Public policy grounds for arbitral awards in arbitration law

Abstract :

Public policy's traditional function was to restrict the application of foreign law and to acknowledge and uphold foreign rulings and awards. The UNCITRAL model legislation and the New York Convention both recognize the significance of public policy in upholding arbitral awards, despite the fact that this is a divisive and difficult topic in the area of arbitration. In India, an arbitral judgment may be overturned if it contravenes Indian public policy, according to Sections 34 and 48 of the Arbitration and Conciliation Act, 1996. Although the A & C Act of 1996 does not provide a clear definition of public policy, the courts have attempted to do so through a number of rulings. This theory is occasionally applied by local courts to invalidate foreign arbitral awards. In international business arbitration, the disputing parties are free to select the applicable laws; nonetheless, they depend on domestic laws and courts for the recognition and enforcement of an award. The court may decline to recognize and enforce an award if it believes that it deals with an issue that is against public policy. It is exceedingly difficult to determine which award will be permitted and which will violate the principle because public policy notions are not standard throughout states and have been construed differently in various jurisdictions. As a result, it poses a significant obstacle to international commercial arbitration. The Indian judiciary took action to define it and restrict the theory of public policy in order to address this problem. The Arbitration and Conciliation Act, 1996 was finally revised by the Indian Parliament in 2015, and the definition of "public policy" was made clearer.

Keywords :

Public Policy, International Commercial Arbitration, The Arbitration and Conciliation Act 1996, New York Convention, Arbitral award.

Introduction :

Alternative dispute resolution is more flexible and informal than the legal system, and it offers additional benefits, it gives disputing parties hope. One method of resolving a dispute outside of court is arbitration. It grants the parties control over some parts, such as selecting arbitrators, determining their qualifications, location, date, and time, and—above all—finalizing a set of laws and procedural norms that apply to the dispute. Additionally, both national and international rules provide for the least amount of judicial action. Only the narrow circumstances specified by the Arbitration and Conciliation Act, 19963 (the Act) allow the judiciary to get involved in arbitral proceedings. According to the agreement, it is to safeguard the parties' rights to settle their disagreement by arbitration, a recognized form of conflict settlement, and this shouldn't be impeded by unwelcome judicial interference. This autonomy is not unrestricted, though, as both national and international law contain rules that serve as a check on the idea of party autonomy. In this study article, the researcher has examined the idea of "public policy," which functions as a constraint on the autonomy of parties. Sections 344 and 485 were modified in 2015, nonetheless, to restrict the definition of "public policy."

Finality of arbitral award :

As per the national and international laws, the decision of an arbitral tribunal is final and binding on parties and persons claiming under it. Judicial intervention is allowed in defined circumstances; therefore, if aggrieved party wants to set aside an arbitral award it can be done by the court ‘only’ on the grounds defined under Section 34, Part I of the Act. According to Section 34(2)(a), the party has to establish that:

a. the party is under some incapacity,

b. the arbitration agreement is invalid under the laws applicable,c. the arbitrator has appointed without giving due notice to the party,

d. the constitution of the arbitral tribunal is not as defined by parties, unless otherwise,

e. the dispute or the matter covered by an arbitral award is not within the scope of arbitration according to the submission agreement,

f. the arbitral tribunal has not followed the procedure defined by parties, unless otherwise.

Apart from the above mentioned, there are two more grounds on which the court may set aside an arbitral award; arbitrability and public policy. This provision is based on Article 34 of the UNCITRAL Model Law on International Commercial Arbitration, 1985 which is the first recourse against an award at the seat of arbitration. Part II of the Act gives effect to the New York Convention 1958 (NY Convention), the Geneva Protocol 1923, and Geneva Convention 1927 which deals with the recognition and enforcement of foreign arbitral awards under the Act. Sub-section (1) and (2) of Section 48 of the Act based on Article V of the NY Convention define more or less similar grounds stated under Section 34 of the Act on which a local court where the recognition and enforcement sought may deny it. Among all grounds, the principle of public policy gives scope for interpretation also works as a limitation on party autonomy.8 Let’s see how!

Doctrine of public policy :

The term ‘public policy’ has not been defined under the Act nor under any convention which makes it difficult to interpret and this gives an opportunity to judge to decide its course. It has been defined in different ways in different jurisdictions across the globe. The House of Lords in 1853 defined public policy as the legal principle which forbids the subject from doing something which is injurious to the public or against the public good. It means the things which are injurious to the public, against the good morals or public good are not allowed to do in that particular jurisdiction. So, if an arbitral award deals with such matters, contrary tolaws or standards, violate the notion of morality and justice prevail in the court’s jurisdiction such awards will be vacated by the domestic court. For example, there is a dispute between parties over casino profit. The disputing parties may resolve it through arbitration. Now, some states will consider it as a commercial dispute and will allow its enforcement. However, the states with strict rules against gambling may not be enforced on the ground of public policy as it is illegal in that particular jurisdiction. A similar approach has been adopted by the US Second Circuit Court of Appeals in Parsons & Whittemore Overseas Co., Inc. v. Societe Generale de I’Industrie du Papier10 while affirming the arbitral award against an American Company. The court stated that the term public policy should be interpreted narrowly and the enforcement of foreign awards under the NY Convention may be denied if it goes against the basic idea of morality and justice. The Supreme Court of Korea stated that the basic tenet of the public policy principle is to protect the fundamental moral beliefs and social order of the country where recognition and enforcement are sought from being harmed. Here, the Korean court gave a narrow interpretation and on the same note, the Swizz court in K S AG v. CC SA upheld the constrained approach of the public policy principle. Apart from international commercial arbitration, in the US, courts from states like Ohio, South Carolina, and North Carolina consider that the binding arbitration agreements between parents to resolve child support disputes violates public policy.

Indian legal system and doctrine of public policy :

Section 34(2)(b)(ii) and 48(2)(b) states that the court may set aside and refuse to enforce an arbitral award, respectively, if it contradicts with the notion of ‘public policy’ prevailed in the state. The Act is silent on its meaning however, the judiciary has taken an initiative to decode. It denotes the fundamental policy of law, justice, and morality. The Supreme Court discussed this issue in a number of cases. In Renusagar Power Co. Limited v. General Electric Company (Renusagar), the Apex Court interpreted the term ‘public policy’ defined as the ground for setting aside an award under the Foreign Awards (Recognition and Enforcement) Act, 1961. The Court held that the term used in a very restricted sense, therefore an arbitral award cannot be barred under public policy principle merely on the ground of violation of Indian laws. The judges have to look for something more to apply the bar of public policy to foreign arbitral awards. It observed that to refuse the enforcement of foreign awards on the ground of public policy the court should find that award contrary to:

(a) Fundamental policy of Indian Law; or (b) The interest if India; or

(c) Justice or morality.

In furtherance of the above observation, the Indian judiciary has expanded the scope of the term ‘public policy’ by adding few more grounds to it. In 2003, in Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd (ONGC) the Supreme Court observed that the role of the court under Section 34 of the Act is appellate/revision court therefore, the vast powers are conferred by the Act. It stated that the ‘patent illegality’ could be a valid ground to set aside an arbitral award. As per the decision, to call an award ‘patently illegal’ has to disregard the substantive provisions of law or contradict the terms of the contract. If the given condition is satisfied, the court can intervene and pass an order under Section 34 of the Act. The court further added that the narrow approach would make some provisions of the Act insignificant, so an extensive interpretation is a prerequisite of the statute to vacate ‘patently illegal’ awards There was a difference between Renusagar and ONGC as the earlier one was dealing with enforcement of an award under Section 7 of Foreign Awards (Recognition and Enforcement) Act, 1961 (since it is repealed Section 48 of the Act govern this field) and later with validity under Section 34 of the Act. However, it increases the burden of the Indian judiciary. Now, every award with an error of application of legal provisions could be challenged under Section 34 of the Act by virtue of newly added ground. Indian courts re-heard the awards on merits which defeated the very basic purpose of the arbitration. In 2011, one more case related to the ‘public policy’ under Section 48 of the Act was filed before the Supreme Court. In Phulchand Exports Ltd. v. OOO Patriot (Phulchand) the Supreme Court held that the test given in ONGC must be followed for foreign awards as the expression ‘public policy’ under Section 34 and 48 of the Act are the same. The Supreme Court brought foreign awards and domestic awards on the same page without specifying reasons for ignoring the difference between these two drawn by the Act. It expands the meaning of the term ‘public policy’ in India. However, Phulchand ruling had a short span, it was overturned in Shri Lal Mahal Ltd. v. Progetto Grano Spa (“Lal Mahal”). The Apex Court held that the term ‘public policy’, defined as ground under Section 48 of the Act, doesn’t cover the ‘patent illegality. This decision restored the position held in Renusagar with respect to enforcement of the foreign award and ceased application of ONGC to Section 48 cases. It ended strikes on the foreign awards on the ground of ‘patent illegality’ by narrowing down the scope of the term ‘public policy’ in India. The court observed that an application of the term ‘public policy’ under Section 48 of the Act is restricted to the arbitral awards contradicting the fundamental policy of India, the interest of India, and justice and morality. Section 48 of the Act doesn’t give an opportunity to review the awards on the merits. Further, it was expected from the highest judicial forum that ONGC v. Western Geco International Ltd. (Western Geco) will review the explanation of the term ‘public policy’ under Section 34 of the Act and override the ONGC. However the Apex Court broadened the scope of ‘public policy’ and observed that the term ‘public policy’ must include all such fundamental principles as providing a basis for the administration of justice and enforcement of law in this country. According to the court, the fundamental policy of Indian law includes three distinct and fundamental juristic principles, those are:

a) the adjudicating authority must adopt a judicial approach while defining the rights of the citizens,

b) the adjudicating authority must follow the principles of natural justice and consider relevant facts of the case to determine the rights and duties of parties,

c) the court should not allow the enforcement of perverse or irrational awards.

These are the judgments that widened the scope of the expression ‘public policy’ referred under Sections 34 and 48 of the Act. To limit the scope of interpretation of the term ‘public policy’, the legislature added explanation to Section 34 and 48 through the Arbitration and Conciliation (Amendment) Act, 2015.

The 246th law commission report and the 2015 amendment :

The Law Commission of India (the Law Commission) responded to these judgments in February 2015 by issuing a supplement to the 246th Law Commission Report, published in August 2014. The Law Commission criticised the Supreme Court decisions in ONGC and Western Geco for broadening the scope of the term ‘public policy’ and “opening the floodgates”. The Law Commission highlighted that the exhaustive list of grounds defined under Section 34 and 48 of the Act are related to the procedural issues and the courts are not supposed to go into the substantive problem. The Law Commission recommended the definition of public policy given by the Supreme Court in Renusagar. Considering the recommendations of the Law Commission on this particular issue, the Parliament amended the Act through the Arbitration and Conciliation (Amendment) Act, 2015. It adds explanation to the Section 34 and 48 of the Act. According to the amended provision, the court may set aside an arbitral award or deny enforcement if it conflicts with the public policy of India, only if:

1. The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

2. It is in contravention with the fundamental policy of Indian law; or

3. It conflicts with the most basic notions of morality or justice.

This amendment limits the scope of ‘public policy’ and reduced the scope of judicial intervention.

Conclusion :

Arbitration is one of the ways of alternative dispute resolution. It has been preferred by the parties for commercial disputes especially international because of its unique features, like, party autonomy and minimal court intervention. Parties to an arbitration agreement are permitted to select the applicable laws to the subject matter of dispute as well as procedural aspects of the arbitration. However, the doctrine of ‘public policy’ limits the party autonomy as ultimately the finality and enforcement of the arbitral award depend on the laws prevailing at the seat of arbitration and place the party seeking enforcement. Interpretation of the term ‘public policy’ varies from state to state, time to time as stated by the Supreme Court in Murlidhar Agarwal and another v. State of U.P. and others. It was observed by the court that the notion of public policy changes with time, generation, community, and state. Even in one generation, it may change its course. It never remains the same or static. It became useless it didn’t change or remain in fixed moulds. So, an award finalised in one state may be denied its enforcement at another. The term ‘public policy’ gives power to the court to decide its future course and the same was observed in India since Renusagar to Western Geco. This issue has been resolved by the Arbitration and Conciliation (Amendment) Act, 2015 which is giving a positive result. Since the amendment, the courts have refused to examine the Section 34 and 48 cases on the merits, act as an appellate authority, or give a wide interpretation to expression ‘public policy’. In Venture Global Engineering LLC and Ors v. Tech Mahindra Ltd. and Ors, the Hon’ble Supreme Court held that the grounds specified under Section 34 of the Act are the ‘only’ grounds on which the court can set aside the awards. While dealing with Section 34 cases the court should not act like an appellate court, they are not supposed to examine the legality of an award on merits of claims by entering into a factual arena. The same approach has been adopted by the judiciary in other cases like Sutlej Construction v. The Union Territory of Chandigarh. Now, the courts are realising that they have to intervene in the arbitral process ‘only’ in specified conditions and grounds defined by the Act and give some free-way so an arbitration can achieve its intended objectives.