India: Traversing The Highs And Lows Of Judicial Intervention In Arbitration

Short Extract of the Article

With the recent evolving jurisprudence in the realm of arbitration, it is crucial to note that even though the aforementioned judgments may indicate an increasingly noticeable tendency of the judiciary to interfere less with arbitral awards, there are still some aspects of the arbitral process in which judicial intervention can be minimized. Hence, this article seeks to not only appreciate the notable strides made by the judiciary in its endeavour of achieving minimal interference in arbitration matters but also highlight the considerable scope for improvement in this regard for the judiciary by discussing some case laws related to such aspects.

Introduction

With the recent verdicts in Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited¹, Gemini Bay Transcription v. Integrated Sales Service² and The Project Director NHAI v. M. Hakeem & Anr.³, the growing inclination of the judiciary towards minimizing its intervention with arbitral awards within the statutory scheme of Section 34 of The Arbitration & Conciliation Act⁴ has become quite discernible. While the first two acknowledged the limited scope of the public policy grounds provided under Sections 34 and 48⁵ with regard to the enforcement of domestic and foreign arbitral awards respectively, the last one affirms that due restraint must be exercised by courts in choosing to modify arbitral awards in keeping with the legislative intention.

All of these decisions from 2021 have contributed towards settling some contentious issues within the realm of Section 34 with a long history of conflicting pronouncements. Hence, it is imperative to trace the origin of the odyssey that the judiciary had embarked upon to finally reach this destination and examine the interpretive struggles that it had to face on its way. It is also crucial to note that even though the aforementioned judgments may indicate an increasingly noticeable tendency of the judiciary to interfere less with arbitral awards, there are still some aspects of the arbitral process in which judicial intervention can be minimized. Hence, this article seeks to not only appreciate the notable strides made by the judiciary in its endeavour of achieving minimal interference in arbitration matters but also highlight the considerable scope for improvement in this regard for the judiciary by discussing some case laws related to such aspects.

Tracing the gradual limitation of the scope of public policy.

Prior to the enactment of The Arbitration & Conciliation Act of 1996⁶, the Apex Court had the chance to elucidate India's conception of public policy in the backdrop of an arbitral award rendered in a foreign-seated arbitration. Since one of the grounds on which the appellant had objected to the award was that it was made in flagrant contravention of the Foreign Exchange Regulation Act of 1973⁷, the Supreme Court was tasked with defining the term 'public policy', as used in Section 7 of the Foreign Awards (Recognition and Execution) Act of 1961⁸.

In response to the contention based on the public policy premise, the Court noted in its opinion that the expression could be subjected to both restrictive and expansive interpretation. Thus, a distinction between how public policy is applied in the national and foreign domains was also delineated. In view of considerations pertaining to private international law and the pro-enforcement inclination inherent in 1958 New York Convention⁹, the Court stated that India's public policy should be considered narrowly. It was, thus, decided that public policy can serve as the basis for the denial of the enforcement of an arbitral award rendered in a foreign-seated arbitration only if its enforcement would be adverse to (i) the country's interests; (ii) its law's fundamental policy; and, (iii) morality or justice. Its ruling in this case was widely regarded as a foundational authority on the norm that reconsideration of an arbitral award on merits cannot be undertaken during the enforcement stage. It was quite evident that the pro-arbitration bias globally prevalent at the time was duly recognized by the Court in its verdict.

The Foreign Awards (Recognition and Enforcement) Act of 1961 was repealed once the Arbitration and Conciliation Act (A&C Act) was passed in 1996. The A&C Act acted as a comprehensive code for the conduct of arbitration in the country. While the enforcement of domestic arbitral awards was provided for under Section 34 of Part I of the A&C Act, enforcement of foreign awards in India was dealt with under Section 48 of Part II. Under both Sections 34 and 48, public policy was maintained as a basis for refusing enforcement. However, until Renusagar¹⁰ was approved by a court under the reformed arbitration framework, clouds of incertitude loomed over its precedential utility.

In ONGC v. Saw Pipes Ltd.¹¹ (ONGC), the Supreme Court was tasked with clearing these clouds when it had to outline the parameters of public policy with regard to the setting aside of a domestic arbitral award under Section 34(2)(b)(ii) of the A&C Act. Specifically, it was compelled to determine if it had the jurisdiction to set aside an award that may be deemed as 'patently illegal' or reconsider an award on its merits. The ruling in ONGC was antithetical to the one in Renusagar. The Court decided that because it was the A&C Act itself that created an arbitral tribunal, it would be necessary for the Court to interfere if the Arbitral Tribunal breached the Act's requirements. The Court appears to have neglected the idea that parties to arbitration have the right to opt-out of an appeal or recourse against the arbitral judgment when applying the norm that every right should have a remedy. By ignoring the principles of party autonomy and minimal judicial intervention while averting the mechanism employed in Section 34(2) that separates procedural from substantive irregularities, the Court's decision went against the 1958 New York Convention¹² and the 1985 UNCITRAL Model Law¹³. The Court incorrectly confused jurisdictional and procedural errors, holding that the arbitral tribunal's infringements of the A&C Act constituted jurisdictional violations. To further bolster Saw Pipes' precedential significance, the Court added the issue of "patent illegality" to the list of grounds established by the Court in Renusagar, thus opening the floodgates for Section 34(2) lawsuits. It is worth noting that the Supreme Court's judgment in Venture Global Engg. v. Satyam Computer Services Ltd.¹⁴ exacerbated the effect of Saw Pipes by establishing that a foreign award can be contested under Section 34 of the A&C Act. However, despite Saw Pipes' precedence, there was a school of thought that aptly recognized the flaws in the system and insinuated much-needed criticism. Although following Saw Pipes, the Supreme Court offered brief observations regarding the limiting role of courts when considering petitions for setting aside arbitral awards under Section 34 of the A&C Act in McDermott International Inc. v. Burn Standard Co. Ltd.¹⁵ In contrast to the statement in Saw Pipes, a similar observation was made later in 2012 in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran¹⁶ (Rashtriya Ispat). Even though the contract is capable of two interpretations, the Court in Rashtriya Ispat established that if the arbitrator's opinion is conceivable, it cannot be arbitrarily subjected to judicial interference.

While articulating its stance on the extent of public policy under Section 48 of the Arbitration Act in Phulchand Exports Ltd. v. O.O.O. Patriot¹⁷, the Court adopted a fairly arbitrary approach and deviated from the widely acknowledged norm that the public policy ground should be applied narrowly to foreign awards. It ruled that the scope of public policy grounds under both Sections 34 and 48 is the same, despite the fact that it was clearly defiant of the principle of comity of nations and the worldwide pro-enforcement prejudice. However, it was later overruled in Shri Lal Mahal Ltd. v. Progetto Grano Spa¹⁸ wherein the Court affirmed that "patent illegality" would not constitute a component of the public policy grounds stated under Section 48. This was also acknowledged by the Court very recently in Gemini Bay¹⁹.

In ONGC v. Western Geco International Ltd.²⁰ (Western Geco), the Court was faced with an appeal an international commercial arbitration having a seat in India. At the time, it was highly anticipated that the Court would see this in an opportunity to overturn the precedent set by Saw Pipes, considering the denunciation that this ruling was subjected to. However, the Court not only conformed to the verdict in Saw Pipes but also allowed the reassessment of an award on its merits on the grounds of safeguarding the "fundamental policy of Indian law," which goes against the spirit of Renusagar. Moreover, the Court failed to recognize that the public policy test is to be employed to determine whether the award's enforcement would result in a breach of public policy, and not to determine the arbitral award's merits. Consequently, the Court had irrevocably tied India's public policy with the merits of an arbitral award without realizing its consequences. Furthermore, the Court in Renusagar had clarified that an award cannot be set aside by a court merely on account of a disagreement with the arbitrator's legal or factual rationale. Lastly, the Court's discussion of the "fundamental policy of Indian law" has resulted in a repetition of the grounds already listed in Section 34(2)(a)²¹. As a result, the procedural errors covered by Section 34(2)(a) are now covered by Section 34(2)(b)(ii) as well, which encompasses principles of natural justice as a ground. This has allowed obstinate parties to wreak havoc by challenging arbitral rulings through a backdoor.

Despite the concept of stare decisis and the consequence burden of the precedents set in Western Geco and Saw Pipes, the Court attempted to alleviate the detrimental consequences of these previous rulings. Despite having to concede to Saw Pipes that violating the contract's terms would amount to "patent illegality," the Court in Associate Builders has tactfully relied on the dictums of McDermott International and Rashtriya Ispat to give primacy to the arbitrator's findings concerning contract interpretation. The Court further stated that when a court applies the public policy test to an arbitral award, it does not serve as a court of appeal, and, as a result, factual mistakes cannot be addressed, which a notable shift from the approach taken in Saw Pipes and Western Geco. Despite the precedential burden, the decision in Associate Builders may be regarded as a landmark decision that signalled the beginning of a more pro-arbitration approach to preserving arbitral verdicts.

In Ssangyong Engg. and Construction Co. Ltd. v. National Highways Authority of India²² (Ssangyong Engg.), the Supreme Court made extensive observations on the situation following the 2015 amendment to the A&C Act and clarified its relations with the judgements in Renusagar, Western Geco and Associate Builders. The Court in Ssangyong Engg. concluded that the broad interpretation of "fundamental policy of Indian law" proposed in Western Geco and implemented in Associate Builders was incorrect and not in line with Renusagar and the 2015 Amendment. The court further stated that the subhead of "fundamental policy of Indian law" will now include (i) breaking a legislation safeguarding national interests; (ii) violating higher court orders; and (iii) breaching natural justice principles. As a result, the Court has eliminated the basis of non-adoption of a judicial approach, rightly anticipating that doing so would require an entrance into the merits of the decision, which is expressly forbidden by the legislative intent.

The Court made conclusions about India's various types of public policy, concluding that the term "interest of India" no longer justiciable in India's jurisprudence. However, in accordance with Associate Builders, the head "justice or morality" was kept by noting that it would now have to be regarded as a clash with the "most basic ideas of morality or justice." As a result, only arbitral rulings that shock the Court's conscience may be eligible on this ground. The Court then re-calibrated the subhead "patent illegality" in light of its statutory recognition, stating that "patent illegality" must clearly appear on the award, implying that such an illegality goes to the heart of the matter but excludes an erroneous application of law by the Tribunal or a reappreciation of evidence as an appellate court. The Court enumerated that "patent illegality" may be invoked only if: (i) the arbitrator fails to give reasons in the award, in violation of Section 31(3) of the A&C Act²³; (ii) the arbitrator takes an impossible view in construing the contract; (iii) the arbitrator transgresses his jurisdiction. The court in Ssangyong Engg. has appropriately carried out the legislative intentions by correcting the flaws in its previous decisions, thereby lifting the flaws created by Saw Pipes and restoring Renusagar.

Even in Government of India v. Vedanta Limited²⁴, the Court had relied on Renusagar for understanding of public policy, holding that "public policy" included the fundamental policy, India's interests, justice, and morality. The Court further concluded that the tribunal's incorrect reading of a contractual clause cannot be used to challenge the judgement on the merits, reaffirming the stance established in Associate Builders and affirmed in Ssangyong Engg. The latest reiteration of the stance taken by the Supreme Court in Ssangyong Engg comes in Delhi Airport²⁵ wherein it held that not every alternative interpretation embraced by an arbitral tribunal or ostensibly erroneous application of law can be included under the umbrella of 'patent illegality' to set aside the award.

Reduced propensity to modify arbitral awards.

Another notable development within the statutory scheme under Section 34 emanated from the Supreme Court's verdict in NHAI. Herein, the Supreme Court cited many decisions such as Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd.²⁶, Kinnari Mullick v. Ghanshyam Das Damanito²⁷ and McDermott International Inc. v. Burn Standard Co. Ltd.²⁸ to support its conclusion that Section 34 only provides a constricted right with limited remedies. Specifically, these include the opportunity to have either the case returned to the arbitral tribunal or the award set aside. The Court established that Section 34 is not an appellate provision, and so does not necessitate a reconsideration of the case's merits. The Court further emphasized that it is imperative for a judge reading a legal provision to accord due consideration to the legislative intention. The Parliament's intention with regard to the provision at hand is fairly lucid, which is to safeguard the arbitral awards from unwarranted judicial intervention so that the status of arbitration as an effective and expedient alternative remedy is maintained. The Court also proclaimed that it is only within the purview of the Parliament's powers to allow the modification of arbitral awards by way of an amendment to the Arbitration Act. Hence, the mere fact that the same is permissible under specific circumstances in some jurisdictions such as the United Kingdom and the United States of America cannot persuade it to allow the same.

In spite of the ostensibly progressive attitude of the Court in NHAI²⁹ in terms of promoting minimal judicial intervention with arbitral awards, there still subsists some scope for concern in this regard. In its judgment, the Court had also taken note of some of its previous decisions such as Hindustan Zinc Ltd. v. Friends Coal Carbonisation³⁰, Gautam Constructions and Fisheries Ltd. v. National Bank for Agriculture & Rural Development³¹ and Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy³². In all these judgments, it had engaged in the modification of the award by altering either the sum granted by the arbitral tribunal or the interest, thus also prompting the High Courts to normalize varying, correcting or modifying arbitral awards. While acknowledging these previous pronouncements, the Court defended them by citing the authority bestowed upon it by Article 142 "to do complete justice between the parties"³³. This indicates that there may be instances, although limited, wherein it presses into service this authority to modify arbitral awards, and hence, leaves room for judicial interference.

Subsisting Scope of Unwarranted Stay on Arbitral Awards.

Previously, filing an application under Section 34 of the Arbitration and Conciliation Act for the setting aside of an arbitral award would result in an automatic stay. In the case of National Aluminum Company Ltd. v. Pressteel & Fabrications Ltd.³⁴, the Apex Court had condemned this provision for not leaving in it any discretion to place the parties on terms, and hence, thwarting the fundamental objective of the alternate dispute resolution mechanism that arbitration is a part of. This issue was also addressed by the Law Commission in its 246^th Report³⁵ wherein it had highlighted the multitude of issues being caused by the automatic stay provisions and strongly suggested a revision of the law in this regard.

In 2015, the automatic stay of awards was abolished by an amendment was introduced that entirely supplanted Section 36 of the Arbitration and Conciliation Act³⁶. The reason behind this abolition was that dealing with cases involving the setting aside of arbitral awards had become inordinately time-consuming for the courts, and rendering the entire mechanism efficient. This amendment requires the offended party seeking the stay to separately apply for the same, and the court to make note or establish its rationale for granting the stay.

Notably, the Supreme Court clarified in the case of BCCI v. Kochi Cricket (P.) Ltd. & Ors.³⁷ that the amended Section 36 will apply retrospectively to all applications submitted in regard to Section 34 of the Arbitration Act before and pending on October 23, 2015, and later. Hence, it seemed that as a consequence of the amendment to Section 36, complemented by the BCCI verdict, the idea of automatic stay of arbitral awards was abrogated for good.

However, through an amendment to the Arbitration Act in 2019, Section 87 was inserted. This provision indicated that the 2015 amendment is to be applied prospectively, thus implying that unconditional stay on arbitral awards would still apply to arbitration proceedings that were initiated prior to October 23, 2015. This, in effect, overturned the verdict in BCCI.

Subsequently, in the case of Hindustan Construction Company v. Union of India³⁸, the Supreme Court expressed its dissatisfaction with the 2019 amendment's upshot of disregarding the intention behind the 2015 amendment to a great degree. The latter meant to minimize excessive deferrals in the enjoyment of the benefits that the award debtor is entitled to by virtue of the award. Such deferrals could even lead to the award debtor's bankruptcy in grave scenarios. Hence, in this case, the Court pronounced Section 87³⁹ as unconstitutional on the grounds of manifest arbitrariness under Article 14 of the Indian Constitution⁴⁰. Nevertheless, the impact of this judgment was negated by an ordinance amendment to the Arbitration Act promulgated in 2020, which was later approved by way of the 2021 amendment to the Arbitration Act⁴¹. It defies the growing resistance to unconditional stay on arbitral awards by stating that the same can be granted when a prima facie case for the arbitration agreement or contract, which constituted the basis of the award, or the making of the award being induced by corruption or fraud can be made.

Scope for Intervention behind the garb of Judicial Scrutiny under Section 11.

For the past few years, the extent of judicial examination or inspection under Section 11 of the Act⁴² has been a particularly contentious issue. SBP & Co. v. Patel Engineering⁴³ was one of the first important cases addressing the assessment of this power's ambit. Herein, the Supreme Court had arrived at the conclusion that that this function was essentially a judicial one, and not merely administrative. Subsequently, the scope of judicial inquiry was re-evaluated through the 2015 Amendment to the Act, which stated that the same was limited to establishing the "existence of the arbitration agreement."

Nevertheless, the Supreme Court's recent decision in DLF v. Rajapura⁴⁴ has enlarged the purview of judicial scrutiny in arbitration matters. As per the ruling, the court's function has evolved from just finding the 'existence of the dispute' to confirming that there exists a discernible connection between the parties' dispute INDIA CONST. art. 1, cl. 2 and their arbitration agreement. If the parties fail to demonstrate this nexus, the courts now have the right to turn down the application for arbitration, a power that was previously reserved exclusively for arbitral tribunals.

Although the broadened extent of judicial examination has been applauded by some, it has been highlighted by several sceptics that allowing courts to decide whether or not an arbitration agreement is valid would take a long time and cause unwarranted inconveniences in the process of resolution of the dispute. Furthermore, as has always been the case, in the event of a conflict, the court's judgement will take precedence over the tribunals. As a result, the arbitral tribunal's authority to resolve the issues before it might be affected adversely.

Therefore, the precedent set in this case is clearly at variance with the concept of 'Kompetenz-Kompetenz,' and aggravates the scope for excessive judicial intervention in arbitration matters.

Conclusion

After examining the augmentation and restriction of the scope of "public policy of India" embodied in Section 34(2)(b)(ii) of the A&C Act from the Renusagar judgment in 1994 to the Delhi Airport judgment in 2021, there appears to be a long-drawn battle finally reaching its conclusion. Despite the far-reaching consequences of McDermott International, Shri Lal Mahal, Associate Builders, Ssangyong Engg. and Delhi Airport decisions, there appears to be an opportunity for mischief that might harm India's aspirations to become a pro-arbitration regime. Although the ratio laid down by the Supreme Court in Renusagar was of considerable utility in its endeavour of minimizing judicial interference, it ended up falling victim only to the "unruly horse." Although the Supreme Court restored the status of Renusagar in Ssangyong Engg., a more authoritative ruling by it is required, one that strictly limits the judiciary's powers, preventing it from reading more profound into the term "public policy of India" and thus, emerging victorious in its battle against the "unruly horse."

In addition to this, the subsisting issues pertaining to the modification of arbitral awards, unconditional stay of arbitral awards and greater scope for judicial scrutiny under Section 11 must also be given higher consideration since they may pose a significant impediment in making India a favoured arbitration centre.

The government must establish a strategy that encourages foreign corporations to invest in India. In addition, in order for India to realize its goal of becoming a global arbitration hub, the courts must adopt a pro-arbitration system, which calls for minimal participation in the implementation of international arbitral awards, as envisioned in the Vedanta decision.

Shobhit is a student of Maharashtra National Law University, Mumbai and the Winner of the 3rd Prize of the 8th Ed. Arb Excel Essay Writing Competition.

Footnotes

1. Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, Civil Appeal No. 5627 of 2021.

2. Gemini Bay Transcription v. Integrated Sales Service, 2021 SCC OnLine SC 572.

3. The Project Director NHAI v. M. Hakeem & Anr., 2021 SCC Online SC 473.

4. Arbitration and Conciliation (Amendment) Act, 2015, S. 34.

5. Arbitration and Conciliation (Amendment) Act, 2015, S. 48.

6. Arbitration and Conciliation Act, 1996 (26 of 1996), Acts of Parliament, 1996.

7. The Foreign Exchange Regulation Act, 1973 (46 of 1973), Acts of Parliament, 1973.

8. The Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961), Acts of Parliament, 1961.

9. New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21.3 U.S.T. 2517.

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

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

12. New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21.3 U.S.T. 2517.

13. United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985, with Amendments as Adopted in 2008 (Vienna: United Nations, 2008).

14. Venture Global Engg. v. Satyam Computer Services Ltd. (2008) 4 SCC 190.

15. McDermott International Inc v. Burn Standard Co. Ltd, (2006) 11 SCC 181.

16. Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, 2012 26 STR 289 SC.

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

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

19. Gemini Bay Transcription v. Integrated Sales Service, 2021 SCC OnLine SC 572.

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

21. Arbitration and Conciliation (Amendment) Act, 2015, S. 34(2)(a).

22. Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131.

23. Arbitration and Conciliation (Amendment) Act, 2015, S. 31(3).

24. Government of India v. Vedanta Ltd., 2020 SCC Online SC 749.

25. Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, Civil Appeal No. 5627 of 2021.

26. Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd., 2021 SCC OnLine SC 157.

27. Kinnari Mullick v. Ghanshyam Das Damanito, 2017 SCC OnLine SC 528.

28. McDermott International Inc v. Burn Standard Co. Ltd, (2006) 11 SCC 181.

29. The Project Director NHAI v. M. Hakeem & Anr., 2021 SCC Online SC 473.

30. Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445.

31. Gautam Constructions and Fisheries Ltd. v. National Bank for Agriculture & Rural Development, (2000) 6 SCC 519.

32. Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy, 2007 (1) Arb. LR 148 (SC).

33. Arbitration and Conciliation (Amendment) Act, 2015, S. 142.

34. National Aluminum Company Ltd. v. Pressteel &; Fabrications Ltd., (2004) 1 SCC 540].

35. Law Commission of India, 246th Report on Amendments to the Arbitration and Conciliation Act 1996 (August, 2014).

36. Arbitration and Conciliation (Amendment) Act, 2015, S. 36.

37. BCCI v. Kochi Cricket (P.) Ltd. & Ors., (2018) 6 SCC 287.

38. Hindustan Construction Company v. Union of India, WP (Civil) No. 1074 of 2019.

39. Arbitration and Conciliation (Amendment) Act, 2015, S. 87.

40. INDIA CONST. art. 14.

41. Arbitration and Conciliation (Amendment) Act, 2021 (03 of 2021), Acts of Parliament, 2021.

42. Arbitration and Conciliation (Amendment) Act, 2015, S. 11.

43. SBP & Co. v. Patel Engineering, 8 SCC 618.

44. DLF Home Developers Limited v. Rajapura Homes Private Limited & Anr, Arbitration Petition No. 17 of 2020.

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