The expression public policy
has not been defined in the Arbitration
and Conciliation Act, 1996. The expression 'public policy' is not capable of a
precise definition because it is a variable notion, depending on changing
manners, morals, and economic conditions. Public Policy is a very unruly horse,
and once you get astride it you never know where it will carry you. It may lead
you from sound law and is never argued but when all other points fail.
It's because the Supreme Court of India in Bhatia International v. Bulk Trading
SA (Bhatia International) and Venture Global v. Satyam Computer Services Ltd.
& Anr. (Venture Global) ¸held that the public policy exception of Section 34
of the Arbitration and Conciliation Act, 1996 ("the 1996 Act") also applies to
foreign arbitrations. This was rectified in the decision of BALCO v. Kaiser
Aluminum (BALCO) where the Supreme Court held that Part I of the 1996 Act
does not apply to foreign seated arbitrations.
However, there's still ambiguity as to whether under Section 48 of the 1996 Act.
Public policy is a principle of law, under which freedom for contract or private
dealings is restricted by law for the good of the community. However, the
concept of public policy is not static and varies with time and changing needs
of society. The expanded scope of the public policy doctrine would be applicable
as it was in Phulchand Exports Ltd v. Patriot. In the recent case of Shri Lal
Mahal Ltd v. Progetto Grano Spa
(Shri Lal Mahalal case), the Supreme Court has
finally narrowed the scope of the defense of public policy and strengthened the
pro-enforcement policy of the Indian Courts as evidenced in BALCO.
The ground stated in section 34(2)(b)(ii) for setting aside an arbitral award
means the party challenging the award on the ground that the award is against
the public policy of India need not plead or prove the existence of these
grounds. The court has ex officio jurisdiction to set aside an arbitral award
under the provisions of section 34(2)(b)(ii) if the award conflicts with the
public policy of India.
The concept of public policy as a res publica coincides daily with private legal
issues in the field of law. Although it may be defined as the last recourse for
the claimant or arbitrator, it can serve as a decisive factor in contractual
issues, arbitrations, and international rulings when challenged with evidence
for valid reasons.
Public policies are one of the most common reasons why international arbitration
parties are widely used to refuse to enforce arbitral awards. Although parties
are free to enter into any agreement as they like, they cannot make a binding
contract in violation of law or of public policy. There has been an extremely
important change in mindset recently in India, where the implementation of the
internationally accepted concept of public policy was delayed by several court
decisions due to various approaches or methods adopted by the courts.
V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (the New York Convention) and article 36(1)(b)(ii) of UNCITRAL's
Model Law both provide that a State may refuse to enforce an award if doing so
would be contrary to the public policy of the State in which enforcement is
sought. Unfortunately, neither defines public policy
. In October 2015,
the International Bar Association released a report on the Public Policy
Exception in the New York Convention that reaffirmed that public policy remains
a nebulous and evolving concept that defies precise definition.
In Kesar Enterprises v. DCM Sriram Industries Ltd
arbitrator, a former Chief Justice of India, did not return a finding on every
question that was raised. It was contended that the arbitrator did not
appreciate and duly consider all the questions raised before him. It was held
that failure of the arbitrator to return a finding on every question raised
before him did not amount to infraction of public policy. In such circumstances,
it would be deemed that the arbitrator rejected the contention.
Objective of Study
The objective of this research paper is to understand the way public policy
works for setting aside an arbitral award and the philosophy around public
policy viz-a-viz the idea in Economics as the act curtails the judicial
intervention with some acceptable cases since public policy leads to bafflement
which further leads to bemused understanding and decisions given by the courts.
This paper is meant to unify the meaning and purpose of this broadly understood
term by analyzing different interpretations of tribunals over time.
- What is the public policy bar in context to the enforcement of arbitral
awards in India?
- What can we learn from the idea of public goods in economics vis-à-vis
the question of public policy in arbitration?
- Is there a need for more robust jurisprudence around the term public
policy in context to a globalized world?
The researcher has used the doctrinal method i.e. reference from available
primary sources like Acts, Rules, and Regulations to study the present questions
at hand. The researcher has also taken references from secondary sources like
books, articles, and newspaper reports to understand the issue of public policy
related to the above questions.
Chapter I: Public Policy And Enforcement Of Arbitral Awards
To have minimal judicial intervention in the arbitration procedure, the Indian
Arbitration Act was introduced. Nevertheless, the Indian courts have
demonstrated a strong propensity to interfere with international arbitration. In
this respect, it is the most controversial judicial intervention in public
policy award enforcement.
In Renusagar v General Electric
, the Hon'ble Supreme Court of India
(hereinafter, the SC), held that the enforcement of a foreign award would be
refused on the ground that it is contrary to public policy if such enforcement
would be contrary to:
- fundamental policy of Indian law; or
- the interests of India; or
- justice or morality
This decision was based on private international law and was widely followed in
most existing arbitration jurisdictions like the US and France in conjunction
with foreign standards. This decision reiterated the perception that the
national courts must deal with arbitral awards based on public policy, only in
extreme circumstances. It was also held that Public policy protection should not
be used by the judges to test the validity of the arbitral award.
Yet, the SC took a different approach in Oil & Natural Gas Corp v Saw Pipes
misinterpreting the public policy defense. The Saw Pipes litigation emerged from
a nationwide controversy over the award of liquidated damages under a contract
of supply. The case has been remitted to arbitration and the tribunal held that ONGC has no right to liquidated damages because it has not made any loss due to
Saw Pipes ' late delivery.
They justified as a wider meaning was required to be given to public policy than
in the case of Renusagar because the public policy concept connoted issues of
public good and public interest. According to the SC, ONGC was not required to
prove its loss and, therefore, was entitled to the liquidated damages.
believed that the award violating the law could not be said to serve the public
interest as it would have negative effects on the administration of justice. In
addition to the 3 heads which the SC stated in the Renusagar case
held that an arbitral award may be set aside on grounds of public policy if it
is patently illegal. It ruled that an award is clearly illegal if it was in
breach of substantive law, of the Indian Arbitration Act, and/or the contractual
terms. The case of Saw Pipes has been criticized by many distinguished
By clearly stating that the public policy ground includes errors of law by the
arbitral tribunal, the Saw Pipes case went beyond the scope of the Indian
Arbitration Act and created a new ground for setting aside arbitral awards. By
bringing errors of law within the ambit of public policy, the Indian courts have
created a backdoor to review the merits of an arbitrator's decision, which is in
clear contravention of arbitration law and practice.
Saw Pipes is particularly disturbing because the Indian Supreme Court has
not expressly excluded international awards from its rationale. Moreover, in
Bhatia International v Bulk Trading, the Supreme Court held that provisions
of Part 1 of the Indian Arbitration Act (which applies to domestic
arbitrations only) would also apply to foreign awards under Part 2 of the
Indian Arbitration Act unless specifically excluded by the parties. The case
of Bhatia generated much debate since it reversed the accepted position that
Part 1 of the Indian Arbitration Act would not apply to international
In 2008, the SC, extending its earlier decision in the Bhatia case, held
that a foreign arbitral award could be set aside on grounds of public policy
as formulated in the Saw Pipes case. It held that the losing party
could bring an independent action in India to set aside a foreign arbitral
award on the expanded grounds of public policy as set out in the case of Saw
The Satyam case has been described by Nariman, one of India's most renowned
arbitrators, as simply 'inexplicable' and one which can not be defended.
Seems that in a manner that violates the New York convention the Indian courts
have consistently misinterpreted the terms of the Indian Arbitration Act. The
Bombay High Court in Western Maharashtra Development Corporation Ltd. v Bajaj
relying on the ONGC case, set aside an arbitral award on the ground
that it was contrary to the substantive provisions of law and, as a result,
The Bombay High Court analyzed the Supreme Court decision in the Saw Pipes case
and held that the award could be set aside on grounds of public policy. The
Bombay High Court felt that the arbitrator did not apply the provisions of the
Indian company law correctly and, as a result, the award contradicted the
substantive provisions of law and was patently illegal.
Such judgments have ignited considerable on-shore and offshore debate and
agitation with lawyers worldwide who remember that such judgments, if left
unsolicited, would seriously damage the reputation of India globally.
Even when the tribunal may have complied with the agreed procedure, courts have
refused to enforce the award as contrary to public policy if the same violates
inherent notions of due process. Similarly, enforcement could also be refused
by resorting to the public policy ground when the conduct of the tribunal and
the procedure adopted by it was antithetical to the fundamental requirements of
due procedure. The public policy bar is, thus, quite large, and this is one of
the words which the judicial authority has continuously understood and described
since antiquity and, thus, the researcher concludes that some rules that
characterize the word ' public policy ' need to be formulated constantly.
Chapter II: Jurisprudence Around Public Policy
Sections 34(2)(b) and 48(2) of the Arbitration Act allow judges, by keeping the
issue of arbitrability to courts, to assign the award if the disagreement was
not settled by arbitration or if the award conflicts with Indian public policy.
In this connection, it is worth noting that the above paragraphs give two
separate reasons for arbitrability and public policy.
In Booz Allen & Hamilton Inc v SBI Home Finance Ltd.
SC advocated the test of 'in rem and in personam'
which are basically rights against the person are arbitrable whereas rights against the society aren't. These two factors are the
primary determinants that influence considerations of arbitrability and the same
has been reaffirmed in the recent holding of the Supreme Court in A. Ayyasamy v.
[A. Ayyasamy]. The Courts have misinterpreted and wrongly
applied the public policy exception while determining the arbitrability of a
dispute due to a lack of clear reasoning. Many courts have criticized the
judgment and said it wasn't complete enough to ensure the arbitrability of the
In simpler terms:
if the subject matter of a dispute qualifies to be
a non-arbitrable subject, the courts will not be obligated to refer the parties
to the arbitration and such a ruling will be binding on the arbitral
tribunals, an arbitral tribunal cannot be seen to oust the jurisdiction of a
There are 2 types of public policy: International & domestic. For there to be a
violation of domestic public policy, it has to be shown that there is some
element of illegality or that the enforcement of the award would be clearly
injurious to the public good. The definition of domestic public policy
can have a great deal of variation; essentially, domestic, public policy is what
is in the interests of each jurisdiction. This provision is premised on Article
V(1)(b) of the Convention which was included to account for the special
importance accorded to fair hearings under international law. If we dig
deeper, we find that Article V(1)(b) was in turn borrowed from the 1927
Geneva Convention, providing further credence to its historical and
Therefore, it can be said that the mere effect of specific due process
requirements being present in Section 48(1) is that for these particular
violations, the party arguing for non-enforcement will have to furnish
conclusive proof while for other due process violations; the court can find
violations on its own accord. It is widely accepted that 'public policy' as used
here, covers fundamental principles of law and justice in substantive as well as
Some jurisdictions have adopted a narrower scope of what is against public
policy, whereas other jurisdictions have adopted a broader scope. The Countries
which have a narrow scope are Switzerland, India, Singapore, the US. Public
Policy is violated by an illegal act, this demonstrates the difficulty of their
existing uniformity of domestic public policy as there exists differences in the
legal status of many acts across jurisdictions. According to Winfield, public
policy is "a principle of judicial legislation or interpretation founded on the
current needs of the community". It suggests that the courts must weigh the
interests of the whole community as well as the interests of a considerable
section of it.
Chapter III: Public Policy In Arbitration Viz-A-Viz Public Goods
Public Policy is a factor that is brought into play by the government which is
elected by the people. Generally, public policy is a set of rules and
regulations, ideologies on which an elected government or an authoritarian
government may use to regulate the use of public goods because if public goods
are overused, then there would be a free-rider problem. It is widely accepted
that 'public policy' as used here, covers fundamental principles of law and
justice in substantive as well as procedural respects.
Public goods are those when the individuals cannot be excluded from using them,
and one individual's use of it does not limit its availability to others. Public
policy is an unruly horse that is supposed to be defined by mostly judicial
interpretations and societal conventions.
Indian courts were not provided with any guidance as to the meaning of the
public policy. After going back and forth multiple times, the apex court
concluded that for Section 48(2)(b), public policy can be understood to mean:
- the fundamental policy of Indian law;
- the interests of India; or
- justice or morality.
A state by enforcing a uniform public policy may prevent the negative
externalities from arising. Having a strong and flexible public policy has
always stood the test of efficiency in economics. A public good is a good that
is both non-excludable and non-rivalrous in that, individuals cannot be excluded
from use or could be enjoyed without paying for it, and where use by one
individual does not reduce availability to others or the goods can be
effectively consumed simultaneously by more than one person. Public goods
that are available everywhere are sometimes referred to as global public goods.
Many public goods may at times be subject to excessive use resulting in negative
externalities affecting all users; for example air pollution and traffic
congestion. Public goods problems are often closely related to the "free-rider"
problem, in which people not paying for the good may continue to access it.
Thus, the good may be under-produced, overused. A government may avoid
undesirable externalities from occurring by implementing a consistent public
policy. Strong and flexible public policies have always been a measure of
The doctrine of public policy is a multi-faceted concept with three distinct—yet
intertwined—constitutive logics. The confusion of courts indicates the
often-neglected intricacies of the discussion on public policy. Courts' opinions
have oscillated between a moralistic account i.e. analyzing it based on basic
notions of morality and justice and a rigid positivistic interpretation that
subjugates the doctrine only to laws and precedents.
In the eyes of the national court which attempts to intervene with the
arbitration process, public policies are still today an important advantage.
The reason is that there is no consensus about what its contents should
include, and there is a difference between states in public policy. Even
though the public policy may be an unruly horse that may deceive you, this
unruly horse cannot be beaten.