Judicial Intervention In Arbitral Awards On The Grounds Of Public Policy

Manvi Singh, Himanshi Nigam, Ritu Ranjan Sharma and Harshita Singh examine the judicial interpretation given to public policy regarding the enforcement and setting aside of international arbitral awards and emphasis the need for courts to restrain themselves from interfering in international commercial arbitration awards as far as possible

Public policy generally
The Arbitration and Conciliation Act, 1996 was conceived by the compulsions of globalisation leading to adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law. This Act is by and large an integrated version of the 1940 Act which governed the domestic arbitration, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Award (Recognition and Enforcement) Act, 1961, which governed international arbitral awards. Apparently, Chapter I to VIII of the UNCITRAL are replicas of Chapters I to VII of the Part-I of the 1996 Act, with the difference that in the UNCITRAL the provisions are called ‘Article’ whereas under the Act they are called ‘Section’.1  The main objectives set out in the Statement of Objects and Reasons of the 1996 Act are “to minimise the supervisory role of courts in the arbitral process” and “to provide that every final arbitral award is enforced in the same manner as if it were a decree of the Court”. 2

Public policy is that principle of law which holds that no subject can lawfully do, which has a tendency to be injurious to the public or against the public good, which may be termed, as it sometimes has been, the policy of the law or public policy in relation to the administration of the law. Public policy connotes some matter which concerns public good and public interest. The concept of public policy varies from time to time.3

Public policy in relation to international commercial arbitration
The UNCITRAL Model Law Commission stated in its report4  that the term “public policy” comprises “fundamental principles of justice”. It was understood that the term public policy which was used in the 1958 New York Convention and many other treaties, covered fundamental principles of law and justice in substantive as well as procedural respects. Thus, instances such as corruption, bribery, or fraud and similar serious cases would constitute a ground for setting aside an award.

In the case of Renusagar Power Plant Co. Ltd. Vs. General Electric Co.,5  the court in view of the absence of a workable definition of “international public policy” found it difficult to construe the expression “public policy” in Article V(2)(b) of the New York Convention to mean international public policy as it could be, construed both in narrow or wide sense. In the Renusagar case, it has been observed:

“It is obvious that since the Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction.”

The Supreme Court, while construing the term ‘public policy’ in Section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, applied the principles of private international law and held that an award would be contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

The trend in India is similar to that in England i.e. public policy could be interpreted in a narrow sense and a broad sense. It may be taken into consideration that in Deutsche Schachtbau-und Tiefbohrgesellschaft mbH Vs. Ras Al Khaimah National Oil Co.,6  Sir John Donaldson M.R. has said, “Consideration of public policy can never be exhaustively defined, but they should be approached with extreme caution.”

ONGC Vs. Saw Pipes7  case
The limited grounds of challenge provided under Section 348 are universally recognised. It is well accepted that the courts have no power to get into the merits of the dispute. However, this basic proposition was put to test and suffered a setback in the case of ONGC Vs. Saw Pipes Ltd. In this case, an award was challenged on the ground that the arbitral tribunal had incorrectly applied the law of the land in rejecting a claim for liquidated damages.

Two errors of great magnitude that have been committed in this case are:

  1. While reviewing the merits of the ONGC case,9 the court failed to consider the labour strike in entire European continent, something which was neither under the control nor could be predicted by SAW Pipes. This particular aspect has been completely overlooked by the court.
  2. The decision of the two judges Bench in ONGC has bypassed the ruling of the three judges Bench of Supreme Court in the Renusagar case. That shows both judicial indiscipline and violation of the binding precedent of a larger Bench. While the Bench in Renusagar case held that the term ‘public policy of India’ was to be interpreted in a narrow sense, the Division Bench went ahead unmindful of the prior precedent and expanded the same to such an extent that arbitral awards could now be reviewed on their merits. This is a huge step backwards in laws relating to alternate dispute resolution in the era of globalisation.

The Supreme Court’s judgment in this case expanded the concept of public policy to add that the award would be contrary to public policy if it was “patently illegal”. The Supreme Court distinguished SAW Pipes case10  from that of Renusagar11 on the ground that the Renusagar judgment12  was in context of a foreign award, while the ratio of SAW Pipes13  would be confined to domestic awards only. And in the name of public policy, the court went on to re-appreciate the question of facts, mixed question of fact and law and pure question of law, which is most undesirable in international commercial arbitration, as it would lead to uncertainty, a factor which no businessman in international business transaction would like to have.

It may be correctly stated that the ratio set in ONGC Vs. Saw Pipes14 makes a significant dent in the jurisprudence of arbitration in India and has come in for some sharp nonetheless deserving criticism. Mr. Fali S. Nariman, one of the greatest lawyers of our generation, remarks on the judgment as having “virtually set at naught the entire Arbitration and Conciliation Act of 1996…To have introduced—by judicial innovation—a fresh ground of challenge and placed it under the head of ‘public policy’ was first contrary to the established doctrine of precedent—the decision of three judges being binding on a bench of two judges. It was also contrary to the plain intent of the new 1996 law, namely the need of finality in alternative methods of dispute resolution without court interference.

If courts continue to hold that they have the last word on facts and on law—notwithstanding consensual agreements to refer matters necessarily involving facts and law to adjudication by arbitration—the 1996 Act might as well be scrapped.

The Division Bench of two judges of the court has altered the entire road-map of arbitration law and put the clock back to where we started under the old 1940 Act.”15

Post ONGC Era: Satyam Venture16  case
The most recent decision of the Supreme Court on the subject of setting aside an award on the ground of public policy under Section 34 is Venture Global Engineering Vs. Satyam Computer Services Ltd.17 Based on the earlier judgment in Bhatia International,18 the Supreme Court held that it is open to the parties to exclude the application of the provisions of part I by express and implied agreement, failing which the whole of part I would apply. Further, it held that to apply Section 34 to a foreign award would not be inconsistent with Section 48 of the 1996 Act, or any other provision of part II and that the judgment-debtor cannot be deprived of his right under Section 34 to evoke the public policy of India, to set aside the award. Thus, the extended definition of public policy cannot be bypassed by taking the award to foreign country for enforcement.

This judgment of the Supreme Court is contrary to the object and scheme of the New York Convention and also in violation of Article III of the Convention, in as much as it introduces an additional ground for challenging a foreign award. The decision is contrary to the intention of the Indian legislature, since it:

  • Exposes a foreign award to an additional ground of challenge, (introduced by way of judicial legislation) meant for domestic awards only.
  • Makes provision of Section 48 of 1996 Act of enforcement of foreign award redundant, as every time an enforcement application is filed before Indian courts under Section 48, the opposite party would file objection under Section 34, availing the benefit of challenging the foreign award on merits.
  • Seeks to introduce a procedure to challenge a foreign award through judicial legislation in the absence of such a procedure under the 1996 Act.

The decision is also contrary to the precedent laid in ONGC Vs. SAW Pipes,19 wherein the court had accepted that the scope of Section 34 and Section 48 are not identical and hence the assumption of the court that the effort of the respondent was to avoid enforcement of the award under Section 48 of 1996 Act, thereby depriving the appellant the benefit of the rule of public policy of India, is not correct.

The Supreme Court’s intervention in the Satyam case20  on grounds of public policy is most unfortunate, as it does not take into account the decision of the three judges Bench in Renusagar case.21 The present decision, thus exposes foreign awards to challenge on merits on the ground that it is “patently illegal”, notwithstanding the enforcement proceedings in any other jurisdiction. In effect, the decision treats a foreign award as a domestic award, if the execution of the award is to be done as per the laws of India.

Thus it is easy for any one to grasp the direction these decisions have taken the law on the subject. What should be noted is that in all such cases, the judgments depart from the spirit through judicial lawmaking and they disclose a lack of trust in the arbitral process.

The law of arbitration in India is very much at its crossroads. An eminent personality has commented at the state of affairs of arbitration laws in India as “arbitration in India is not for the faint-hearted”.22 It is largely upto the Indian Judiciary to step in and contain the interventionist role it has assumed for itself and have greater trust in the arbitral process. Mr. Javed Gaya23 has stated that the Supreme Court’s judgment in SAW Pipes24 would encourage further litigation by the aggrieved party to arbitration, and in doing so diminish the benefits of arbitration as a mode of dispute resolution. The harsh reality is that courts are totally unequal to the task of meeting the basic expectations of the litigating community. Mr. Kachwaha25 opines that these very courts cannot be leaned upon to salvage the perceived inadequacies of the arbitral system through their greater intervention. Rather, the courts must take the law forward based on trust and confidence in the arbitral system.

Very recently, the Supreme Court in McDermott International Inc Vs. Burn Standard Company Ltd.,26 accepted that the ONGC judgment27 was “subjected to considerable adverse comments and went on to observe that only a larger Bench can consider its correctness or otherwise”.28  One wonders why it felt shy of referring the matter to a larger Bench. Similarly, the court does not miss an opportunity to criticise the legislature, where it said, “It must be stated the recent act (Arbitration and Conciliation Act, 1996) does not appear to be a well drafted legislation”. In our view, the court has ignored that certainty of law is one of the basic requirements of law and it is more so in international business transactions.

  1. Vikrant Tyres Ltd. v. Export Foreign Trade Co. Ltd., 2005(3) RAJ 612 (Ker)
  2. Para 4 (v) and (vii) of the Statement of Objects and Reasons of the Arbitration and Conciliation Act, 1996
  3. Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571. For a very fine and detailed statement of  Sir William Holdsworth on public policy please refer History of English Law, Vol. III, p.55
  4. UNCITRAL Report on the work of its 18th session, June 3-21, 1985, para.296
  5. Renusagar Power Plant Co. Ltd v. General Electric Co., AIR 1994 SC 860
  6. Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v. Ras Al Khaimah National Oil Co., [1987] 2 All ER 769
  7. ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629
  8. Arbitration and Conciliation Act, 1996
  9. ONGC v. SAW Pipes Ltd., AIR 2003 SC 26299
  10. Ibid.
  11. Renusagar Power Plant Ltd. v. General Electric Co., AIR 1994 SC 860
  12. ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629
  13. Renusagar Power Plant Ltd. v. General Electric Co., AIR 1994 SC 860
  14. ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629
  15. From transcript of speech delivered by Mr. F. S. Nariman at the inaugural session of “Legal Reforms in Infrastructure”, New Delhi, 2 May, 2003 – quoted in Kachwaha, Sumeet, ‘The Indian Arbitration Law : Towards a New Jurisprudence’, Int. A.L.R. 2007, 10(1), 13-17
  16. Venture Global Engineering  v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)
  17. Ibid
  18. Bhatia International v. Bulk Trading SA, (2003)5 SCC 105
  19. ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629
  20. Venture Global Engineering v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)
  21. Renusagar Power Plant Co. v. General Electric Co., AIR 1994 SC 860
  22. Gaya, Javed, ‘Judicial Ambush of Arbitration in India’, L.Q.R.2004, 120 (OCT), 571-574
  23. Ibid
  24. ONGC v. SAW Pipes Ltd, AIR 2003 SC 2629
  25. Kachwaha, Sumeet, ‘The Indian Arbitration Law : Towards a New Jurisprudence’, Int. A.L.R. 2007, 10(1), 13-17
  26. McDermott International Inc v. Burn Standard Company Ltd., (2006) 11 SCC 181, at p.211
  27. ONGC v. SAW Pipes Ltd., AIR 2003 SC 2629
  28. Bhatia International v. Bulk Trading SA, (2003) 5 SCC 105

Manvi Singh is a fourth year B.A.LL.B student of the New Law College, Bharati Vidyapeeth University, Pune. The study of Constitutional Law, Arbitration Laws and Intellectual Property Rights interests her

Himanshi Nigam is a fourth year B.A.LL..B. student of the New Law College, Bharati Vidyapeeth University, Pune. The study of Law of Contracts, Corporate Laws, Arbitration Laws and Human Rights interests her

Ritu Ranjan Sharma is fourth year B.A. LL.B. student of the New Law College, Bharati Vidyapeeth University, Pune. The study of Constitutional Law, Arbitration Laws and Law of Contracts interests him

Harshita Singh is a fouth year B.A. LL. B. student of the New Law College, Bharati Vidyapeeth University, Pune. The study of Arbitration Laws, International Laws, Law of Contracts and Corporate Law interests her