One
of the remedies available for a party losing in the arbitration proceeding is
to approach the courts under Section 34 of the Arbitration and Conciliation Act
1996 (hereinafter termed as ‘the Act’) for setting aside the arbitral award.
Section 34 deals with the applications for setting aside arbitral awards on the
limited grounds mentioned therein. The grounds mentioned relate to the process
of the decision making of the arbitral tribunal and do not envisage the courts
getting into the merits of the award. Time and again, various courts have held
that the courts should not turn an application under the aforesaid provision
into an appeal and should not act as an appellate authority. Of the limited
grounds available, one such ground for setting aside the award is provided in
Section 34(2)(b)(ii) of the Act[1]
which provides for setting aside of award if the court finds that the arbitral
award is in conflict with the ‘public policy’ of India.
Scope of Public Policy under
Section 34 and Section 48
The
interpretation of this term ‘public policy’ has been a matter of contention and
has been much debated among practitioners and academicians alike. The sequence
of judicial pronouncements on the contentious issue as to what should be the
scope of ‘public policy’ and whether it should be given a narrow meaning or an
expansive/wide meaning began with the case of RenusagarPower Co. Ltd vs General Electric Co[2],
where the Supreme Court of India in a case of international commercial
arbitration seated outside India gave a narrow meaning to the term ‘public
policy’ and held that while construing expression ‘public policy’ in the
context of foreign award under Section 48 of the Act, only an award which is
contrary to i) fundamental policy of India, ii) interest of India, iii) justice
or morality; would be set aside on the ground that it is contrary to the public
policy of India. Subsequently, in a non-international commercial arbitration
case of ONGC v. Saw Pipes[3],
the Supreme Court gave an expansive meaning to the expression ‘public policy’
under Section 34 of the Act, stating that the expression ‘public policy’
connotes something of public interest or public good, and hence an award which is, on
the face of it, patently in violation of statutory provisions cannot be said to
be in public interest as such award/judgment/decision is likely to adversely
affect the administration of justice. Hence, apart from the grounds mentioned
in the Renu Sagar(supra) judgment, an award can also be set aside on the ground
that it is contrary to public policy if the award is patently illegal. The
Supreme Court in the case of Phulchand Exports. Ltd. v. OOO Patriot[4], extended the expansive
meaning given to the expression ‘public policy’ in ONGC v. Saw pipes(supra)
under Section 34 of the Act to the expression used in Section 48 of the Act and
held that even in international commercial arbitrations, a foreign award can be
set aside on the additional ground of patent illegality. However, subsequently
the Supreme Court in the case of Shri Lal Mahal Ltd. v. Prograto Grano Spa[5], overruled the judgment in
Phulchand Exports and restricted the gamut of expression ‘public policy’ in
case of international commercial arbitrations under Section 48 of the Act
(foreign awards) to the meaning ascribed in the Renu Sagar judgment(supra). The
scope of judicial intervention reached to its limits when the Supreme Court in
ONGC v. Western Geco[6], expanded
the ambit of challenging an arbitral award under Section 34 of Arbitration and
Conciliation Act 1996 by giving a broad meaning to the expression “fundamental
policy of Indian law”.[7]Thus,
the Apex Court widened the gamut of ‘Public Policy’ grounds under Section 34 of
the Act for challenging an arbitral award, thereby making international
arbitrations seated in India and domestic arbitration extremely vulnerable to
judicial intervention.
Arbitration Amendment Act 2015
The
Arbitration and Conciliation Act 1996 has been amended and it has brought about
significant changes with an intention to minimize judicial intervention andachieve
the purposes for which the Act was enacted in the first place. One of the
significant amendments that have been brought about is in Section 34 of the Act
as well as in Section 48 of the Act, where a clarification is provided as to
what it means by public policy. An Explanation is added to clause (b) of
sub-section (2) of Section 34 as well as Section 48 of the Act, stating that an
award shall be in conflict with the public policy only if it is in
contravention with the fundamental policy of Indian law or it is in conflict
with the most basic notions of morality or justice. A sub-section (2A) has been
inserted in Section 34 of the Act envisaging that an arbitral award arising out
of arbitrations other than international commercial arbitrations, may also be
set aside by the Court, if the award is vitiated by patent illegality appearing
on the face of the award, provided that the award shall not be set aside merely
on the ground of erroneous application of law or by re-appreciation of
evidence.
Effect of Arbitration Amendment Act
2015
Now,
Section 2(7) of the Act provides that any award made under this Part shall be
considered a domestic award. Part I of the Act applies to domestic awards i.e.
those awards that are made in India, whether in a purely domestic scenario
where none of the parties are in any way ‘foreign’ or those awards that are
made in international commercial arbitrations covered within Section 2(1)(f)
held in India.[8]Prior
to the amendment, the additional ground of ‘patent illegality’ was also
available for setting aside the awards passed in an international commercial
arbitration seated in India, as an award passed in an international commercial
arbitrations seated in India is considered to be a domestic award under Part I
of the Act. However, as per the new amendment, the scope of public policy is
narrowed down for international commercial arbitrations that are seated outside
India as well as for international commercial arbitrations seated in India.
The
new amendment does not distinguish between international commercial
arbitrations seated in India or outside India and simply lays down that an
arbitral award ‘arising out of arbitrations other than international commercial
arbitration’ can be set aside on the ground of patent illegality. Hence, the
ground of patent illegality is available only for purely domestic arbitrations
seated in India where none of the parties are in any way ‘foreign’.
The Sasan Power judgment of Supreme Court, though upheld judgment by Madhya Pradesh High Court for other reasons , did not delve into the question of whether two indian parties can legitimately have a foreign seated arbitration and whether such an arbitration would not be in violation of public policy. What would be interesting is when two parties have a foreign seated arbitration, as per Section 44 of the Act, the award passed in such an arbitration would be a 'foreign award' under Part II of the Act. Now, observations in Madhya Pradesh High Court judgment, suggest that two indian parties can have a foreign seated arbitration and legitimacy of such an award qua 'public policy' can be ascertained at the time of enforcement(if the award is to be enforced in India) under Part II of the Act. A pertinent question arises that as per the changed applicability of patent illegality, such an award between two indian parties in a foreign seated arbitration cannot be challenged on the ground of being 'patently illegal' to any laws being force in India, hence cannot be termed as against public policy merely because the award is in patent violation of laws in India. This can be a hurdle when scrutinised by courts in India prior reference to arbitration, as, if such an arbitration clause (between two indian parties in a foreign seat) is held to be valid, the award so passed in such an arbitration cannot be challenged in Indian courts on the ground of being patently illegal against the laws in force in India, and can only be refused to be enforced on the narrow grounds of being against fundamental policy of India, interest of India, justice and morality. However, alternative view can be that the ground of fundamental policy of India is too wide, hence under its compass an award can be refused to be enforced if it so much so against interests of public at large or public good.
In another post, we would analyse various provisions of Arbitration Act discuss the possibility of whether 'two indian parties can have a foreign seated arbitration'.
Conclusion
The
amendment is nevertheless a welcome step as it endeavors to reduce the enhanced judicial
intervention in arbitrations, where arbitration was reduced to a mere foreplay
to litigation. By providing a clarification as to what it means by ‘public
policy’ in the Act itself, the Act has put down to rest the debate on as to
what is the gamut or scope of public policy for challenging an award under
Section 34 and Section 48 of the Act.
[1]Section 34(2)(b)- An arbitral
award may be set aside by the Court only if the Court finds that i) the subject
matter of the dispute is not capable of settlement by arbitration under the law
for the time being in force; ii) the arbitral award is in conflict with the
public policy of India.
[5]Shir Lal Mahal v. ProgatoGrano Spa,
(2014)2SCC433;
[7]“fundamental policy of Indian
law” encompasses three juristic principles which are (i) that every court or
authority is bound to adopt a “judicial approach” or bona fide approach in the
determination of any matter, (ii) the court or authority must, while
determining the rights and obligations of parties before it, do so in
accordance with the principles of natural justice; and (iii) perversity or
irrationality of decisions was to be tested on the touchstone of the Wednesbury
principle of “reasonableness”
[8]Balco v. Kaiser, (2012) 9 SCC
552; Read para 88- “Therefore, it
would appear that the term “domestic award” means an award made in India
whether in a purely domestic context, i.e., domestically rendered award in a
domestic arbitration or in the international context, i.e., domestically
rendered award in an international arbitration. Both the types of awards are
liable to be challenged under Section
34 and are enforceable
under Section
36of the Arbitration Act, 1996. Therefore, it seems clear that the object
of Section
2(7) is to distinguish the domestic
award covered under Part I of the Arbitration Act, 1996 from the “foreign
award” covered under Part II of the aforesaid Act; and not to distinguish the
“domestic award” from an “international award” rendered in India.”
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