The Convention on the Recognition and Enforcement of Foreign Arbitral Awards also known as the New York Convention itself lays down1 that recognition and enforcement of an Arbitral Award may be refused, if the award is contrary to the public policy of the country enforcing it. The convention, however, does not prescribe a definition of public policy but allows the States to create their own standards.
With respect to domestic Arbitrations, Section 34(2)(b)(ii) envisages that a domestic arbitral award can be set aside if a court finds that the award is against the "public policy of India". The legislature, by not precisely defining 'public policy' has left it open for judicial interpretation.
The Supreme Court of India in Central Inland Water Transport Corpn. V. Brojo Nath Ganguly2 and BCCI v. Cricket Association of Bihar & Ors.3 has held that public policy is not a static concept, but varies from time to time and from generation to generation.
True to its nature, the contours of public policy have evolved over the years through judicial interpretation. Several landmark judgments have laid down the interpretation and standards of public policy in India.
'Public Policy' before enactment of Arbitration and Conciliation Act, 1996.
The first such case in the Indian jurisprudence was Renusagar Power Co. Ltd v. General Electric Co.4 which dealt with the expression of 'Public Policy'5 under the Foreign Awards (Recognition and Enforcement) Act, 1961. The Supreme Court held that the expression 'public policy' would mean the doctrine of public policy applied by courts in India and not international public policy. The Supreme Court further laid down the standards of public policy, which need to be followed, while judging upon the validity of an award and held that enforcement of an award could only be refused if the award was against the -
- Fundamental policy of Indian law;
- Interests of India or;
- Justice or morality.
Post-enactment of Arbitration and Conciliation Act, 1996
The Arbitration and Conciliation Act, 1996 came into being after the judgement in Renusagar (Supra). The Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. while dealing with Section 34 of the Act, broadened the standard of public policy laid down in the Renusagar case by reading the ground of 'patent illegality' into public policy and held that a patently illegal award cannot be allowed to be enforced and must be set aside.
The Apex court held that if the award was contrary to any substantive provision of law or the provisions of the Act or against the terms of the contract, it would be 'patently illegal' and hence, could be interfered with under Section 34 of the Act.
In the case of ONGC v. Western Geco Ltd.6a three-judge bench of Supreme Court elaborated the expression of 'fundamental policy of Indian law' as interpreted in Saw Pipes (supra) by holding that award must conform to three fundamental and distinct juristic principles –
- Duty to adopt judicial approach; and
- Compliance with principles of natural justice; and
- The decision is not so perverse or irrational that no reasonable person would have arrived at the same i.e. Wednesbury7
The Supreme Court in Associate Buildersv.DDA,8 reiterated the dictum of Saw Pipes (supra) and held that an award was open to be interfered under Section 34 of the Act if it was contrary to any substantive provision of the law, contrary to the provisions of the Act or against the terms of the contract.
The Law Commission of India in supplementary report to its 246th Report9 took the following view in relation to 'public policy' as given by the Supreme Court in Western Gecko & Associate Builders -
"10.5 As the Supreme Court's judgment in Western Geco would expand the Court's power rather than minimise it, and given that it is also contrary to international practice, a clarification needs to be incorporated to ensure that the term "fundamental policy of Indian law" is narrowly construed. If not, all the amendments suggested by the Law Commission in relation to construction of the term "public policy" will be rendered nugatory, as the applicability of Wednesbury principles to public policy will certainly open the floodgates."
Arbitration and Conciliation (Amendment) Act, 2015
To limit the widening scope of judicial interference in Arbitral Awards, the legislature amended the Act through Arbitration and Conciliation (Amendment) Act, 2015 on the recommendations of the reports of 246th Law Commission.10 The amendment added "Explanation 2" to 34(2) which reads as under -
"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."
The Statement of Objects of the Arbitration and Conciliation (Amendment) Bill, 2015 noted that interpretation of certain provisions by courts has resulted in increased interference and delay in disposal, contrary to the intent of the act.
In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India11 the Supreme Court observed that the widened scope of interfering on the merits of an Award under Section 34, as held in Western Gecko and Associate Builders is not available post 2015 Amendment and ought to be construed in line with the Renusagar judgement.
In Delhi Airport Metro Express (P) Ltd. v. DMRC12the Apex Court held that the explanation (1)13, as amended by the 2015 Amendment Act, clarified the expression "public policy of India" making it clear that an award would be in conflict with the 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.
Further, the Supreme Court expressed anguish at the tendency of courts to set 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, apart from the other grounds available for annulment of the award.
As seen from the recent pronouncements in Ssangyong Engineering & Construction Co. Ltd. (Supra) & Delhi Airport Metro Express (P) Ltd. (Supra), the judicial trend towards interpretation of 'public policy' has been towards limiting judicial interference with arbitral awards and reinforcing the object of the 1996 Act and its 2015 Amendment i.e. minimising judicial interference.
Footnotes
1 Article V(2)(b) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958)
2 (1986) 3 SCC 156
3 (2015) 3 SCC 251
4 1994 Supp (1) SCC 644.
5 Section 7(1)(b)(2) of the Foreign Awards (Recognition and Enforcement) Act, 1961.
6 (2014) 9 SCC 263
7 Associated Provincial Picture Houses Limited v. Wednesbury Corporation. (1948) 1 KB 223
8 (2015) 3 SCC 49
9 https://lawcommissionofindia.nic.in/reports/Supplementary_to_Report_No._246.pdf
10 https://lawcommissionofindia.nic.in/reports/report246.pdf
11 (2019) 15 SCC 131
12 (2022) 1 SCC 131
13 Section 34 of the Act
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