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Case Comment On Landmark Judgements On Public Policy As A Ground For Setting Aside An Arbitral Award

Arbitration is a type of out of court settlement in which parties agree to submit the dispute to one or more arbitrators who make a binding decision on the dispute. Arbitration has been defined in Section 2 of Arbitration and Conciliation Act, 1996.[1]

An Arbitration award or Arbitral award refers to the decision made in the arbitration proceedings by the Arbitration Tribunal. An Arbitration award is considered to be analogous to the judgement of the court of law. The Arbitration and Conciliation Act does not define Arbitral award, it just prescribes what is included in Arbitral award and that is interim award.[2]
Section 34(2)(b)(ii)[3] of the Arbitration and Conciliation Act, 1996 provides that arbitral award can be set aside if the court finds that the Arbitral Award is against the public policy of India.

The Legislation does not define the term Public policy, so there has been various cases where the Judiciary and Arbitration Tribunal has played their role in defining public policy and its scope. Over the years the term has been evolved and many things have been included in the term "public policy".

There are many landmark judgments that define what all is included in public policy and will be considered while setting aside the arbitral award if it is against the public policy of India.
5 landmark judgements over the decades in relation to public policy are:
  1. Renusagar Power Co. Ltd vs General Electric Co. [4]
  2. Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd. [5]
  3. Shri Lal Mahal Ltd. v. Progetto Grano Spa[6]
  4. Oil & Natural Gas Corporation Ltd. Vs Western Geco International Ltd.[7]
  5. Associate Builders v. Delhi Development Authority[8]

Renusagar Power Co. Ltd Vs General Electric Co.
Citation: 1994 Air 860, 1994 Scc Supl. (1) 644 - Composition Of Bench: Agrawal, S.C., Venkatachalliah, M.N., Anand, A.S.
Applicable Laws: Section 5, Section 7(1)(B)(Ii) Of The Foreign Awards (Recognition And Enforcement) Act, 1961.

Issue:
  • What Is The Meaning Of Public Policy And What Are Its Components?

Summary Of The Facts:
Renusagar Power Co. Ltd., the appellant and General Electric Co. the respondent made an agreement in which General Electric would supply Renusagar with equipment and power services for the construction of a thermal power plant at Renukoot to be known as the Renusagar Power Station.

The contract between the parties called for arbitration to take place in Paris, under the auspices of the International Chamber of Commerce ("ICC"). Also, the parties agreed to be governed by the rights and obligations of the State of New York, U.S.A.

Respondent's adherence to the time schedule for the delivery of equipment was a little behind schedule.

PROCEDURAL HISTORY:
The parties appeared before the Arbitral Tribunal in Paris and Renusagar was ordered to pay General Electric a total of US $ 12,215,622.14 by the Arbitral Tribunal in Paris.
Under Section 5 of the Foreign Awards (Recognition and Enforcement Act) 1961[9], General Electric filed a lawsuit in the Bombay High Court for the enforcement of the award. This was objected by Renusagar inter alia, that the enforcement of the award as well as the award itself, is against the public policy.

Renusagar's objections were dismissed by the Single Judge of the High Court, who ruled that the award was enforceable and that the decree was drawn in accordance with it. Though rejecting Renusagar's appeal, the division bench issued Renusagar a certificate to appeal to the Supreme Court. Renusagar filed an appeal with the Supreme Court, arguing that enforcement of award is against the public policy and the words "public policy" would include the public policy of the State of New York.

DECISION:
  • The Court dismissed the appeal and heldthat the term "public policy" in Section 7(1)(b)(ii)[10][11], refers to the doctrine of public policy as implemented by Indian courts.
  • The court stated that by using only the terms "public policy" and not "public policy of India," parliament did not wish to depart from the provisions of the New York Convention found in Article V(2)(b)[12][13], which included the words "public policy of that country," meaning public policy of the country where recognition and compliance is sought.
  • The court also elaborated on the principle of public policy, stating that enforcement of a foreign award would be rejected on the basis 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



Oil & Natural Gas Corporation Ltd Vs Saw Pipes Ltd [14]
Citation: (2003) 5 Scc 705 - Composition Of Bench: M.B. Shah & Arun Kumar

Applicable Laws:
Section 34(2)(B)(Ii),Section 28(3)[15], Section 48(2)(B)(Ii) [16], Section 30, Section 31 Of Arbitration And Conciliation Act, 1996

Issue:
  • Whether The Court Has Power Under Section 34[17] To Set Aside The Arbitral Award Where There Were Violations Of Section 28 To 31 Of The Act[18].
Summary Of Facts:
Oil and Natural Gas Corporation Ltd. (ONGC), issued a tender for supply of casing pipes. The SAW Pipes Ltd. a company engaged in the supply of equipment responded to the tender. It was decided that on or before 14.11.1996 the goods will be delivered.

The contract deed contained that in case of failure in the supply of the goods the appellant i.e., ONGC, without prejudice to any other right or remedy, entitled to recover from the respondent liquidated damages as agreed, a sum equivalent to 1% of the contract price of the whole unit per week for such delay or part thereof subject to a ceiling of 10% from the respondent i.e., Saw Pipes.Both the parties agreed to this pre-estimate It was also agreed that the payment of the damages will be from the bill for payment of the cost of the material which is sent by the respondent.

During September and October of the year 1996, in Europe, the mill workers went on strike which affected Italy from where the respondent supplied the requisite raw materials so they failed to deliver the materials on time. Respondent asked appellant for extension of 45 days from the agreed date of execution of order. The appellant granted the extension but put a condition that the amount equal to the liquidated damages will be recovered from the Saw Pipes, the respondent.

The goods were delivered to the appellant and the appellant made the payment but retained an amount of Rs.15,75,559 as liquidated damages.This deduction of the amount of payment became the reason of dispute.

PROCEDURAL HISTORY:
The Saw Pipes (respondent in the present case) initially moved to Arbitral Tribunal, which ruled that ONGC (appellant in the present case) should pay the deduced amount from payment to Saw Pipes as it has wrongly deduced it. Tribunal held this on the basis that ONGC failed to present the evidence of loss suffered by it due to delay in supply of the goods when asked by the Tribunal.

Then ONGC moved to High Court appealing against the order of the Tribunal but High Court dismissed the appeal. Then ONGC moved to Supreme Court where their appeal was upheld.

DECISION:
The Supreme court held that the Tribunal has violated section 28 to 31 of the Arbitration and conciliation Act,1996 which provide the procedure to be followed in the proceeding. Section 28(3) provides, "In all the cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction"[19]. The court held that Tribunal has clearly violated Section 28(3) as it was mentioned in the contract about deducing amount of payment to which both the parties agreed.

The Court said,
"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 good6 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 decision/ award / judgment is likely to adversely affect the administration of justice."[20]

The Court held that in case of an application made under section 34 of the Arbitration and Conciliation Act,1996 to set aside an award, the Court play a similar role to an appellate/revision court, therefore, the Court has wide powers. The Court also added a new ground patent illegality in addition to the grounds for setting aside an arbitral award listed in Renusagar Power Co. Ltd vs General Electric Co.

Finally, the court said:
The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:

  1. fundamental policy of Indian law;
  2. the interest of India; or
  3. justice or morality, or
  4. if it is patently illegal".[21]
In Phulchand Exports Ltd. v. O.O.O. Patriot [22], The Supreme Court upheld the decision made in ONGC vs Saw Pipes and relied on the additional ground of 'patent illegality' under 'public policy'.

Shri Lal Mahal Vs Progetto Grano Spa [23]
Citation: (2014) 2 Scc 433 - Comosition Of Bench: R.M. Lodha, Madan B. Lokur, Kurian Joseph

Applicable Laws:
Section 34, Section 48(2)(b)(ii), Section 7(1)(b)(ii)[24][25]

Issues:
  1. Whether the enforcement of the awards could be withheld compliance on the grounds claimed by the Appellant.
  2. Whether the word "public policy" has the same meaning and purpose under sections 34(2)(b)(ii) and 48(2)(b)(ii) of the Act.[26]

Summary Of The Facts:
A contract to supply wheat was signed between an Indian supplier and an Italian buyer. To prove that the wheat supplied was of the required quality, the seller used a certificate of quality issued by a certifying agency at the port of loading in India. The buyer questioned the validity of the quality certificate issued at the port of loading and claimed, based on numerous other reports, that the wheat quality was below that agreed upon in the contract.

Procedural History:
An arbitral tribunal was established under the auspices of the Grain and Feed Trade Association (GAFTA), which is based in London, to hear the case. The arbitral tribunal ruled in the buyer's favour and awarded damages to the seller. The seller unsuccessfully appealed the tribunal's decision to the GAFTA Board of Appeal, as provided for in the GAFTA Arbitration Rules.

The seller's application to the High Court of Justice in London to have the award set aside under section 68 of the English Arbitration Act 1996 was also denied.

The Respondent then tried to have the awards implemented in India in compliance with the Act's provisions, to which the Appellant objected, arguing that the award was against India's public policy and that implementation of such awards in India should be denied.

The Appellant argued that the award was against Indian public policy because it went against the express terms of the parties' contract. The concerns concerned the expert's certification of the wheat's consistency, as well as whether that certification was in the form decided upon by the parties.

The appellant (seller) moved to The High Court which declined to interfere with the award, stating that in enforcement proceedings, it was not expected to re-determine factual issues.
Then the seller appealed against High Court's decision to the Supreme Court of India and quoted Phulchand case[27] to argue that even in enforcement proceedings, the court had the authority to consider the merits of a case where the award was patently illegal.

Decision:
The Supreme Court sought to restrict and limit the extent of judicial interference in enforcement of Foreign awards. The court held that during setting aside proceedings, the arbitral award is not yet final and executable and this is in opposition to a challenge during enforcement where the award is final and binding.

On this basis, the court declined to extend the concept of the word "public policy" that was used in ONGC v Saw Pipes in the sense of setting aside proceedings.

Court held that the guidelines laid down in Renusagar case[28] with reference to Section 7(1)(b)(ii) of the Foreign Awards Act for setting aside a foreign award would similarly extend to the framework of Section 48(2)(b), and therefore the enforcement of a foreign award will be rejected under Section 48(2)(b) solely on the basis of the three categories outlined in the Renusagar case:
  1. Fundamental policy of Indian law;
  2. The interests of India; or
  3. Justice and morality.
The court, in particular, specifically refused to accept "patent illegality" as a ground of public policy for setting aside the arbitral award.

Oil And Natural Gas Corporation Ltd Vs Western Geco International Ltd[29].
Citation: (2014) 9 Scc 263 - Composition Of Bench: T.S. Thakur, C. Nagappan, Adarsh Kumar Goel
Applicable Laws:
Section 34 of Arbitration and Conciliation Act, 1996.

Issues:
  1. Whether Court has power under Section 34[30] to overturn the award given by Arbitration Tribunal.
  2. What would constitute the 'Fundamental policy of Indian Law'
Summary Of The Facts:
The Respondent, Western GecoInternational limited ('GECO'), was employed by the Oil and Natural Gas Corporation ('ONGC') to acquire U.S. root "Geophone" Hydrophones ('US Hydrophones'). As a product of post-9/11 legislative initiatives in the United States, GECO told ONGC that it would be difficult to fulfil the required U.S. demand. Hydrophones are underwater microphones. It threatened to use the force majeure provision to protect itself from liability.

GECO's assertion of force majeure was refuted by ONGC, which requested that the US Hydrophones be delivered immediately. GECO offered compatible alternatives to the US origin Hydrophones when they were unable to obtain them.

GECO communicated to ONGC on October 16, 2001 that it would no longer be able to use hydrophones manufactured in the United States. In March 2002, ONGC conditionally approved GECO's bid, on the condition that the liquidated damages will be deducted. In this situation, it was the deductions that contributed to the arbitration.

Procedural History:
The GECO Ltd. Approached the Arbitral Tribunal which ruled that ONGC could not subtract the damages in its entirety. In the Bombay High Court, ONGC filed a motion to cancel the proceedings. The award of pendente lite and future interest was found null and void by the High Court. The Bombay High Court, on the other hand, partly upheld the award.

The award was challenged in the Supreme Court by ONGC. GECO argued that there was no clause in Section 34 that allowed the court to overturn the award. Furthermore, it argued that the Court could not hear an appeal on the substance of a Tribunal award.

Decision:
The Court noted that the Saw Pipes[31] decision contained 'Fundamental Policy of India Law' which was not elaborated or explained by the court then so in this case the Court laid down what fundamental policy meant. Court said it included [32]:
  1. Judicial Approach:
    When making any decision that affects citizens' rights or has civil implications, any court, tribunal, or other body must use its judicial mind and refrain from acting unilaterally or whimsically.
     
  2. Natural Justice Principles:
    When deciding the rights of individuals, all courts and quasi-judicial bodies shall adhere to these principles. The parties to the conflict should be granted a fair opportunity to be heard.
     
  3. Wednesbury's theory of reasonableness:
    It states that if a decision by a court of law or a tribunal is so unfair that it is beyond the understanding of any reasonable individual, it will not be upheld in a court of law.
As a result, the Court held that if the arbitrators failed to make an inference that should have been made or made a prima facie incorrect inference, "the adjudication, even though made by an arbitral tribunal that enjoys considerable discretion and play at the joints in making awards, would be subject to challenge and may be set aside or modified."[33]Using this theory, the court denied GECO's contention of the Court's non-interference with the award and overturned the arbitral award, and ONGC was allowed to deduct liquidated damages.

Associate Builders Vs Delhi Delvelopment Authority[34]
Citation: [2015] Air 620 (Sc) - Composition Of Bench: Ranjan Gogoi, Rohinton Fali Nariman

Applicable Laws:
Section 34(2)(b)(ii), Section 37 of the Arbitration and Conciliation Act,1996.

Issue:
  • What is the scope of public policy for setting aside the arbitral award under Section 34(2)(b)(ii) of the Act[35]

Summary Of The Facts:
The Delhi Development Authority ("DDA/Respondent") awarded Associate Builder (Appellant) a construction contract for 168 middle-income group houses and 56 lower-income group houses in Trilok Puri in the trans-Yamuna district. The contract was expected to be completed in nine months and cost INR 87,66,678. However, it took 34 months for the work to be done.

The Appellant claimed that the Respondent was to blame for the delay and filed fifteen claims as a result.

Procedural History:
The Delhi High Court appointed Shri K.D. Bali as the sole arbitrator to resolve the conflict. The Arbitrator upheld four of the Appellant's charges and reduced two others on the grounds that DDA was to blame for the contract's late execution. Following that, DDA filed an application under Section 34 of the AAC Act to the Delhi High Court before a single judge which got dismissed.

The respondent filed a new appeal under Section 37[36] of the AAC Actto the Delhi High Court's Division Bench. The Division Bench considered the arbitral award to be erroneous and dismissed the appellant's claims. The claimant was dissatisfied with the impugned award and filed a special leave petition with the Supreme Court.

Decision:
The Court held that any arbitral award must be fair, rational, and impartial in order for it to be upheld by the courts. The Supreme Court laid down the grounds of public policy as follows:
The 'fundamental policy of India' would include:
  1. Disregarding the orders of Superior courts
  2. Judicial approach
  3. Natural justice principles
  4. Decision of arbitrator cannot be irrational to the extent that no rational person can reach a similar conclusion.
The Supreme Court described "Indian interest" as everything that has to do with India's place in the world community and its ties with other countries. Notably, the Supreme Court did not elaborate on this ground because it is a fluid principle that evolves on a case-by-case basis.

The Court explained the nature of understanding of morality and justice's most fundamental concepts. According to the Supreme Court, the phrase "award is against justice and morality" encompasses the following:
  1. In terms of justice, the award does not cause the court's conscience to be shocked.
  2. In terms of morality, there can be no common and standard principle.

2015 Amendment in the Arbitration and Conciliation Act, 1996
The 2015 amendment explained that an award can only be set aside on the grounds that it is against India's public policy if and only if the award:
  1. is tainted by fraud or corruption;
  2. is in violation to the fundamental policy of Indian law;
  3. is in conflict with basic notions of morality and justice.
It was explained that the basis of "patently illegality" cannot be used to appeal an award in international arbitrations, but can be used in domestic arbitrations.

Recent case laws in relation to Public Policy as a ground for setting aside an Arbitral Award:
  1. In Venture Global Engineering LLC and Ors. v. Tech Mahindra Ltd. and Ors[37]., The Court interpreted that violation of the provision of the Foreign Exchange Management Act (FEMA) will be considered as patent illegality, and therefore a breach of public policy, based on the Associate Builders case[38].
  2. In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India[39], The Supreme Court stated that the interpretation of the word "public policy" has been narrowed down after the Act's 2015 amendments. The Court explained that no court would interfere with an arbitral award on the grounds that in its opinion the justice has not prevailed. This will be a foray into the merits of the case, which is incompatible with the spirit of Section 34 of the Act[40]
  3. In National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S. A[41]., The Supreme Court held that the protection of 'public policy' under Section 7(1)(b)(ii) of the Foreign Awards Act was narrowly read. Though overturning the award, the Court used the Renusagar guidelines to broaden the concept of "public policy."
  4. In Government of India v. Vedanta Limited[42], the Court relied on the Renusagar case's understanding of public policy, holding that "public policy" included the fundamental policy, India's interests, justice, and morality. The Court also stated that the tribunal's incorrect interpretation of a contractual clause cannot be used to challenge the award on its merits.
  5. In Steel Authority of India v. Primetals Technologies India Pvt. Ltd[43]., The Delhi High Court ruled that the arbitrator should be solely responsible for construing and interpreting the terms of a contract between two parties, and that courts should not intervene unless it is in the public interest. While applying the 'public policy' test to an award, the courts should not serve as a court of appeals.

End-Notes:
  1. Arbitration and Conciliation Act 1996, Section 2(a): "arbitration" means any arbitration whether or not administered by permanent arbitral institution;
  2. Arbitration and Conciliation Act 1996, Section 2 (c): "arbitral award" includes interim award;
  3. Arbitration and Conciliation Act 1996, Section 34 (2): An arbitral award may be set aside by the Court only if:
    1. *
    2. The Court finds that:
      1. *
      2. the arbitral award is in conflict with the public policy of India.
  4. 1994 AIR 860, 1994 SCC Supl. (1) 644
  5. (2003) 5 SCC 705.
  6. (2014) 2 SCC 433
  7. (2014) 9 SCC 263
  8. [2015] AIR 620 (SC)
  9. Where the court is satisfied that the foreign award is enforceable under this Act, the court shall order the award to be filed and shall proceed to pronounce judgment according to the award.
  10. The Foreign Award Act, 1961.
  11. Section 7:
    1. Conditions for enforcement of foreign awards:
      1. if the court dealing with the case is satisfied that:
        1. *
        2. the enforcement of the award will be contrary to public policy.
  12. Article V (2)(b) of the New York Convention enables the courts of a Contracting State to refuse recognition and enforcement of an award when they find that such recognition or enforcement would be contrary to its public policy.
  13. https://newyorkconvention1958.org/index.php?lvl=cmspage&pageid=10&menu=626&opac_view=-1#:~:text=INTRODUCTION-,1.,to%20the%20New%20York%20Convention.
  14. https://indiankanoon.org/doc/919241/
  15. In all the cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction
  16. the enforcement of the award would be contrary to the public policy of India. Explanation. -Without prejudice to the generality of clause (b) of this section, it is -hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption
  17. Arbitration and Conciliation Act, 1996
  18. Arbitration and Conciliation Act, 1996.
  19. https://indiankanoon.org/doc/65067/
  20. https://www.mondaq.com/india/arbitration-dispute-resolution/669348/interpretation-of-public-policy-us-34-of-the-arbitration-and-conciliation-act-1996
  21. https://indiankanoon.org/doc/919241/
  22. (2011) 10 SCC 300
  23. https://indiankanoon.org/doc/15591279/
  24. The Foreign Award Act, 1961.
  25. Section 7:
    1. *
    2. Conditions for enforcement of foreign awards.
      1. *
      2. if the court dealing with the case is satisfied that:
        1. the enforcement of the award will be contrary to public policy.
  26. Arbitration and Conciliation Act, 1996
  27. Phulchand Exports Ltd. v. O.O.O. Patriot, (2011) 10 SCC 300
  28. Renusagar Power Co. Ltd vs General Electric Co., 1994 AIR 860, 1994 SCC Supl. (1) 644
  29. https://indiankanoon.org/doc/136518863/
  30. Arbitration and Conciliation Act, 1996.
  31. Oil & Natural Gas Corporation Ltd Vs Saw Pipes Ltd, (2003) 5 SCC 705
  32. https://www.barandbench.com/columns/public-policy-india-arbitration-un-blinkering-unruly-horse
  33. https://indiankanoon.org/doc/136518863/, (para 30)
  34. https://indiankanoon.org/doc/31621011/
  35. Arbitration and Conciliation Act, 1996.
  36. An appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:-
    (b) setting aside or refusing to set aside an arbitral award under section 34
  37. https://indiankanoon.org/doc/82725479/
  38. Associate Builders Vs Delhi Delvelopment Authority, [2015] AIR 620 (SC)
  39. https://indiankanoon.org/doc/95111828/
  40. Arbitration and Conciliation Act, 1996.
  41. https://indiankanoon.org/doc/155215460/
  42. https://indiankanoon.org/doc/28091559/
  43. https://indiankanoon.org/doc/44552128/

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