India: Interpretation Of "Public Policy" U/S 34 Of The Arbitration And Conciliation Act, 1996

Arbitration is an alternative system of dispute resolution. The system follows the mandate of "minimal court intervention" and Courts can interfere in the arbitral process only under the limited grounds provided under the Arbitration and Conciliation Act, 1996. One such provision, section 34 provides grounds on which an arbitral award can be set aside by the Court. Section 34 (2)(b)(ii) states that a Court may set aside an arbitral award if it finds that the award is in conflict with the public policy of India. Explanation 1 of S. 34(b) states three criteria on which an award could be overturned on the ground of public policy – when the award was induced by fraud, corruption or in violation S. 75 or S. 81; or it is against the fundamental policy of Indian Law; or it is in contrast with the most basic notions of morality and justice. The second and third grounds are vague and are susceptible to being interpreted too widely. Accordingly, a number of Supreme Court judgments had widened the scope of interpretation of public policy. In 2015, section 34 for amended in order to restrict the scope of"Public Policy."

Wide Interpretation in ONGC v. SAW PIPES

The Supreme Court, in the case of Renusagar Power Co. Ltd. v General Electric Co1, held that an award against public policy would be an award that was passed in contravention of "(i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality". In 2003, the scope of interpretation of public policy was significantly widened in ONGC Ltd v Saw Pipes Ltd.2 The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was similar to an appellate/revision court, therefore, it had wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated in Renusagar Power Co. Ltd; 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 litigation under S. 34 as every award where there was an alleged error of application statutory provisions could now be challenged.

Wide Interpretation in ONGC v. WESTERN GECO

Further expansion of the interpretation of "public policy" was given in the Apex Court Judgment of ONGC Ltd v Western GECO Ltd.3 Here, a three-judge bench of the Supreme Court cited the Saw Pipes Case, and noted that the judgment was silent on the meaning of "fundamental policy of Indian Law". The Court went on to interpret "fundamental policy of Indian Law" to comprise of three separate heads – "duty (of the tribunal) to adopt a judicial approach", "adhering to the principles of natural justice (by the tribunal)" and that the decision of the tribunal must not be "perverse or so irrational that no reasonable person would have arrived at the same" – thereby further expanding the scope of "Public Policy", as each of these heads could then be a subject of a challenge. In addition, the Court also held that the award of the arbitral tribunal resulted in a miscarriage of justice, the award could be set aside, or even modified to the extent the offending part was not severable.

Thus, not only did this judgment further leave it open to the Courts to examine arbitral awards based on merits, it also stated that under the head of "fundamental policy of India Law" it would be open to Courts to modify the arbitral award as well. This would thus defeat the purpose of arbitration and reduce trust in the arbitral process.

INTERPRETATION OF MORALITY AND JUSTICE IN ASSOCIATE BUILDERS V. DDA

Further, in Associate Builders v Delhi Development Authority4 the Supreme Court also clarified the scope of interpretation of most basic notions of morality and justice. Accordingly, an award could be set aside under 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.

CHANGES MADE BY THE 2015 AMENDMENT

The Arbitration and Conciliation (Amendment) Act, 2015 made major changes to section 34. The changes were suggested by the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of August 2014 and the Supplementary to the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of February 2015. These changes were aimed at restricting Courts from interfering with arbitral awards on the ground of "public policy." Accordingly, the amendment 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."

Thus, this explanation significantly curtailed the scope of interpretation supplied in ONGC v Western GECO. Because of this amendment, Courts would no longer be able to 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 also curtails the scope of interpretation of "patently illegal" as propounded in ONGC v Saw Pipes. 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, Courts can no longer reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with the same. It is interesting to note that the amendment did not make any changes to the interpretation of "justice and morality" as explained in Associate Builders.

Recent Trends in Interpretation of "Public Policy"

Since the amendment, Courts have refrained from giving a wide interpretation to "public policy" or interfering with the merits of the case. In the November2017 Supreme Court Judgment of Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors5 the Court observed –

"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."

A similar view was also taken in the judgment of Sutlej Construction v. The Union Territory of Chandigarh. 6

These judgments show that the recent trend of interpretation of "public policy" has been one where the Courts have refused to examine the arbitral awards on merits, thereby upholding the legislative mandate of "minimal intervention of the Courts in the arbitral process" as reflected by the changes brought by the Arbitration and d Conciliation (Amendment) Act, 2015.

Footnotes

1 [1994] AIR 860 (SC)

2 [2003] 5 SCC 705

3 [2015] AIR 363 (SC)

4 [2015] AIR 620 (SC)

5 [2017] 13 SCALE 91 (SC)

6 [2017] 14 SCALE 240 (SC); Judgment dated December 5th, 2017

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