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Realm of Public Policy and Enforcement of Domestic Arbitral Award

Arbitration offers parties with a plethora of advantages over litigation in commercial disputes. The purpose of arbitration is to bring into effect a quasi-justice delivery system agreed upon by the parties to the contract. Such arrangement also has an implicit consequence that it should not be open for the parties to subject the award to a normal process of appeal in judicial Courts. The parties can move to the judicial Courts for either enforcement or setting aside of the award.

But, since such arbitral tribunals are made through the creation of a contract, they lack certain powers which are entrusted upon the normal judicial Courts, including powers to enforce the fruits of the award. It is here that the role of judicial Courts comes into the process. The grounds on which an award by an arbitral tribunal can be set aside has been limited under S.34 (domestic awards) and S.48 (foreign awards) of the Arbitration and Conciliation Act, 1996.

Since the decisions rendered by arbitral tribunals are not subjected to appeal before any Court, it becomes important that these quasi-judicial bodies do not digress from the pious task of imparting justice. Broadly speaking, it may also be put that the role of the judicial body is to ensure that the realm of public policy is not set aside as public order is equally important as individual freedom.

Therefore, the tribunals must ensure that in the process they do not abandon the public policy element while passing any award. The awards passed by the arbitral tribunals which are contrary or oppose to the public policy therefore, can be challenged before the judicial Courts and thereby also set aside.

The earliest of the laws on Arbitration in India was the Indian Arbitration Act, 1899 (hereinafter 1899 Act). The 1899 Act provided ‘misconduct and improper procurement of award’ as the only ground when the Court could interfere with the award and set it aside. The 1899 Act was repealed and replaced by The Arbitration and Conciliation Act, 1940 (hereinafter 1940 Act).

The 1940 Act in addition to the grounds mention in the 1899 Act, added an award being ‘otherwise invalid’ as an additional ground to set aside the award by the Courts, thus giving a scope for the expansion of judicial review. The challenges faced by the 1940 Act and the need to boost the alternate dispute resolution process was realised and addressed by the lawmakers who repealed the 1940 Act and introduced The Arbitration and Conciliation Act, 1996 (hereinafter 1996 Act).

The 1996 Act was an attempt in a direction to make India an arbitration friendly jurisdiction by adopting global model laws and therefore was based largely upon the United Nations Convention on The International Trade Laws Model Law on International Commercial Arbitration (hereinafter UNCITRAL Model Law).

The UNCITRAL Model Law introduced an award being opposed to ‘public policy’ as a valid ground for setting aside the arbitral award. This concept was adopted by India in the 1996 Act under S.34 (relating to the domestic awards) and under S.48 (relating to the foreign award).

In arbitration, the autonomy of the parties is kept at the highest pedestal. Therefore, any Court adjudicating upon the validity of an arbitral award is not to function as an appellate Court, but merely is to decide upon the legality of the validity of the arbitral award.

But the jurisprudence related to what constitutes public policy has been a matter of debate and discussions until the Arbitration and Conciliation (Amendment) Act 2015 (hereinafter 2015 Amendment) was brought into force which amended the 1996 Act. The 2015 Amendment expressly laid down the features of public policy whose violation would be considered as being opposed to the public policy.

Pre 1996 Act:

Prior to the 1996 Act, Arbitration in India was governed by the 1940 Act. The 1940 Act, unlike the 1996 Act, was not a complete code on arbitration. The 1940 Act also did not provide for any specific ground pertaining to public policy on which an award could be set aside. However, enforcement of foreign awards in India then was governed by The Foreign Award (Recognition and Enforcement) Act, 1961 and the said Act contained a specific provision on public policy. Section 7(1)(b)(ii) of The Foreign Award (Recognition and Enforcement) Act, 1961 provided that the enforcement of foreign awards can be set aside on the ground of the award being contrary to the public policy.

As far as domestic awards were concerned there was no specific statutory provision qua public policy under this arbitration regime for setting aside domestic awards and the same existed only with respect to enforcement of foreign awards. The public policy ground has been a matter of consistent debate in the common law countries. It has been described by the Courts as an unruly horse, which could lead anywhere[1] and also, to a good man at the saddle[2].

The Supreme Court of India first faced the issue of setting side an award on grounds of it being contrary to the public policy in the Renusagar[3] matter. The award in the case was rendered under the ICC Rules and the arbitral tribunal had its seat in New York. The three-judge bench of the Supreme Court clarified upon the ambit of the term public policy used under Foreign Awards under the Foreign Awards (Recognition and Enforcement) Act, 1961.

The Supreme Court ruled that the realm of public policy would be determined by the context and the purpose of the provision. The Court held that in the context of the Foreign Awards (Recognition and Enforcement) Act, 1996; an award opposing public policy would mean one that is contrary to the laws of India, is against the interests of India and is contrary to justice and morality. The Apex Court therefore limited judicial scrutiny only to the above-mentioned grounds.

Renusagar (Supra) judgement was delivered during the time when the Arbitration and Conciliation Act, 1940 was in force. The Renusagar (Supra) judgement received international acceptance and served as an important precedent in the times to follow even after the 1940 Act being repealed by the 1996 Act.

The 1996 Act:

The 1996 Act was largely implemented to bring the Indian law in consonance with the UNCITRAL Model Law and it introduced an award being opposed to public policy as a valid ground for setting aside the award. The first instance where the Apex Court was to determine the ambit of the term public policy as introduced in the 1996 Act was in Saw Pipes.[4] The Supreme Court in Saw Pipes (Supra) gave an expanded meaning in addition to the earlier verdict of the Supreme Court in Renusagar (Supra). It was held that the realm of public policy would also include an award which is patently illegal and contravenes the provisions of Indian law.

Further expansion of the interpretation of "public policy" was given in the Apex Court judgement of Western GECO Ltd[5]. Here, a three-judge bench of the Supreme Court cited the Saw Pipes Case, and noted that the judgement was silent on the meaning of "fundamental policy of Indian Law".

The Court went on to interpret "fundamental policy of Indian Law" to comprise of three separate heads – "duty (of the tribunal) to adopt a judicial approach", "adhering to the principles of natural justice (by the tribunal)" and that the decision of the tribunal must not be "perverse or so irrational that no reasonable person would have arrived at the same" – thereby further expanding the scope of "public policy", as each of these heads could then be a subject of a challenge.

In addition, the Court also held that the award of the arbitral tribunal resulted in a miscarriage of justice, the award could be set aside, or even modified to the extent the offending part was not severable.

In another landmark judgement of Associate Builders[6] , the Supreme Court ruled that the judicial interference on ground of public policy violation can be used to set aside an arbitral award only when it shocks the conscience of the Court to an extent that it renders the award unenforceable.

The Court laid down the following conditions which ought to be satisfied to render an award unenforceable on the grounds of being contrary to the public policy:
  • When the award passed is contrary to the fundamental policy of the Indian laws
  • Contrary to the interests of India
  • An award passed without citing any reasons
  • An award which has been obtained by the means of any fraud or corruption

The 2015 Amendment to the Arbitration and Conciliation Act, 1996 and onwards

Since the definition of public policy was given a wider scope by the Courts and there was no statutory provision specifying the grounds on which an award can be set aside as being opposed to the public policy, the 246th Law Commission Report recommended amendment to specify the grounds on which an award can be set aside as being opposed to the public policy.

Accordingly, the 2015 Amendment to the 1996 Act added an explanation to the definition of the term public policy as used in S.34 and S.48 of the Arbitration and Conciliation Act, 1996.

The 2015 Amendment specifically lays down conditions which shall amount to the violation of public policy, which are as follows:
  1. an award induced through fraud or corruption,
  2. award which is in contravention to the fundamental policy of Indian Law or,
  3. an award in conflict with the notions of morality and justice.

The positive response which the 2015 Amendment intended to bring was highlighted in the judgement by the Supreme Court in Venture Global Engineering[7] where the Court clarified that the award of the arbitral tribunal can be set aside only on the grounds mentioned under S.34 of the 1996 Act and on no other grounds.

The Supreme Court recently in a landmark judgement in Ssangyong Engineering[8] while interpreting the grounds of public policy as introduced in the 2015 Amendment, made the following observations:
  • The interpretation of the term fundamental policy of Indian law would not attract judicial review on the merits of the award;
  • The ground that an arbitral award may be set aside if it is against the interest of India as has been recognised in the Renusagar judgement is not valid;
  • An award would be against the public policy if it shocks the conscience of the Court;
  • The amended provisions introduced to the 1996 Act in 2015 would apply to arbitrations invoked on or after 23rd October 2015;
  • Public policy under S.34 (domestic award) and that under S.48 (foreign award) shall have the same meaning.
Conclusion
The ground of public policy for setting aside of an award seems well settled in terms of the 2015 Amendment to the 1996 Act and the judgement of the Supreme Court in Venture Global Engineering (Supra) and Ssangyong Engineering (Supra). The very nature of adopting an alternate means of dispute resolution is to minimise the interference of the Courts and provide more autonomy to the parties. The jurisprudence in the Indian scenario has come far and now it appears to be in consonance with the spirit to promote the alternate means of dispute settlement.

End-Notes:
  1. Richardson vs. Mellish; (1824) 2 Bing 229.
  2. Enderby Town Football Club vs. The Football Association; [1971] Ch 591.
  3. Renusagar Power Co. Ltd. vs. General Electric Co.; AIR 1994 SC 860.
  4. Oil and Natural Gas Co. vs. Saw Pipes; AIR 2003 SC 2629.
  5. ONGC Ltd. vs. Western Geco International Ltd; (2014) 9 SCC 263.
  6. Associate Builders vs. Delhi Development Authority; (2015) 3 SCC 49.
  7. Venture Global Engineering vs. Tech Mahindra Limited; (2018) 1 SCC 656.
  8. Ssangyong Engineering and Construction Co. Ltd. vs. National Highways Authority of India (NHAI); AIR 2019 SC 5041.
Written By:
  1. Abhinav Agnihotri is an Associate Partner with Link Legal India Law Services having 13 years of experience in handling disputes and arbitration matters. He is a part of the Disputes team and has been handling various high-stake dispute matters before various courts and tribunals. He has been representing clients in disputes before the Supreme Court, High Courts, Subordinate Courts and Tribunals including arbitrations.
  2. Kumar Karan is an Associate in the Dispute Resolution practice of the firm.

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