‘Public Policy’ under Indian Arbitration Law

1. Introduction

To avoid the infamous ‘tareekh pe tareekh’ defect our judicial system suffers from, alternate dispute resolution (ADR) mechanisms were adopted with major changes to the previous legal theories by putting in legal parlance the Arbitration and Conciliation Act, 1996 in post LPG era. Sec. 5 of this Act categorically provided for minimal judicial intervention. However, opposite to what was sought, judicial interference made the process even slower. Reportedly, Attorney General while signaling green to the Arbitration and Conciliation (Amendment) Ordinance, 2015 as promulgated to avoid various hindrances, called the 1996 Act a ‘complete failure’. The Ordinance was nulled by the fresh act earlier this year i.e. Arbitration and Conciliation Act, 2015. One such failing Trojan in the 1996 Act was sec. 34 which paved way for knocking court’s doors by way of a statutory challenge before the court having original jurisdiction to try.

2. Section 34; The Trojan in 1996 Act

Section 34 lays down an exhaustive list of reasons, based on which an application can be preferred to the court for challenging the award. It is derived from Art 34 of the UNCITRAL Model Law, 1985 and its width is much larger than predecessors under the 1940 Act. Sec 34(2)(a) mentions 5 sub provisions under which a party has to furnish concrete proof in support of its petition to the court to set aside the arbitral award. What concerns us here, however, is Sec 34(2)(b) which uses the expression ‘the Court finds that’ laying grounds where the party is not required by law to prove the reasons for challenge to the award. This sub clause refers to two grounds of examining the arbitral award. Firstly, if the subject matter of dispute is not capable of settlement and secondly, if the award is in conflict with the ‘public policy of India’. An explanation has been annexed next to it stating a brief outline for what is to be understood with ‘public policy of India’ i.e fraud, corruption, and violation of Section 75 or Section 81. Sec. 48(2)(b) of the 1996 Act also uses the same expression for non enforcement of a foreign arbitral award. As the expression ‘public policy’ has not been supplied with a definitive meaning under the 1996 Act or any other statute, over the years through judicial craftsmanship the width of this expression gradually increased giving vast discretion to courts to interpret it accordingly. Lately, in International Commercial Arbitration and Investment Arbitration, this has caused a lot of difficulties to litigants as the courts have whimsically rejected and accepted claims on this ground.

3. Judicial Pronouncements & ‘public policy’

Sec 23 of the Indian Contract Act, 1872 states that a contract against public policy is void. In Gherulal Parakh v Mahadeo Das, this was considered for the first time in independent India and it was held that public policy was an ‘untrustworthy guide’. This view was confirmed in P.Rathinam quoting it to be an ‘unruly horse’. In Renusagar in an issue under the 1940 Act, an interpretation to the expression was provided. It was held that enforcement of a foreign award can be refused on the ground of contrary to public policy if such enforcement would be contrary to (1) fundamental policy of Indian Law; or (2) the interests of India; or (3) justice or morality. These 3 expressions were however kept open for judicial discretion and not defined. Subsequently, in Saw Pipes, for the second time a vast expansion in the scope of “public policy” took place when it was held that it includes “patent illegality” apart from the 3 cases mentioned in Renusagar. It was supplanted that illegality must go to the root of the matter and if it is of trivial nature it cannot be held to be against public policy. This judgment allowed the courts to go into the merits of the case. In atleast 2 cases, this decision was criticized – McDermmott International & Centrotrade Minerals.

For the first time, however, dissent sounded when in Glencore Grain Rotterdam B.V v Shivnath Rai Harnarain (India) Co, the Delhi High Court relied on Renusagar limiting itself to the three grounds only and categorically declined to accept the proposition propounded by Saw Pipes. Unfortunately, in a contemporary judgment, the Delhi High Court in Toepfer International Asia Pvt. Ltd. V. Priyanka Overseas Pvt. Ltd, held that Saw Pipes would be applicable to interpret Sec 48(2)(b).

The Apex Court in Phulchand held that “patent illegality” under the term ‘public policy of India’ needs to be considered even while examining enforcement of a foreign award u/s 48(2)(b) of the 1996 Act. This judgment was however overruled in Sri Lal Mahal and the interpretation given by Renusagar was held to be correct in respect of Sec 48 of the 1996 Act.

4. SCOPE

Last year in Western Geco, the Supreme Court restated the Saw Pipes approach to public policy. It said that this includes "all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country." In particular, a court could assess whether a tribunal: (i) has applied a "judicial approach", i.e. has not acted in an arbitrary manner; (ii) has acted in accordance with the principles of natural justice, including applying its mind to the relevant facts; and (iii) has avoided reaching a decision which is so perverse or irrational that no reasonable person would have arrived at it (adopting the Wednesbury principle from administrative law). This decision has been followed in a landmark judgment on Sec 42 in Associate Builders. It was held that the an award can be set aside if it is: (1) contrary to the fundamental policy of Indian law, i.e. it is "arbitrary" or "whimsical", as opposed to being fair, reasonable and objective, or it contains a decision so irrational that no reasonable person would have arrived at it;  (2)contrary to the interest of India, i.e. it affects India's relations with other countries;  (3)contrary to justice and/or morality, i.e. it "shocks the conscience of the court", or it relates to an immoral contract; or  (4) patently illegal, i.e. it contains a ruling which contravenes the law of India, or it contravenes the provisions of the Act, or it is based on an interpretation of the terms of a contract that no fair-minded or reasonable person would adopt.

5. PROPOSITIONS & CONCLUSION

As is evident, the interpretation of ‘public policy’ has shuttled across various judge centric interpretations and in absence of a proper laid down definition, the subordinate courts have given whimsical decisions as to its definitive meaning. There have been reported instances where mere violation of an Indian Law has been held to be against public policy. The ‘patent illegality’ test opened a pandora’s box for litigants as in multiple adjudications, after thorough examination by the arbitral tribunal, the courts again started sitting on the merits of the case which vitiated the whole purpose of arbitration. However, it is important at this juncture to point out that for domestic arbitrations, ‘patent illegality’ doctrine must be retained u/s 34 but not for international arbitrations.

The Law Commission of India in its 246^th Report had suggested amendments in a lot of sections including Sec 34. The Arbitration and Conciliation (Amendment) Ordinance, 2015 narrows down the scope for judicial intervention & clarifies that an award will be treated to be in conflict with the public policy of India, only in certain circumstances. These circumstances are - when the award is induced or affected by fraud or corruption, or is in contravention with the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice. The Ordinance also provides that a determination of whether there is a contravention with the fundamental policy of Indian law cannot entail a review of the merits of the dispute. This amendment seeks to limit the re-appreciation of the merits of the dispute at the stage of challenge to the award before the Court. The Legislature has therefore fundamentally reduced the scope of the inquiry by the judiciary into the question of violation of ‘public policy’.  The Ordinance also rules that an arbitral award can be set aside by a court if the award is vitiated by patent illegality appearing on the face of the award. However, an award cannot be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence.

The Ordinance modifies the ambit of violation of public policy to only include those awards that are: (i) affected by fraud or corruption, (ii) in contravention with the fundamental policy of Indian Law or (iii) conflict with the notions of morality or justice. The expressions ‘fundamental policy of Indian law ’ & ‘most basic notions of morality or justice’ though are sure to be adjudicated again and interpreted by the courts discretionally, but the rider that the courts must not review the merits of the dispute is a welcome move. We must hope that the original intent of having an alternate and shortcut route to justice delivery is restored with this.