Guest Post: Public Policy of India and the Arbitral Award: Fighting the Unending Battle

(The following guest post is contributed by Amrit Mahal, a fourth-year student at the National University of Juridical Sciences, Kolkata)

The
Indian Arbitration and Conciliation Act, 1996 (hereinafter, “Act”) was enacted
with a view to bring the Indian arbitration regime in line with international
practice. Providing for a limited judicial review of arbitral awards, Section 34(2)(b)
and Section 48(2)(b) of the Act permit a court to set aside an arbitral award which
is found to be in conflict with the “public policy of India.” The Act however, shirks
from defining a clear ambit of public policy, leaving its interpretation to the
judiciary. This loophole in the statute has proved to be a recurring worry. The
judiciary has adopted an expansive approach to its interpretation, and opened a
floodgate of litigation seeking to set aside binding arbitral awards that are
in alleged conflict with Indian public policy. Twenty years later, the
Arbitration and Conciliation (Amendment) Act, 2015 has put a cap on the width
of this expression based on the recommendations of the Law Commission. While
the move is a welcome step, the cap seems to be a minimal restriction, still
leaving interpretation in the hands of the judiciary.

Navigating
the meaning of “public policy”
The
Supreme Court first interpreted the expression “public policy” in
Renusagar
Power Co. v General Electric Co.
(hereinafter,
“Renusagar”), noting that the enforcement of a foreign award could be
refused on the ground of public policy only
if such enforcement was contrary to a) the fundamental policy of Indian law, b)
the interests of India, or c) justice and morality. The most notable case on
“public policy” however is
Oil
& Natural Gas Corporation Ltd v Saw Pipes Limited
.
The Supreme Court expanded the definition further, observing that in addition
to the three grounds listed in Renusagar, the court would also check whether
the award has a “patent illegality,” i.e. an illegality that went to the root
of the matter. Such a situation could arise where the award was contrary to the
substantive laws of India or where the tribunal did not record proper reasons
for its decision. The decision had the effect of permitting Indian courts to
examine the “root of the matter” and set aside an award where it was unsatisfied with the evaluation or reasoning
undertaken by the arbitral tribunal. This created a stepping stone for losing
parties to have their case reviewed again on challenge. In this manner, the
approach compromised the “final and binding” nature of an award, and rendered
arbitration an ineffective system of alternative
dispute resolution.

In
the absence of a clear meaning of “public policy of India” and a permitted
review on merits, a regressive trend had been set for arbitration in India. Not
only does such a regime make arbitration an unreliable system, but excessive
judicial intervention also erodes the faith of Indian and foreign businesses to
commit to business in India. In a regime where arbitration is likely to end in
long drawn legal battles that cost time and money, large business commitments
are dis-incentivized. Further, an unreliable and unfriendly arbitration regime
also impacts India’s ability to become a hub for commercial arbitration,
contrasted with the growing legal services market in other Asian hubs like
Singapore and Hong Kong.

The Recommendations of
the Law Commission
In
August 2014, the Law Commission submitted its 246th Report to the
Central government recommending several amendments to the Act. The Commission
tightened the interpretation of “public policy” under both Section 34 and
Section 48, recommending that the award would be in conflict with public policy
only if it was induced by fraud or
corruption or was opposed to the “fundamental policy of Indian law” or “most basic
notions of morality or justice.” It removed “interests of India” as well as
“patent illegality” from the definition, both of which permitted judicial
overreach.

The
Law Commission also observed that under the statute, grounds for setting aside
an award and conditions for refusal of enforcement are in pari materia and as such, both domestic and foreign awards are
treated the same way. However, the legitimacy of judicial intervention in a
purely domestic award is far greater than in cases where the court is examining
a foreign award. The Commission thus recommended that Section 34 (2A) be
inserted to permit setting aside purely domestic awards on the ground of
“patent illegality appearing on the face of the award.” At the same time, to
avoid excessive intervention, a proviso was recommended stating that the award
would not be rendered defective merely “due to erroneous application of law or
by re-appreciation of evidence”. Thus, not only did the Commission prescribe an
exhaustive definition of public policy, but also expressly prohibited a plain
review on merits.

Separation
of patent illegality from the definition of public policy ensures that it is
not applicable to any international arbitrations, be it for challenge to the
award or for its enforcement. This was a much needed step to regulate judicial
intervention and help build trust towards the Indian arbitration regime in the
international community. In contrast, the expression “public policy” while
formally defined, leaves interpretation of fundamental policy of Indian law and
basic notions of justice and morality in the hands of the judiciary. Within a
month of the recommendation, the ambiguity of the term “public policy” struck
the Law Commission (and the arbitration regime) again.

In
September, the Supreme Court in
ONGC Ltd. v Western
Geco International Ltd.

(hereinafter,
“Western Geco”)
observed that the term
“fundamental policy of Indian law” had not been expounded upon. Thus noting,
the Court held that the expression would include first, adopting a ‘judicial
approach,’ which involves giving a reasonable and non-arbitrary decision, second,
adhering to the principles of natural justice, and third, rendering
a decision that adheres to a high threshold of reasonableness (Wednesbury
principle) i.e. the decision must not be “so perverse or irrational that no
reasonable person would have arrived at the same.” To determine whether the
decision was reasonable, the Court would necessarily involve itself in the
facts of the matter and the evidence available (which was also undertaken in
Western Geco). Thus, one again, the Court empowered itself to adjudicate upon
whether the reasoning and conclusion of the tribunal is satisfactory.

Responding
to this development, the Law Commission published a Supplementary to Report No.
246 in February 2015 detailing this development, and noted that the Western
Geco had expanded the Court’s power to review an award on merits. Such a review
was “contrary to the object of the Act
and international practice
.” The Report recommended that an explanation be
added to Section 34(2)(b) stating that “fundamental
policy of Indian law shall not entail a review on the merits of the dispute
.”
The Law Commission has thus, attempted a second time to shut the gates to routine
challenges to arbitral awards by losing parties. In January 2016, all of these
recommendations took form in the Arbitration and Conciliation (Amendment) Act,
2015.

The Battle Continues
Arbitration
is sought-after as a private, faster and cheaper means of dispute settlement.
However, excessive and unpredictable court intervention has rendered the Indian
arbitration regime unreliable. With the amendments in place, the Act has
expressly prohibited a review on merits under “fundamental policies of Indian
law” or “patent illegality.” While this proves to be a welcome move, there
still remains ambiguity in what these expressions entail. The three-pronged
approach to the interpretation of fundamental policy of Indian law prescribed
in Western Geco leaves little understanding of how judges will determine
whether the tribunal applied a “judicial approach” or whether the award is
reasonable, especially in light of the prohibition on a review on merits. The
Act has ensured a minimal standard of protection by preventing such review, but
the building blocks of conflict with public policy remain undefined. Further,
another judicial bench may very well alter the approach in Western Geco and
expand or narrow down the meaning of the “fundamental policies of Indian law.”

It
may also be pertinent to consider how appropriate it is to draw principles of
administrative law into arbitration and to what extent it may be permissible.
The same question has been answered in the negative in Singapore in
Sui
Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd
,
where the Wednesbury principle was categorically rejected “as a matter of principle and authority” by the court as a ground
for review of awards. The Court observed that there was no appropriate analogy
to draw between administrative and arbitral decisions. The former is subject to
judicial scrutiny on the Wednesbury principle because it is presumed that when
the Parliament gives an administrative decision-maker some discretion, it will
be exercised reasonably. In contrast, parties to an arbitration contractually
agree to abide by the decision of the tribunal and consent to the finality of
the award. Further, even if the award is so unreasonable as to be perverse, it
will still be an examination of the error of law or fact. The Court however,
cannot sit in appeal on a final and binding arbitral award. Thus, an import of
administrative law principles into public policy, and in particular, the
Wednesbury principle may be questionable.

The
unpredictability of the Indian arbitration regime has been especially
cumbersome for international businesses who fail to have any clarity and
assurance of dispute settlement here. Excessive judicial intervention reduces
trust in arbitration as a system of adjudication within India and abroad, and
the legislature must take more responsibility in setting clear outlines to the
expressions devised by the judiciary. Until then, the “public policy of India”
remains to some extent, a threatening dark sea in Indian arbitration.

About the author

V. Niranjan

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