Challenge to an arbitral award as being in conflict with 'public policy'
Published: Nov 29, 2024
By Shoba Ramamoorthy
THE Queen Mary University of London published the results of its empirical International Arbitration Survey (2021), wherein it reported that "greater support for arbitration by local Courts and Judiciary", "increased neutrality and impartiality of the local legal system" and "better track record in enforcing agreements to arbitrate and arbitral awards" are the key adaptations that would make arbitral seats more attractive.
The report declared London to be the most favoured destination for Alternate Dispute Resolution.
Here in India, Justice Hima Kohli (former Judge, Supreme Court) while speaking at an event1 highlighted India's potential to be the "preferred Choice" for international commercial arbitration, as the nation has a "progressive legislative framework, a pro-enforcement Judiciary and robust institutional support". This article seeks to justify the viewpoint of Justice Kohli, on the basis of the evolution of legal principles governing the concept of challenge to an arbitral award, in Indian jurisprudence.
Section 34 of the Arbitration and Conciliation Act, 1996 ('1996 Act' for short) provides for recourse to a Court, against an arbitral award. This provision specifically states that award may be set aside only if the grounds set out thereunder are made out. As such these grounds are exhaustive and the jurisdiction of the Court under Sec. 34 is limited.
There are seven grounds in all, provided under Sec. 34, which are - (i) incapacity of a party, (ii) invalid arbitration agreement, (iii) no proper notice of appointment of arbitrator/ proceedings, (iv) reference/decision-beyond the scope of the agreement, (v) composition of the tribunal/ conduct of proceedings- not in terms of agreement, (vi) subject matter of the dispute is non-arbitrable and (vii) award being in conflict with the Public Policy of India.
Whereas the first five grounds are to be proved by the party assailing the award, by adducing sufficient credible evidence, the last two grounds empower the Court, to suo moto (ex officio jurisdiction) set aside the award, if it is vitiated by any one of the two grounds, viz., non-arbitrability or being opposed to public policy.
Most commercial disputes are arbitrable under the laws in India. Arbitrability of a dispute refers to the determinability of such dispute through arbitration. Arbitrability, as an issue, is always considered by Courts in contradistinction to the disputes that can be resolved exclusively by Traditional Courts (eg. Criminal offence, Guardianship rights, Matrimonial matters, Insolvency, Testamentary matters and Labour disputes). Arbitrability of a dispute has invited Court's attention, but not as much as the ground of public policy.
The 1996 Act does not define public policy. An explanation to Section 34 of the 1996 Act declared an award to be against public policy only if -
The making of the award was induced or affected by fraud or corruption.
In the 1940 Arbitration Act, there was no specific provision for setting aside an award on the public policy ground. However, the Foreign Award Act, 1961 forbid2 the enforcement of a foreign award if the Court was satisfied that such enforcement would be against public policy.
In 1994, while dealing with enforcement of a foreign award, the Supreme Court, in Renusagar case,3 declared that having regard to the objective of the 1961 Act, which is, to subserve the cause of international trade and its promotion by speedy settlement of disputes arising thereunder, the expressions occurring in the enactment should be construed in a manner consistent with its literal and grammatical sense and in the sense in which it applies in private international law. And, on this basis, the 3 judge Bench confined judicial intervention with an arbitral award to cases where the award was contrary to - the fundamental policy of Indian law, the interests of India or justice or morality.
In 2003, in ONGC Vs Saw Pipes,4 a 2 judge Bench of the Supreme Court, while dealing with the jurisdiction of the Court to set aside an award under the 1996 Act, adopting a wider construction, ruled that an award which, on the face of it, is in violation of statutory provisions, is not in public interest and that such an award would adversely affect the administration of justice. Thus, patent illegality, going to the root of the matter, resulting in such injustice and unfairness as shocking the conscience of the Court, was recognised as a ground to challenge an award, in addition to the grounds encompassed in Renusagar case.
In 2008, in DDA Vs M/s. R.S. Sharma & Co, 5 the Supreme Court set aside an award as being patently illegal for the reason that the award was against the specific terms of the contract between the parties.
Thereafter in 2014, a 3 judge Bench of the Supreme Court,6 in ONGC Vs Western Geco, while interpreting the phrase 'fundamental policy of Indian law', clarified that it would subsume all such fundamental principles which form the very basis for administration of justice in this country and illustratively (not exhaustively) outlined the following principles:
(i) judicial approach in all determinations affecting the rights of citizens and having civil consequences
(ii) adherence to principles of natural justice
(iii) the decision must not be perverse or irrational that no reasonable person would have arrived at.
Thus, in a score of years after the enactment of the 1996 Act, the Supreme Court, in the process of declaring/interpreting the term 'public policy', expanded the scope of judicial review of an award, corroding the institution of arbitration, instead of forging it.
By Act 3 of 2016, the 1996 Act was amended and the expanse of 'public policy of India' was limited to
(i) award induced or affected by fraud
(ii) award in conflict with fundamental policy of Indian law
(iii) award in conflict with most basic notions of justice and morality
However, the Act categorically provided that there shall not be a review on the merits of the dispute, while scrutinizing the award on the above said grounds.
The 'patent illegality' ground was introduced to determine the legality of domestic arbitral awards with a caveat that "an award shall not be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence".
In 2019, in Ssangyong Engineering,7 the Supreme Court took note of a supplementary report (February 2015) made by the Law Commission of India, after the Western Geco judgment was delivered by the Court and clarified the legal position as under:
"what is clear therefore is that the expression "public policy"….would mean fundamental policy of Indian law…relegated to Renusagar's understanding of this expression. This would necessarily mean that Western Geco expansion has been done away with…."
In its recent decision, in September 2024, in the matter of a domestic arbitral award,8 a 3 judge Bench of the Supreme Court, while restoring the award, affirmed that what is not subsumed within 'the fundamental policy of Indian law', cannot be brought in by the backdoor, when it comes to setting aside an award on the ground of patent illegality.
It could now be well said that, under the Indian Law, the relationship between the Courts and the arbitral process is distinctly complementary and co-operative and that the intervention of Courts is fostering the reference to arbitration and is not being antagonistic to the aims and operation of the arbitral process.
*****
_____________________
1 Seminar organized by the Gibson, Dunn, UNUM law & Secretariat on Recent developments in Arbitration to promote business.
2 Section 7 (1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961.
3 Renusagar Power Co Ltd Vs General Electric Co 1994 Supp 1 SCC 644
4 Oil & Natural Gas Corporation Ltd Vs Saw Pipes Ltd, 2023 5 SCC 705
5 DDA Vs M/s. R.S. Sharma & Co 2008 13 SCC 80
6 Oil & Natural Gas Corporation Ltd Vs Western Geco International Ltd 2014 9 SCC 263
7 Ssangyong Engineering & Construction Co Ltd Vs National Highways Authority of India, 2019 15 SCC 131; Associate Builders Vs DDA 2015 3 SCC 49
8 OPG Power Generation Private Limited Vs Enexio Power Cooling Solutions India Private Limited & Ors- MANU/SC/1040/2024
