed in domestic and international arbitration circles for opening the door for courts to review an arbitral award on merits. By overruling Phulchand, the Supreme Court inLal Mahal successfully saved at least the foreign awards from such scrutiny at the stage of enforcement by clarifying that the 'patent illegality' test of Saw Pipes was inapplicable. Therefore, the storm surrounding the concept of public policy which centered mostly on the concept of patent illegality came to be restricted only to domestic arbitrations.

However, Western Gecoand Associate Builder shave, by expanding the meaning of "fundamental policy of India", given unruly litigants a fresh impetus to delay enforcement of foreign awards. By introducing judicial principles applicable in the sphere of public law into the concept of 'fundamental policy of Indian law', Western Gecohas created more opportunities for parties to resist enforcement of an award under the ambit of public policy. This is further aggravated by the decision inAssociate Builderswhere the Court has not only affirmed such an expansive interpretation to the words 'fundamental policy of India' but also elaborated and expanded the concepts of 'justice', 'interest of India' and 'morality'.

Although Western Geco and Associate Builders are decisions under Section 34 of the 1996 Act , it would appear that they could apply with equal force to cases under Section 48 of the 1996 Act (enforcement of foreign award) which are now governed by the Renu sagar test which inter alia includes 'fundamental policy of India'.

Impact on Domestic Awards
The Parliament incorporated Section 34 of the Model Law without any changes into the 1996 Act. Unlike other statutes from several different jurisdictions which subject domestic awards to a different rigour of scrutiny from that of foreign awards, the 1996 Act makes no such distinction. Yet, by judicial pronouncements, and in particular, theSaw Pipes'patent illegality' test, domestic awards came to be subject to a far greater review than was perhaps contemplated by the legislature.

With Western Geco having further expanded the test of 'fundamental policy of India' the problem is somewhat compounded. Western Geco is further damaging as a precedent since the court set aside the award on its own interpretation of the facts in issue. On the other hand in Associate Builders, although the Court acknowledged that examination of the facts is off-limits in a challenge proceeding, the Court saved the award on its de novo determination that the award was correct - a determination which the Court made based on its own assessment of the facts and arguments.

Western Geco has opened the floodgates for further review of domestic arbitral awards on merits by introducing well-established judicial principles having a long line of precedents in common law, into the concept of 'fundamental policy of Indian law'.

Treatment to Public Policy issue in USA:
The approach of the US Court was summarized by the judgment in Seven Seas Shipping (UK) Ltd v Tondo Limitada[8]. The court stated that enforcement of an award could only be found contrary to public policy if "it would violate our most basic notions of morality and justice." Only in extreme cases will the foreign award to be set-aside on public policy considerations. Stevens J. conveyed the same. When he dissented in Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc[9]that "Arbitrations awards are only reviewable for manifest disregard of the law and the rudimentary processes which make arbitration so desirable in the context of a private dispute often mean that the record is so inadequate that the arbitrator's decision is virtually unreviewable. Absolute decision making of this kind is fine for parties who are willing to agree in advance to settle for a best approximation of the correct result in order to resolve quickly and inexpensively any contractual dispute, which may arise in an ongoing relationship." In RAKTA Case[10]it was held that "In equating 'national policy' with United States 'public policy' the appellant misses the mark...this provision was not meant to enshrine the fervencies of international politics under the rubric of 'public policy'. Rather a circumscribed public policy doctrine was contemplated by the Convention's framers and every indication is that the United States, in acceding to the convention, meant to subscribe to this supranational doctrine."

Changes made by The Arbitration And Conciliation (Amendment) Bill, 2015
The Arbitration and Conciliation (Amendment) Act, 2015 made major changes to section 34. The changes were suggested by the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of August 2014 and the Supplementary to the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of February 2015. These changes were aimed at restricting Courts from interfering with arbitral awards on the ground of "public policy." Accordingly, the amendment added "Explanation 2" to section 34(2) as well as Section 2A. Explanation 2 of section 34(2) states –

"For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian Law shall not entail a review on the merits of the dispute."

Thus, this explanation significantly curtailed the scope of interpretation supplied in ONGC v Western GECO. Because of this amendment, Courts would no longer be able to interfere with the award passed by the arbitrator. The explanation makes it especially clear that in no way would a Court be entailed to review the award on merits of the dispute. Similarly, section 2A also curtails the scope of interpretation of "patently illegal" as propounded in ONGC v Saw Pipes. Section 2A states –

"An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiate by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence."

Thus, Courts can no longer reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with the same. It is interesting to note that the amendment did not make any changes to the interpretation of "justice and morality" as explained in Associate Builders.

Recent Trends in Interpretation of "Public Policy"

Since the amendment, Courts have refrained from giving a wide interpretation to "public policy" or interfering with the merits of the case. In the November2017 Supreme Court Judgment of Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors[11]the Court observed –

"The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the AAC Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court."

A similar view was also taken in the judgment of Sutlej Construction v. The Union Territory of Chandigarh[12]

These judgments show that the recent trend of interpretation of "public policy" has been one where the Courts have refused to examine the arbitral awards on merits, thereby upholding the legislative mandate of "minimal intervention of the Courts in the arbitral process" as reflected by the changes brought by the Arbitration and Conciliation (Amendment) Act, 2015.

As is evident, the interpretation of 'public policy' has shuttled across various interpretations and in absence of proper laid down definition, the subordinate courts have given whimsical decisions as to its definitive meaning. There have been reported instances where mere violation of an Indian Law has been held to be against Public Policy. The 'patent illegality' test opened a pandora's box for litigants as in multiple adjudications, after thorough examination by the arbitral tribunals, the courts again started sitting on the merits of the case which vitiated the whole purpose of arbitration. However, it is important at this juncture to point out that for domestic arbitrations, 'patent illegality' doctrine must be retained u/s 34 but nor for international arbitrations.

While there is a need for a developed and broad version of the concept of public policy in the realm of contractual relationships, the same may not be extended to the laws governing arbitrations. The process of arbitration is a method of alternate dispute resolution that has become increasingly popular in the settlement of commercial disputes. The process of arbitration centres on the guarantee of minimal interference by the judiciary. Thus, to further the object of arbitration and to increase its instances in the country, it is important that not only is the concept of public policy interpreted in a restrictive sense, but that it has clearly defined parameters, whose ambiguities do not lend them to conflicting interpretations. The recent amendments to the Arbitration and Conciliation Act 1996, are clearly in furtherance of this pro-arbitration stance and it is hoped that they will bear fruit in the years to come.

[1][1994 SCC Supl. (1) 644]
[2](2003) 5 SCC 705
[3](2011) 1 ARBLR 244 (Delhi)
[4](2011) 10 SCC 300
[5]Civil Appeal No. 5085 of 2013
[6](2014) 9 SCC 263
[7]2014 (4) ARBLR 307(SC)
[8]XXV YBCA 987 (2000) 989
[9]473 U.S. 614; 105 S.Ct.3346; 87 L.Ed.2d. 444 (1985); 24 ILM 1064 (1985)
[10]Parsons & Whittemore Overseas Co, Inc v Societe Generale de l'Industrie de Papier, and Bank of America, 508 F.2d` + 969 (2d. Cir. 1974)
[11]2017 SCC Online SC 1272
[12][2017] 14 SCALE 240 (SC)

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