The Arbitration Act was enacted to make the provisions for an arbitral procedure which is fair, efficient, and capable of meeting the needs of the specific arbitration, to minimize the supervisory role of courts in the arbitral process and to permit an arbitral tribunal to use mediation, conciliation or other procedures during the arbitral proceedings in settlement of disputes.
The basic impetus of this Act is to bring cost effective and expeditious resolution of disputes by giving finality to an arbitral award. The public policy of India is the most imperative factor in the process of enforcement of an arbitral award as it involves individuals from multiple jurisdictions and legal traditions. What then constitutes Public Policy is the primary question. This article primarily focuses on the Framework of this Clause i.e., “Public Policy” and the significant transformation it has undergone with the passage of time due to judicial pronouncements and its present significance.
SECTION 34 (2) (B) (II)
34: Application for setting aside arbitral award.
(2) An arbitral award may be set aside by the court only if
(a) the party making the application furnishes proof that
(b) the court finds that:
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) “the arbitral award is in conflict with the public policy of India.”
The term “Public Policy” has not been defined in the Arbitration and Conciliation Act, 1996, therefore, the term stayed indistinctive. Due to the non-explicit definition of the term public policy, the term had an extensive implication thereby giving the courts the liberty to interpret it according to their understanding. The expression is taken to a point towards larger public interest, though this gives an intellectual explanation of the term without giving a detailed meaning to it. Henceforth, the explanation devoted to sub- clause (ii) by means of the amendment Act has defined the meaning and scope of the expression where the arbitration award shall be probable to be against public policy of india if the award was influenced by dishonesty or fraud or is contrary to the fundamental policy of Indian Law or the basic notions of the policy i.e. morality and justice.
The Supreme Court interpreted and conveyed an open-handed meaning to the term “public policy” in ONGC Ltd v. Saw Pipes Ltd explaining the concept of “public policy of India” held that it has not been defined in the Act and is vague and is likely to be interpreted widely or narrowly depending on the context in which it is being use.
The 246th Report of the Law Commission of India pertaining to the year August 2014, made recommendations so as to make the application for setting aside an arbitral award restricted on grounds of public policy and to apply only when the award was influenced or exaggerated by fraud or corruption, or was in contradiction of the fundamental policy of Indian law or in infringement with the most basic notions of morality. The Law Commission was the first to suggest the amendment and its recommendations was thereby incorporated in the Amendment Act,
The purpose of the amendment was to limit the judicial intervention of courts in arbitration. This is so because the key notion for adopting arbitration as an alternate dispute resolution for settling disputes is speedy resolution of the disputes and if courts interfered then it will only increase the pendency and cost of the parties to arbitration. Furthermore, the amendment has also added explanation 2 to sub-clause (ii) by virtue when an aggrieved party proceeds for setting aside an arbitral award on grounds of fundamental policy of Indian Law the courts are now barred from going into the worth of the case.
HISTORY OF “PUBLIC POLICY” IN VIEW OF JUDICIAL PRONOUNCEMENTS
In Renusagar Power Co. Ltd. v. General Electric Co.1 (1993), the hon'ble Supreme Court of India held 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 invoke something more than the violation of the Indian law.
In Oil and Natural Gas Co. v. Saw Pipes2 (2003), the apex court widened the scope of Public Policy and further added a new ground of “Patent Illegality” in addition to the grounds already enumerated in Renusagar Power Co. Ltd. v General Electric Co. The court further observed “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.”
In McDermott International Inc v. Burn Standard Co. Ltd3 (2006), the hon'ble Supreme Court observed that the 1996 Act makes provision for the supervisory role of courts, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it. It was further observed that patent illegality must go to the root of the matter and the Public Policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court.
In ONGC Ltd. v. Western Geco International Ltd4 (2014), the question of “Public Policy of India” was raised. The apex court upholding the ratio given in Saw pipes, further elaborated the concept of “Fundamental policy of Indian law” and determined three juristic principles. The first and the foremost is that the court or authority is bound to adopt ‘judicial approach' in the matters affecting the rights of a citizen or which leads to any civil consequences. Second, equally important and indeed fundamental is when the courts or quasijudicial authority determining the rights and obligations of parties, shall do so in accordance with the principles of natural justice. Third and no less important is the principle that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law.
In Associate Builders v. Delhi Development Authority5 , (2014), it was held that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable, and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective. It was further held that the expression “justice” when it comes to setting aside an award under the public policy ground can only mean that an award shocks the conscience of the court.
In Venture Global Engineering LLC and Ors. v. Tech Mahindra Ltd. and Ors6 (2017), it was held that the award can be set aside only on the grounds specified in Section 34 of the Arbitration Act and on no other ground. The court cannot act as an Appellate Court to examine the legality of award, nor can it examine the merits of claim by entering in factual arena like an Appellate Court. 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.
In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India7 (2019), it was held that after the 2015 amendment to the Arbitration Act, the interpretation of the term Public Policy has been narrowed down. It was further held that when it comes to the public policy of India argument based upon “most basic notions of justice”, it is clear that this ground can be attracted only in very exceptional circumstances when the conscience of the court is shocked by infraction of fundamental notions or principles of justice and was further clarified that no court in any circumstance can interfere with an arbitral award on the ground that justice has not been done in the opinion of the court. That would be an entry into the merits of the dispute which is contrary to the ethos of Section 34 of the 1996 Act.
In its most recent judgment Delhi Airport Metro Express Pvt. Ltd. Vs. Delhi Metro Rail Corporation Ltd8 , (2021), the apex court observed that there is a disturbing tendency of courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality which ultimately leads to corrosion of the object of the Act and the endeavors made to preserve this object, which is minimal judicial interference with arbitral awards. It was held that patent illegality should be illegality which goes to the root of the matter and therefore erroneous application of law cannot be categorized as patent illegality. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them.
It is pertinent to note that the apex court made it clear that an award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of Indian law or if it is in conflict with the most basic notions of morality or justice.
The foremost objective of the legislature while framing the law on arbitration under the Arbitration and Conciliation Act, 1996, was to lessen the involvement of the courts and suggest an alternative procedure for resolution of commercial disputes which enables a speedy justice delivery system. The amendments brought under Section 34 of the Act under the Arbitration and Conciliation (Amendment) Act, 2015, have resolved many disputes to a great extent and at the same time minimized judicial intervention. It has also clarified to a certain extent the term “public policy of India” which was not definite before the amendment and added patent illegality as another ground.
However, the amendment was brought into effect to limit the judicial intervention of courts in arbitration and speedy resolution for dispute settlement. This is so because the main idea for adopting arbitration as a means for settling disputes is expeditious adjudication of the disputes and if courts are involved in the process, then it will only add to the pendency and costs of the parties to arbitration. Moreover, the amendment has also appended explanation 2 to sub-clause (ii) by virtue of which when an aggrieved party applies for setting aside an arbitral award on grounds of fundamental policy of Indian Law the courts are now barred from going into the worth of the case.
Then again, one must keep in mind that although the Arbitration and Conciliation Act provides an alternative to litigation system however, it is not a complete departure from the judicial machinery rather it coexists with it. Keeping in mind the present situation of the appointment of arbitrators, where most of them are government employees appointed by the Central Government and are usually retired judges, they are mostly adapted to the habit of conducting the proceeding strictly according to the procedures and law.
Moreover, the judgments quoted above are a proof that the courts are now accustomed to applying narrower interpretation of the term “Public policy” and are therefore, scrutinising the arbitral awards on legislative intent i.e. minimal judicial intervention rather than on merits.
4. AIR 2015 SC 363
8. 2021 SCC Online SC 695
Originally published January 2022
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