India: Public Policy In Arbitration Gets New Wings: Review Of Indian Supreme Court Decisions In 2014

Last Updated: 21 January 2015
Article by Economic Laws Practice

Introduction

Justice Burroughs once described 'public policy' as an unruly horse; when once you get astride it you never know where it will carry you.1 The Indian position on 'public policy' as a ground for setting aside an arbitral award befits this description.

The scope and width of the concept of 'public policy' as a ground for setting aside an arbitral award has been the source of much debate across all jurisdictions, but India has been perceived to be a forerunner in stirring the debate. The two landmark decisions in Saw Pipes2 and Phulchand3(which distinguished Renusagar)4 caused significant uproar in India and the international arbitral community. Perhaps as a result of the severe criticism received, there was an attempt by the Indian Courts in subsequent decisions to water down the effects of these decisions.5 Just when India was beginning to receive some praise for having 'tamed the unruly horse'6 the recent cases in Associate Builders7andWestern Geco8have breathed new life in the debate.

In this article, we will analyse these decisions and their impact on both domestic and foreign awards.

Background to the Indian Position

Analysing the trail of decisions on 'public policy' (as a ground for refusal of enforcement of foreign awards and challenging an award in India) may be a good starting point to this discussion.

In 1993, the Supreme Court in Renusagar was faced with the interpretation of the expression public policy under Section 7(1) of the Foreign Awards (Recognition and Enforcement) Act, 1961 ("Foreign Awards Act") which dealt with grounds for refusal of enforcement of foreign awards. This Act has since been repealed and Section 48 of the Arbitration and Conciliation Act, 1996 ("1996 Act") now governs the field. Notably however, Section 7 of the Foreign Awards Act and Section 48 of the 1996 Act are identical and intend to give effect to Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 ("the New York Convention"). The Court held, "[t]here is nothing to indicate that the expression "public policy" in Art. V(2)(b) of the New York Convention and S. 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense" and that "[t]his would imply that the defence of public policy which is permissible u/s. 7(1)(b)(ii) should be construed narrowly." TheCourt construed the expression 'public policy' to mean: (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. The Court categorically held that contravention of law alone will not attract the bar of public policy and something more than contravention of law is required.

In 2003 however, the Supreme Court in Saw Pipes drew a distinction between the scope of enquiry in refusing enforcement of a foreign award and the scope of enquiry in setting aside an award. The Court held that in cases where the award is challenged "there is no necessity of giving a narrower meaning to the term 'public policy of India. On the contrary, a wider meaning is required to be given so that, a patently illegal award passed by the Arbitral Tribunal could be set aside". By this decision, the expression public policy under Section 34 of the 1996 Act (pertaining to challenge of awards) now included "patent illegality", in addition to the tests laid down in Renusagar. An award could be set aside if it was contrary to the laws of India or contrary to the express provisions of the contract between the parties. In effect thereby, Saw Pipes took a significant departure from Renusagar at least as far as challenge to awards was concerned. However, the Saw Pipes decision categorically provided that the 'patent illegality' test would be applicable only to purely domestic awards (involving only Indian parties), as Indian law applied to purely domestic arbitration by default.

In 2011, the Supreme Court in Phulchand 9while 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". Notably however, the Supreme Court expounded no reasons for ignoring the distinction drawn between foreign awards and domestic awards in Saw Pipes itself or for departing from Renusagar which although dealt with a separate statute, had in fact interpreted a provision identical in text and intention to that of Section 48.

Phulchand came to be overruled by the Supreme Court in 2013 in Lal Mahal.10 The Court reinstated the Renusagar position with respect to enforcement of foreign awards and confirmed that the Rensuagar 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 Saw Pipes therefore ceased to apply to Section 48and the possibility of an attack to a foreign award in India at the stage of enforcement was limited.

In 2014, the two Supreme Court decisions, Associate Builders and Western Geco, have once again ruffled some feathers with respect to the meaning and scope of the term 'public policy' under Section 34 of the Act.

Western Geco: Shot in the arm for the Unruly Horse

It was widely anticipated that the three-judge bench hearing this case, which had the opportunity of reviewing the interpretation of 'public policy' under S. 34 of the 1996 Act might overrule the wide interpretation given by Saw Pipes, which was a decision of the division bench. However, the larger bench of the Supreme Court referred to the Saw Pipes ratio, and went a few steps further to add additional vague terminologies – a baggage which can potentially weigh down much of the progress made since Saw Pipes.

In order to appreciate the decision, a brief factual background would be helpful. In this case, the Appellant (ONGC) invited offers for the upgrade of a seismic survey vessel for which one of the main items required were 'steamers' fitted with 'hydrophones'. Western Geco (the Respondent) submitted a bid offering to supply steamers with hydrophones of U.S. origin. The Respondent did not deliver the vessel back to the Appellant by the due date and, notably, made an application for obtaining a licence from the U.S authorities for the sale of US origin hydrophones only after the due date. Due to certain problems with obtaining licence from U.S. authorities for the sale of the hydrophones, the Respondent intimated to the Appellant that it would not be able to supply U.S. origin hydrophones and proposed to replace the same with Canadian hydrophones a few months later. After several months of communication between both parties, the Appellant acceded to the replacement on the condition that the Appellant would deduct liquidated damages and damages for excess engagement of the vessel. The Appellant accordingly made deductions from the Respondent's invoice on account of liquidated damages which the Respondent contended were inflated.

The arbitrator inter alia held that deductions made by the Appellant for delay after the intimation that Respondent was not seeking to pursue the request for licence before the U.S. authorities was unjustified. Aggrieved by the award, the Appellant challenged the award under section 34 of the 1996 Act before the Bombay High Court, which was rejected. The Appellant then preferred an appeal before the Supreme Court.

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.

On such expansive interpretation of the concept 'fundamental policy of India', the Court concluded that in the instant case the decision reached by the arbitrators 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.

Associate Builders: Further Attempt at Defining the Elusive Concept

The latest decision concerning public policy, rendered end of November, is the Associate Builders case by a division bench of the Apex Court. While on facts, the court reinstated the award set-aside by the lower court, the probably unnecessary and elaborate exposition of the law in this case has added further fuel to fire in what now seems to be an ever expanding scope of the public policy ground in India.

In this case, the Appellant entered into a works contract with the Respondent for construction of a residential colony. There was a delay in the completion of the project which the Appellant attributed to the Respondent. The arbitrator inter alia held that the entire delay of 25 months was attributable to the Respondent. Aggrieved by the decision, the Respondent challenged the award before a Single Judge of the High Court of Delhi where the application was dismissed. An appeal was preferred to the Division Bench where the judgment of the Single Bench was set aside. The Appellants then came before the Supreme Court in appeal against the order of the Division Bench.

The Court in Associate Builders not only referred to Saw Pipes and Renusagar, but also relied on the Western Geco decision. It further elaborated on the concept of fundamental policy of Indian law, interest of India, justice, morality and patent illegality as held in several prior decisions and in particular further expounded the position of law laid down in Western Geco. In the attempt to do a comprehensive review and explanation of the law, the court has made many remarks that are potentially dangerous precedent, bound to be cited repeatedly by parties to challenge awards in future. As a result, Associate Builder has accelerated the expansion of challenge jurisdiction, despite having upheld the award on facts.

The Court however, also stated that "while applying the public policy test to an arbitration award, it [the court] does not act as a court of appeal and consequently errors of fact cannot be corrected" and that "the arbitrator is the ultimate master of the quantity and quality of evidence relied upon when he delivers the arbitral award." Whilst on one hand, the Apex Court held that the Division Bench had exceeded its jurisdiction by interfering with a possible view of the Arbitrator; on facts the Apex Court upheld the award based on its own assessment that the arbitrator's views were indeed correct.

Impact on Foreign Awards

The Saw Pipes decision has been widely panned in domestic and international arbitration circles for opening the door for courts to review an arbitral award on merits. By overruling Phulchand, the Supreme Court in Lal Mahal successfully saved at least the foreign awards from such scrutiny at the stage of enforcement by clarifying that the 'patent illegality' test of Saw Pipes was inapplicable. Therefore, the storm surrounding the concept of public policy which centered mostly on the concept of patent illegality came to be restricted only to domestic arbitrations.

However, Western Geco and Associate Builders have,by expanding the meaning of "fundamental policy of India", given recalcitrant litigants a fresh impetus to delay enforcement of foreign awards. By introducing judicial principles applicable in the sphere of public law into the concept of 'fundamental policy of Indian law', Western Geco has created more opportunities for parties to resist enforcement of an award under the ambit of public policy. This is further aggravated by the decision in Associate Builders where the Court has not only affirmed such an expansive interpretation to the words 'fundamental policy of India' but also elaborated and expanded the concepts of 'justice', 'interest of India' and 'morality'.

Although Wester Geco and Associate Builders are decisions under Section 34 of the 1996 Act (challenge proceeding), it would appear that they could apply with equal force to cases under Section 48 of the 1996 Act (enforcement of foreign award) which are now governed by the Renusagar test which inter alia includes 'fundamental policy of India'.

Impact on Domestic Awards

The Parliament incorporated Section 34 of the Model Law without any changes into the 1996 Act. Unlike other statutes from several different jurisdictions which subject domestic awards to a different rigour of scrutiny from that of foreign awards, the 1996 Act makes no such distinction. Yet, by judicial pronouncements, and in particular, the Saw Pipes 'patent illegality' test, domestic awards came to be subject to a far greater review than was perhaps contemplated by the legislature.

With Western Geco having further expanded the test of 'fundamental policy of India' the problem is somewhat compounded. In an attempt to give content to the otherwise elusive and vague concept of 'fundamental policy of Indian law', the Supreme Court has yet again released the genie from the bottle. Western Geco is further damaging as a precedent since the court set aside the award on its own interpretation of the facts in issue. On the other hand in Associate Builders, although the Court acknowledged that examination of the facts is off-limits in a challenge proceeding, the Court saved the award on its de novo determination that the award was correct - a determination which the Court made based on its own assessment of the facts and arguments.

Western Geco and Associate Builders have opened the floodgates for further review of domestic arbitral awards on merits by introducing well-established judicial principles having a long line of precedents in common law, into the concept of 'fundamental policy of Indian law'. In particular, the two recent decisions highlight the unpredictability in the application of the concept of public policy by Indian Courts – a concept that was only beginning to be reined in.

Conclusion

The Model Law travaux preparatoires show the fears that UK and India shared in adopting the expression 'public policy', except in India's case they have come true. The unruly horse has indeed brought Indian Courts to unknown destinations. Since experience shows that in order to do justice, courts will widen this principle so as to reach unto an award it considers unjust, it is increasingly clear that nothing short of legislative intervention will stall this process. Just about the time of going to print, media has reported that the Government of India has decided to promulgate an ordinance to amend the Indian Act. It will be interesting to see if the ordinance addresses this concern.

Footnotes

1 Phulchand Exports Limited v. OOO Patriot (2011) 10 SCC 300.

2 Shri Lal Mahal Ltd. v. Progetto Grano Spa 2013 (4) CTC 636

3 Richardson v. Mellish, 2 Bing.229 (1824) at 303

4 Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705

5 Phulchand Exports Limited v OOO Patriot (2011) 10 SCC 300

6 Renusagar Power Co. Ltd. v. General Electric Co 1994 Supp (1) SCC 644

7 See, e.g. Penn Racquet Sports v. Mayor International Ltd. 2011 (177) DLT 474; Shri Lal Mahal Ltd. v. Progetto Grano Spa 2013 (4) CTC 636

8 The Public Policy Exception – Is the Unruly Horse Being Tamed in the Most Unlikely of Places? By Mathew Gearing (http://kluwerarbitrationblog.com/blog/2011/03/17/the-public-policy-exception-%E2%80%93-is-the-unruly-horse-being-tamed-in-the-most-unlikely-of-places-4/)

9 Associate Builders v. Delhi Development Authority, 2014 SCC OnLine SC 937

10 Oil and Natural Gas Corporation Ltd. v. Western Geco International Ltd. (2014) 9 SCC 263

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