Public Policy Exception for Setting Aside of Arbitral Awards - Indian Position

Abstract

Public policy is an exception, in India, for setting aside of Arbitral Awards, both foreign and domestic. But the definition of this term is nowhere mentioned in the Arbitration and Conciliation Act, 1996 and hence its interpretation and application has largely been in the hands of the judiciary. This paper will explore and analyze various landmark judgements delivered in this realm to draw an understanding of how the scope and extent of application of the public policy exception and how it has evolved over time.

Public policy is a ground under the Arbitration and Conciliation Act, 1996 for setting aside of arbitral awards. It presents itself in two sections – (a) Section 34 (2)(b)(ii) under which an arbitral award passed domestically can be set aside if it violates public policy and (b) Section 48 (2)(b) under which the enforcement of a foreign award may be refused if it would be contrary to the public policy. But, unfortunately the statute nowhere defines the term ‘public policy’ thereby leaving open the doors for various interpretations. The scope and extent of application of the public policy exception to decide the maintenance of the arbitral award has been continuously debated. We shall look at certain landmark judgements to understand how the law has evolved in this realm.

The first case that is important to discuss is the Renusagar case² which was a judgement prior to the 1996 Act. The Court in this case had first interpreted the term ‘public policy’ under Section 7 of the Foreign Awards Act. Using a very narrow interpretation it said that since the Act in question was concerned with enforcement of foreign awards which are regulated by public international law, therefore the term public policy must also be interpreted in that sense only.³ It held that the bar of public policy will only apply on the enforcement of a foreign award only when its enforcement would be contrary to (a) fundamental policy of Indian law or (b) interests of India or (c) justice and morality.⁴ It was established that “contravention of law alone will not attract the bar of public policy and something more than contravention of law is required.”⁵

The 2003 case of SAW Pipes case⁶ considerably widened the scope of public policy exception while faced with a challenge to a domestic arbitral award rendered in India. The Court also added an additional ground to the existing grounds laid down by the Renusagar case – patent illegality. It reasoned that the general parameters of what conflicts with public good and public interest keep changing and hence ‘public policy’ shall be given a wider interpretation to include awards which are patently in violation of statutory provisions which would always against public interest. The said violation should not be trivial but shall have the effect of shocking the conscience of the Court.⁷ This case opened floodgates of litigation because now the Court could at the award enforcement stage, review the merits of the case and decide on the validity of the award.

The ground of patent illegality laid down in SAW Pipes in relation to domestic arbitral awards, was extended to apply to enforcement of foreign awards as well by the ruling of the SC in the Phulchand case⁸. This case widened the scope of public policy vis-à-vis foreign awards. This case was soon overruled by Shri Lal Mahal case⁹ by refusing to apply patent illegality as a ground and thereby restoring the old position of the Renusagar case with respect to foreign awards. The 246^th Law Commission Report in 2014 proposed adding a definition of public policy based on the principles in the Renussagar case with the exception of ‘in the interests of India’ because the same could be subject to interpretational misuse.¹⁰ Along with this it also suggested limiting patent illegality to domestic cases.

The Court in Western Geco despite having the chance to overrule the problematic judgement of SAW Pipes under Article 34, chose to agree with the SAW Pipes case and took the next step in the direction by expounding the meaning of ‘fundamental policy of Indian law.’ It held that the phrase constituted of three distinct juristic principles – (a) responsibility to employ a judicial approach, to act in a fair and non-arbitrary manner, (b) abiding by principles of natural justice and (c) the decision made shall not be so unreasonable and perverse that no reasonable person could have arrived at that (basically the Wednesbury principle).¹¹ According to this, a domestic award could be set aside if any of the above three criterions along with the ones established in Renusagar and SAW Pipes is met. This decision further broadened the scope of the public policy exception because it required the judge to take up the role of the arbitrator and re-evaluate the case using the Wednesbury principles.

The next case to be considered is the Associate Builders case¹² which added fuel to the fire by expanding the public policy exception even more. In the aim of doing damage control for the Western Geco case and restoring the narrow viewpoint laid down initially in the Renusagar case, the Court elaborated on various terms of public policy. Even after stating that the grounds for setting aside of the award shall be limited, it added a new ground for the same, as disrespecting superior court’s order. The one good thing was that it established was that the Court at this stage shall not take up the role of court of appeal, though it might in some circumstances adopt a merit review mechanism. The Geco and Associate Builders case could have an effect on foreign awards as well because the principles that could be invoked in cases of foreign awards is not clear.

The Supplementary Report to the 246^th Law Commission report and the 2015 amendment were next in line. The former had made reference to the ONGC v Geco case, especially about the inclusion of Wednesbury principles and as a result added an explanation to Section 34 which stated that a review based on the merits of the case would not be allowed, for assessment of public policy violation. The latter added Section 34(2A), which were similar in principle to the guidelines laid down in Renusagar case and explanation 1 and 2 to Section 48 of the Act, which makes it clear that the public policy exception to foreign award cases would be similar to the domestic award cases with the exception of patent illegality, which is only available in domestic arbitration cases.

This position was not held for long. The Court in the very next case, Venture Global case¹³ where the Court held that patent illegality would apply as a ground for setting aside foreign awards only if the arbitration agreement was entered into before the amendment. The 2018 case of Ansaldo Energia¹⁴ saw the Court modify a part of the award based on certain conditions that it laid down in which it can interfere, despite it being against the law. This practice of Courts interfering with the award at award-enforcement stage by Section 5 and justifying it as minimal interference on the grounds of patent illegality, even after the 2015 Amendment is problematic. While dealing with a Section 34 appeal under Section 37, the Court in the Vedanta case¹⁵ held that its powers under the section are only procedural and restricted to ensuring that the proceedings have been carried out properly. This judgement shows restraint on the part of the court which is a breath of fresh air.

The SC in the 2019 Ssangyong Engineering case¹⁶ removed the inclusion of judicial approach as a sub-set to public policy as was seen in Geco and Associate Builders. The Court had set aside the majority award because the award had unilaterally altered the contract’s underlying terms. Despite the fact that the case was related to a domestic award, the Court proceeded to declare under what conditions enforcement of a foreign award can be refused.¹⁷ It also confirmed the prospective application of the 2015 Amendment and hence reinforced a narrow view of the public policy exception.

It was then held in Vijay Karia case that the Court can exercise its discretion for refusing the enforcement of a foreign award on certain grounds but the grounds of fraud, corruption, fundamental policy of Indian law, notions of justice and morality have been excluded from the list.¹⁸ This goes on to show the intention of keeping the Courts away from interfering into the substance of the award. In the South East Marine case, the Court set aside the award given by the arbitral tribunal, under Section 34 on the ground of patent illegality by justifying that the contract was interpreted by the tribunal in an unreasonable manner.¹⁹ This action of the Court, intervening into the merits of the case was against the 2015 amendment against the Court reviewing the award on its merits. This proved to be a step back in the progress that was happening slowly. The Court in the NEEPCO case also set aside the award based on patent illegality, but this was justified because the petitions in the case were filed after the amendment, unlike the previous case, and hence the Court set aside the award as it found it to be very unreasonable.²⁰

The 2020 latest judgement in the NAFED case has been another disappointment in the realm of foreign arbitral awards. In this case, foreign award was set aside by the Court because in its opinion, the enforcement of the award would have violated the public policy of India as an export was made without the government’s permission. This case has once again widened the scope of application of the public policy exception by going into the facts and interpreted the contract in question.²¹ The most recent case of GOI v Vedanta has tried to correct the damage made by the NAFED case. It established that enforcement court, cannot under Section 48, re-assess or re-appreciate the evidence that was presented in the arbitration and thereby refuse the enforcement due to the fact that it made a different interpretation.²²

Based on the trajectory of these cases it can be concluded that the position of the public policy exception in India is changing constantly. There is no doubt that it is indeed an unruly horse i.e. the position of the public policy exception for setting aside of arbitral awards is very uncertain and changing. Despite the number of efforts made to tame it in the form of amendments, progressive judgements like Ssanyong and GOI v Vedanta, the decisions in cases like the NAFED, Western Geco and Ansaldo Energia have made it difficult for progress to be made and hence the taming of the unruly horse has not been achieved yet. The exception continues to extend to much broader application than necessary and the same shall be controlled to protect the provision being misused.

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