India: Analyzing The Prospect Of Public Policy As A Defense For The Enforcement Of Arbitral Award In View Of The 2015 Amendment To The Arbitration And Conciliation Act

Last Updated: 15 May 2017
Article by Surbhi Darad

Most Read Contributor in India, December 2018

The prominent role of national courts in international arbitration has been recognized in almost every country, as because arbitrations are regulated pursuant to national laws and, accordingly, have a close relationship with the national courts where arbitral awards are to be enforced in accordance with the governing laws.

According to the new amendment, a cap has been introduced limiting the arena of Public policy as a defense in the attribute enforcement of award in International arbitration. This defense is incapable of being precisely determined and is entirely dependent upon the laws of individual states for its application. As a result, it varies from one state to another. An award passed in an international arbitration, can be put aside on the ground that it is against the public policy of India if, and only if, – (i) the award is vitiated by misrepresentation or corruption; (ii) it is in repudiation with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of profound quality, equity and justice. The present amendment has illuminated that the extra ground of "patently illegality" to challenge an award must be taken for domestic arbitrations and not international arbitrations.

Further, the amendment provides that the domestic awards can be challenged on the ground of patent illegality on the face of the award but the award shall not be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence. The source of the unlawfulness could arise by statute or by virtue of the principles of general law, in majority of cases the unlawfulness lies within the object that one or each parties have in mind or within the technique of performance. The intent behind the amendment was mad clear by the Commission1 as they believes that this will go a long way to assuage the fears of the judiciary as well as the other users of arbitration law who expect, and given the circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards.

Also the concept of public policy connoted matters which concerned public good and public interest. The Supreme Court in the case of ONGC v. SA W Pipes Ltd [(2003) 5 S.C.C. 705, 727] held that an award which violated the law could not be said to be in the public interest, because it was likely to adversely affect the administration of justice. The Indian Supreme Court held that, in addition to the three heads set forth in the Renusagar case [Renusagar Power Co Ltd v. General Electric CO, 1994 Supp (1) S.C.C. 644], held that an arbitral award may be set aside on grounds of public policy if it is patently illegal. It was pointed out that an award was patently illegal if the award was contrary to the substantive law, the Indian Arbitration Act and/or the terms of the contract. The effect of this was that these included any error of law committed by the arbitrators.

The stand of Indian judiciary in the case of Venture Global Engineering v Satyam Computer Services [(2008) S.C.A.L.E. 214 ]was a sort fall in accepting the international standards of arbitration concerning set of arbitration outside India and enforce challenged in India on the grounds of public policy.2 Although there is no provisions in Part 2 of the Indian Arbitration Act providing for challenge to a foreign arbitral award, a petition to set aside the same could lie under Part 1 of the Indian Arbitration Act. Court held that the losing party could bring an independent action in India to set aside a foreign arbitral award on the expanded grounds of public policy as set out in the case of Saw Pipes.

Rules that rest on the foundation of 'Public Policy,' not being rules that belong to the fastened Customary Law, are capable on correct occasion, of enlargement or modification relying upon circumstances. within the broader view, the doctrine of "Public Policy" is reminiscent of the "Policy of Law," no matter ends up in obstruction of justice or violation of a statute or is against the great morals once created the object of contract would be against 'Public Policy of India" and being void, wouldn't be prone to social control.3

In international arbitration, the New York Convention and the UNCITRAL Model law have incorporated provisions allowing a state to refuse to recognize or enforce foreign arbitral awards, if such awards are found contrary to the public policy. Article V(2) (b) of the New York convention, 1958 provides that "Recognition and enforcement of an arbitral award may be refused if the competent authority in the country, where enforcement is sought finds that the recognition and enforcement would be contrary to the public policy of the country". In India this provision was given legislative recognition in section 7 (1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act 1961 which provided that a foreign award may not be enforced if the enforcing country is satisfied that the enforcement of the award will be contrary to the public policy4. After Arbitration Act, 1996 being enacted Foreign Awards (Recognition and Enforcement) Act 1961 was repealed. The said defense was incorporated in section 34 (2)(b)(ii) in Part-I of the Act but the stand of public policy was highly being misused by the parties on the ground of procedural or substantive injustice.

Despite the potentially expansive and unruly character of "Public Policy", the courts in most of the developed jurisdictions have been very reluctant to invoke the public policy exception adopting a restrictive interpretation in the context of enforcement of arbitral award.

It's forever within the domain of the judiciary to interpret the general public policy at a given purpose of your time. By leveling "patent illegality" to an "error of law", the Court effectively made up the approach for losing parties within the arbitral method to possess their day in Indian courts on the premise of any alleged contraventions of Indian law, thereby resurrecting the possibly limitless review that the 1996 Act was designed to eliminate.5 A new and narrower definition of the term public policy is needed within the era of globalization to encourage the foreign investors to hold out healthy commercial relationships in India. A globally compatible definition of 'public policy' ought to be adopted or the court ought to give up the public policy to therefore extent so on ensure the structure of International industrial Arbitration.

Public policy could be used to catch procedural faults which were not covered by the other grounds for set aside. Where parties to the contract are choosing the mode of arbitration for solving the legal tussle, it shows the intention to avoid litigation procedure. A view of arbitral awards having a distinct existence separate from domestic law has a realist slant, as the rights of the parties are not technically determined by the law of the seat but may vary considerably in relation to the same dispute depending on the national system ruling on an award.

Also countries interested to invest in India, will rescue themselves from doing the same seeing the prevailing circumstances of Arbitration as no end result is to be attained with the failure of non enforcement of the award, cautioning an alarming issued for using and interpretation of the new amended law.

It may thus be seen that 'public policy' has had varied interpretations across the globe. Courts have interpreted it keeping in mind their own laws and morals. Almost common to all the courts has been the fact that 'public policy' has been narrowly constructed and very limited options are available for widening its scope.

Footnotes

1.Law Commission of India, 246th report on Amendments to the Arbitration and Conciliation Act 1996, August 2014.

2 F Nariman, 'India and International Arbitration', (2010) 41 The Geo. Wash. Int'l L. Rev. 367 at 376

3 Justice D R Dhanuka, "Public Policy" Plea for Consideration by Larger Bench of Supreme Court' (2003) XLVIII Indian Council of Arbitration Quarterly 23.

4 O P Malhotra and Indu Malhotra, Law and Practice of Indian Arbitration and Conciliation (LexisNexis, 2006) 1175.

5 Challenge to Arbitral Awards on Public Policy: A Comment on ONGC v. Saw Pipes Ltd., 52(3) Arb. LoR. 1 (2003)

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