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Decoding The Meaning Of Public Policy: Discussing The Roles Played By The Judiciary And Legislature In Interpretation Of The Controversial Term Public Policy

The Arbitration and Conciliation Act, 1996 (Act) was framed to minimize judicial interference. Accordingly, Section 34 of Act, provides limited grounds on which an aggrieved party can rely on and get the award annulled through an application to the Court. One of the most controversial grounds enumerated in Section 34 is the ground of public policy.

Section 34(b)(ii) states that, an arbitral award may be set aside if the Court finds that the arbitral award is in conflict with the public policy of India. The term 'public policy' is an ambiguous term which is open to interpretation and as a result has been in the midst of controversy in the past.
 
Role played by the Judiciary
The Supreme Court had first attempted to interpret the term 'public policy' in the case of Renusagar Power Co. Ltd. vs General Electric Company [1] where the Court was dealing with the grounds for refusal of enforcement of foreign awards under the Foreign Awards (Recognition and Enforcement) Act, 1961. In this case the Supreme Court held that 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:
  1. fundamental policy of Indian law; or
  2. the interests of India; or
  3. justice or morality.

However, this interpretation did not make the situation any better as it attempted to define one vague term with three other vague terms. The Supreme Court again tried to interpret the term 'public policy' in the case Oil and Natural Gas Corporation Ltd. vs. SAW Pipes Ltd.[2] where the Court significantly widened the scope of public policy by adding another ground on which an award can be set aside. This new ground was the ground of patent illegality which was another ambiguous and controversial term.

The Supreme Court in this case held that an award can be challenged if it is in contravention of any statutory provision and as the award was challenged before a Court with revisionary jurisdiction, it ought to have a wider jurisdiction and wider meaning ought to given to the term 'public policy' to set aside patently illegal awards.

The Supreme Court justified its decision by stating that:
For achieving the object of speedier disposal of dispute, justice in accordance with law cannot be sacrificed. In our view, giving limited jurisdiction to the Court for having finality to the award and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal award to operate. Patently illegal award is required to be set at naught, otherwise it would promote injustice.

This judgement of the Supreme Court was widely criticised as it afforded the Courts an opportunity to review an arbitral award on merits which would defeat the purpose of arbitration and fundamental principles of the Act. The Supreme Court attempted to rectify this mistake in the case McDermott International vs. Burn Standard Co. Ltd. [3] where the Court, being mindful of the ONGC vs Saw Pipes case, ruled on the scope of Section 34 of the Act and held that:
The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc.

The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.

The Supreme Court further reiterated its stand on minimal judicial interference in arbitral proceedings in the case of Madhya Pradesh Housing Board vs Progressive Writers and Publishers [4]where the Court stated that It is fairly well settled and needs no restatement that the award of the arbitrator is ordinarily final and the courts hearing applications under Section 30 of the Act do not exercise any appellate jurisdiction. Reappraisal of evidence by the court is impermissible.

Another such progressive decision was given by the Supreme Court in the case of Associate Builders vs. Delhi Development Authority,[5] where the Supreme Court gave a narrow interpretation to the term 'public policy' and stated that a Court while applying the different heads of public policy to an arbitral award cannot act as a court of appeal and correct errors of facts.
 
Role played by the Legislature
The underlying issue with the interpretation of the term public policy was discussed in the 246th Law Commission Report,[6] wherein the Commission suggested restrictive scope of public policy in Section 34 and Section 48 of the Act. The Commission further stated in its report that:
Under the formulation of the Commission, an award can be set aside on public policy grounds only if it is opposed to the fundamental policy of Indian law or it is in conflict with most basic notions of morality or justice.

Subsequently, the Arbitration and Conciliation (Amendment) Act, 2015 [7] (2015 Amendment) was passed which narrowed the scope of the term 'public policy' and gave a definition to the said term by adding two explanations to Section 34(b) of the Act.

Explanation 1 states that an award is in conflict with the public policy of India if:
  1. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81 or
  2. it is in contravention with the fundamental policy of Indian law or
  3. it is in conflict with the most basic notions of morality or justice.

Explanation 2 was added to clearly define the role of the Courts when ruling on an application to set aside an arbitral award which is alleged to be in contravention of the public policy of India. The said proviso states that:
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.

Section 34(2-A) was also added by the said amendment which briefly states that the ground of 'patent illegality' can only be used in domestic arbitration  and when an award is challenged on the ground of patent illegality, the award cannot be merely set aside on the basis of erroneous application of law or re-appreciation of evidence.

The Parliament, through the Arbitration and Conciliation (Amendment) Act, 2019 [8] (2019 Amendment) replaced the words furnishes proof that with establishes on the basis of the record of the tribunal that in S. 34(2)(a) of the Act. This entails that a party can only rely on the record of the arbitral tribunal when an application is made under S. 34 of the Act and cannot produce any new evidence. 
 
Conclusion
In conclusion, the nature of the term public policy is such that it can never be precisely defined and will always be open for interpretation. However, the recent Amendments to the Act as well as the progressive judgements given by the Courts will certainly ensure uniform interpretation of the term 'public policy' and minimal judicial interference. Hopefully, this trend of narrow interpretation of the term 'public policy' will deter parties to invoke the ground of public policy to seek annulment of the award passed by the tribunal, thereby delaying the enforcement of the award.

End-Notes:
  1. https://main.sci.gov.in/jonew/judis/11863.pdf
  2. http://www.scconline.com/DocumentLink/iYHg1TVT
  3. https://main.sci.gov.in/jonew/judis/27762.pdf
  4. https://indiankanoon.org/doc/1134466/
  5. https://main.sci.gov.in/jonew/judis/42114.pdf
  6. https://lawcommissionofindia.nic.in/reports/report246.pdf
  7. https://lawmin.gov.in/sites/default/files/ArbitrationandConciliation.pdf
  8. https://egazette.nic.in/WriteReadData/2019/210414.pdf

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