The Arbitration and Conciliation Act, 1996, brings into scope the system of 'minimal court intervention' for dispute resolution. The intrusion of the Courts is extremely restricted in the dispute resolution process. The provision that provides for the grounds on which an Arbitral Award can be set aside through the Court is Section 34 of Arbitration and Conciliation Act.
DOCTRINE OF PUBLIC POLICY
Section 34(2)(b)(ii) states that an arbitral award may be set aside by the Court if the arbitral award is in conflict with the public policy of India. It is difficult to interpret the meaning of "public policy" as it has not been defined in the Act. However, 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.
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.
In Renusagar Power Electric Company v. General Electric Company1, a pre-1996 Act case involving enforcement of an ICC Award, the Hon'ble Supreme Court explained the expression Public Policy in section 7 (1) (b) (ii) of the 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:
- Fundamental Policy of Indian Law; or
- The interests of India; or
- Justice or morality.
In 2003, in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd2, the scope of interpretation of public policy was significantly widened. The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was deemed to be that of an appellate/revision court, thereby rendering it wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated in Renusagar Power Electric Company vs. General Electric Company 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 litigations under Section 34 as every award where there was an alleged error of application of statutory provisions could now be challenged.
In 2011, the Hon'ble Supreme Court in Phulchand Exports Ltd. Vs. OOO Patriot3 while deciding the meaning of 'public policy' under Section 48 of the 1996 Act, held that the test laid down in Saw Pipes must 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". However, the Supreme Court expounded no reasons for ignoring the distinction drawn between foreign awards and domestic awards in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd itself or for departing from Renusagar Power Electric Company vs. General Electric Company which although dealt with a separate statute, had in fact interpreted a provision identical in text and intention to that of Section 48.
The judgment of Hon'ble Supreme Court in 2011 in Phulchand Exports Ltd. Vs. OOO Patriot came to be overruled by the Supreme Court in 2013 in Shri Lal Mahal Ltd. Vs. Progetto Grano Spa4. The Hon'ble Supreme Court reinstated the position held in Renusagar Power Electric Company vs. General Electric Company with respect to enforcement of foreign awards and confirmed that the Renusagar test 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 in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd therefore, 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.
Further, in ONGC Ltd. Vs. Western Geco International Ltd.5, it was anticipated that the three judge bench, had the opportunity of reviewing the interpretation of 'public policy' under Section 34 of the 1996 Act might overrule the wide interpretation given by Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd, which was a decision of the division bench. However, the larger bench of the Supreme Court referred to the Saw Pipes ratio, and further added additional vague terminologies.
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.
The Court concluded that the decisions reached by the Arbitrators in the instant case, based on the expansive interpretation of the concept 'fundamental policy of India', 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.
The above-mentioned judgments have widened the scope of interpretation of the term 'public policy' in regard to the Arbitration and Conciliation Act, 1996. In 2015, Section 34 of the Act was amended with a view to limit the permissibility under 'Public policy'.
THE 246TH LAW COMMISSION REPORT
In February 2015, the Law Commission of India issued a response to these judgments, by issuing a Supplement to the Report about the Act that it had published in August 2014, known as the 246th Law Commission Report. The Law Commission emphasized that Section 34 sets out an exhaustive list of grounds to challenge an award, and these relate to the procedural issues only without going into substantive problems. The Law Commission criticized Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd for "opening the floodgates" and criticized ONGC vs Western Geco and Associate Builders v Delhi Development Authority6 for reinforcing the broad scope of public policy.
The Law Commission had previously stated that Section 34 must expressly state that an award cannot be set aside merely because the tribunal has made a mistake of law, or because the court takes a different view of the evidence. It has now suggested that section 34 also 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."
THE 2015 AMENDMENTS TO THE ACT
The Arbitration and Conciliation (Amendment) Act, 2015, made major changes to section 34. These changes had been suggested by the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of August 2014. There was also a Supplementary to the 246th Report of the Law Commission of India issued on Amendments to the Arbitration and Conciliation Act, 1996 of February 2015. These were the changes that focused on restricting Courts from interfering with arbitral awards on the ground of "public policy." Thus, the amendment was 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." Further, in Associate Builders v Delhi Development Authority7, the Hon'ble Supreme Court also clarified the scope of interpretation of most basic notions of morality and justice. Accordingly, an award could be set aside on the ground of justice when the "award" would be such that it would shock the conscience of the Court. Further, an award against morality was considered to be something that was against the mores of the day that would shock the conscience of the Court.
Therefore, this explanation significantly limited the scope of interpretation supplied in ONGC v Western GECO8. Due to the presence of this amendment, Courts could no longer 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 further curtails the scope of interpretation of the term "patently illegal" as propounded in ONGC v Saw Pipes9. 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, the Courts are no longer permitted to reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with it. It is further to understand that the amendment did not make any changes to the interpretation of "justice and morality" as was laid down in Associate Builders.
Since the amendment, the Courts have avoided giving a wide interpretation to "public policy" or with interfering with the merits of the case. In the November 2017, the Hon'ble Supreme Court in Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors10 observed that –
"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."
This view has also been taken in other judgments such as Sutlej Construction v. The Union Territory of Chandigarh11
These judgments are proof of the recent trend of interpretation of "public policy" which has been one where the Courts have refused to examine the arbitral awards on merits, thereby following the legislative intent "minimal intervention of the Courts in the arbitral process" as reflected by the changes brought by the Arbitration and Conciliation (Amendment) Act, 2015.
Footnotes
1. AIR 1994 SC 860
2. AIR 2003 SC 2629
3. (2011) 10 SCC 300
4. (2014) 2 SCC 433
5. 2014 (9) SCC 263
6. 2014 (4) ARBLR 307
7. 2014 (4) ARBLR 307
8. 2014 (9) SCC 263
9. AIR 2003 SC 2629
10. (2018) 1 SCC 656
11. (2017) 14 SCALE 240 (SC)
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