Scope of Public Policy under Arbitration Law: Should be Narrowed Down!
The basic purpose of arbitration is to bring about cost-effective and expeditious resolution of disputes and further preventing multiplicity of litigation by giving finality to an arbitral award. The article ambidextrously and comprehensively analyzes India’s Commitment and challenge to the International Arbitration in the era of globalization when the investment by the foreign entities is at the peak.
Public Policy of India has most important role in the whole process of enforcement of an arbitral awards particularly the foreign awards because it involves parties, lawyers and arbitrators form diverse legal &cultural traditions. Most often the arbitral tribunal consists of arbitrators from multiple jurisdictions & legal traditions different from those of parties and of their council. It is thus desirable that the International Companies/firms working in India as Joint venture or otherwise should be fully aware for the law on public policy of India and its impact on arbitration awards.
Arbitration continues to grow at a rapid pace, antitrust cases in particular are increasingly being arbitrated; and the law is still evolving in relation to the tension between the domestic legitimate claims of a nation and the arbitral finality given to an International arbitral award. Further when the arbitration proceedings are in themselves requiring a judicial process by producing the evidence and giving the parties opportunity of hearing, why should the court at this level interfere with the decision frustrating the very purpose of arbitration? If disputes are going to end up in courts anyway, there is scant incentive for parties to bother to arbitrate in the first instance. What should be the realm of judicial interference in such arbitral awards and where should it meet the barricades. A supportive yet non-interventionist approach without undue interference should be adopted by the courts to facilitate an efficient arbitral process within the permissible or jurisdictional limits.
Public policy imposes certain restrictions upon the freedom of persons to contract. An ostensibly
valid contract may be tainted by illegality. The source of the illegality may arise by statute or by virtue of the principles of general law. In some instances, the law prohibits the agreement itself, and the contract is then by its very nature illegal but in the majority of cases the illegality lies in the object which one or both parties have in mind or in the method of performance. As a general rule, although all the other requirements for the formation of an agreement are complied with, an agreement that is illegal will not be enforceable.The issue is sufficiently related to fundamental concepts of morality and fair dealing that a court should not, as litigants have sometimes urged, ignore it merely because the claimant can plead its case without disclosing any contravention of public policy. Indeed, even if neither party raises the issue, the court will do so on its own initiative and refuse enforcement if justified by the record, at least if the contravention is serious.
On the touchtone of ‘public policy’:
Definition of Public Policy:
The Arbitration and conciliation Act, 1996 or the Contract Act, 1872 do not define the expression “Public Policy” or “opposed to public policy.” “Public Policy” is not the policy of a particular Govt. It connotes some matter which concerns the public good or the public interest.
‘Public Policy’ is equivalent to the “Policy of Law.” Therefore any acts that have a mischievous tendency so as to be injurious to the interest of the state or the public is stated to be against “Public Policy” or against the ‘Policy of Law.”
In the case of Renusagar Power Co. Ltd v. General Electric Co. the Apex Court has held that the Expression ‘Public Policy’ has a wider meaning in the context of a domestic award as distinguished from a foreign award.”
The concept of the ‘Public Policy’ denotes that what is good for the public or in public Interest or what would be injurious or harmful from time to time. It has very wide and general connotations. Anything that hurts collective consensus is against the ‘Public Policy.’ Hence the Acts in violation of law shall be considered against the ‘Public Policy’.
Doctrine of Public Policy
Doctrine of ‘Public Policy’ is somewhat open textured and flexible, and this flexibility has been the cause of judicial censure of the doctrine. There is a general agreement that the courts may extend existing ‘Public Policy’ to new situations and the difference between extending on existing principle as opposed to creating a new one will often be wafer thin. ‘Public Policy’ is not immutable. Rules which rest on the foundation of ‘Public Policy,’ not being rules which belong to the fixed Customary Law, are capable on proper occasion, of expansion or modification depending upon circumstances. In the broader view, the doctrine of “Public Policy” is equivalent to the “Policy of Law,” whatever leads to obstruction of justice or violation of a statute or is against the good morals when made the object of contract would be against ‘Public Policy of India” and being void, would not be susceptible to enforcement.
Though misconduct of “Arbitral Tribunal” or of the “proceedings before an arbitral tribunal” and “error of law on the face of an arbitral tribunal award” by themselves are not made as grounds for recourse against an arbitral award under section 34 of the 1996 Act. Interpreting the doctrine of “Public Policy of India” in its broader view, courts of law may intervene permitting recourse against an arbitral award based on irregularity of a kind which the court considers has caused or will cause substantial injustice to the applicant. Extreme cases where arbitral tribunal has gone so wrong in its conduct of arbitration that justice calls out for it to be corrected may justifiably fall within the ambit of the doctrine of ‘Public Policy of India” to enable courts of law in India to intervene under section 34 of the 1996 Act permitting recourse against arbitral award.
Public Policy of India
The expression ‘Public Policy’ used in section 48 sub-section 2 refers to the “Public Policy of India” and does not cover policy of the country, whose law governs the contract or of country or of place of arbitration. More contravention of law would not attract bar of Public Policy, but the award must be contrary to;
1) Fundamental Policy of Indian law or
2) The Interest of India or
3) Justice or morality or
4) Patently illegal. (After the case of ONGC v. Saw Pipes Ltd.)
International Public Policy
In view of the absence of a workable definition of “International Public Policy” the Supreme Court of India in the case of “Renusagar Power Co Ltd. v. General Electric Co. –while construing section 7 (1) (b) (ii) of the foreign Award Act held that it was difficult to construe the expression ‘Public Policy’ in Article (v) (2) (b) of the New York convention to mean international Public Policy and the said expression must be construed to mean the doctrine of ‘Public Policy’ as applied by the courts in which the foreign award is sought to be enforced and consequently the expression ‘Public Policy’ in section 7 (1) (b) (ii) of the foreign Award Act means the doctrine of Public Policy as applied by the courts in India. This controversy has been set at rest by the legislature now using the expression ‘Public Policy of India” in section 48 (2) of Arbitration and Conciliation Act, 1996.
Foreign Award and Public Policy
Enforcement of foreign award, if resulting in violation of Provisions of foreign Exchange Regulation Act, 1973, would be contrary to “Public Policy” as envisaged in section 48 (2) of Arbitration and Conciliation Act, 1996.
Arbitration Law on “Public Policy”:
The Arbitration and Conciliation Act, 1996 restrain an Arbitral Tribunal or sole Arbitrator to make any award which is against the Public Policy of India. Various provisions laid down under 1996 Act are briefed here under:-
Section 34. (2) (b) (ii)
Section 34. (2) (b) (ii) of the said -Act lays down that an Arbitral Award may be set aside if the court finds that the arbitral award is in conflict with the Public Policy of India.”
Explanation to section 34 of the 1996 Act, without prejudice to the generality of sub-clause (ii), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India if the making of the Award was induced or affected by fraud or corruption or was violation of Section 75 or Section 81 of 1996 Act.
Section 17 of the Indian Contract Act, 1872 defines fraud. However ‘fraud’ has a wider meaning, far wider than the definition given under the Contract Act. Fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage.
The Supreme Court of India in the case of S.P. Chengalvaraya “Naidu v. Jagannath had held that “A litigant, who approaches the court, is bound to produce all documents executed by him, which are relevant to the litigation. If he withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party.”
Corruption means bribery. It need not necessary be in monetary terms. An improper relationship between an arbitrator and a party or a party’s legal advisor may render the award open to attack also on this ground. Procurement by “Undue Means” was a ground for setting an award aside under clause (c) of section 30 of the Arbitration Act., 1940.
If an arbitrator accepted hospitality from one of the parties and the invitation was extended with the intention to induce the arbitrator to act unfairly or had the affect of inducing the arbitrator to act unfairly, it may be said that the award was induced or affeded by corruption. But mere dining or lunching with one of the parties or his witness or witnesses in the absence of the other may not make him guilty. To induce the court to interfere on such ground, there must be something more than mere suspicion.
In the matter of Chouthmal Jivrajjec poddar v. Ram Chandra Jivrajjec Poddar, it has been held that, “Putting up with one of the parties may not by itself be sufficient to vitiate the award, but if it enables the arbitrators to have a private conference with one of the parties on an important topic, it would entitle the court not to accept the award.”
The arbitrator should always scrupulously avoid any course of action which even remotely bears the complexion of his having put himself into a position where it might be said against him that he had received a pecuniary inducement which might have had some effect on his determination of the matter to his adjudication. An arbitrator ought to be an indifferent person between the disputes and should be incorrupt and impartial. If the arbitrator take bribe, the award would be liable to be set aside.
International Law Governing Public Policy:
i) Geneva Convention 1927
Under the Geneva Convention, 1927, in order to obtain recognition or enforcement of a foreign arbitral award, the requirements of clause (a) to (e) of Article 1 had to be full filled and in Article 2, it was prescribed that even if the conditions laid down in that article were fulfilled recognition & enforcement of the award would be refused if the court was satisfied in respect of matters mentioned in clause (a), (b) and (c) as given hereunder:-
a) The award has been annulled in the Country in which it was made.
b) That the party being under a legal incapacity, he was not properly represented.
c) That the award contains decisions on matters beyond the scope of the submission to arbitration.
The principles which apply to recognition and enforcement of foreign awards are in substance, similar to those adopted by the English court at Common law, It was, however, felt that the Geneva Convention suffered from certain defects which hampered the speedy settlement of disputes through arbitration.
The New York Convention has sought to remedy the said defects by providing for a much more simple and effective method of obtaining recognition and enforcement of foreign awards.
ii) New York Convention, 1958
The York Convention (1958), Art III provides that each contracting State Shall recognize awards as binding and enforce them in accordance with the rules & procedure of the territory, where award is relied upon. Accordingly the procedural laws of the Country in which the award is relied upon would govern the procedural aspect of the filing of foreign award.
Further, New York Convention (1985) Article. V (2) provides that the enforcement of an arbitral award may also be refused, if the law of the Country where the recognition and enforcement is sought finds that.
a) The Subject matter of the difference is not Capable of Settlement by arbitration under the law of that Country or
b) The recognition or enforcement of the award would be contrary to the public policy of that country.
iii) UNCITRAL Model law (1985)
The UNCITRAL model Law (1985), Article 36 (b) provides the grounds for refusing recognition or enforcement of an arbitral award, irrespective of the country in which it was made, it may be refused if the court finds that:-
a) The subject matter of the dispute is not capable of Settlement by arbitration under the law of this state, or
b) The recognition or enforcement of the award would be contrary to the public policy of this state.
Perusal of the International laws laid down at Geneva Convention, 1927, New York Convention 1958 & UNCITRAL Model Law (1985) reveals that Public Policy of any Country has a great impact on the International/Foreign awards. Therefore, it is desirable that the constructing agency should be conversant with the Public Policy of the Country, where it undertakes construction works.
The Hon’ble Supreme Court, on a number of occasions has held that a suit can be filed in a court in India challenging a foreign award passed by an arbitrator in a matter concerning International Commercial transactions if the award is against the ‘public policy’ and in contravention of statutory provisions. It is always in the domain of the judiciary to interpret the public policy at a given point of time.
In the historic ruling of Renu sagar Power Co. v. General Electrical Corporation the Supreme Court construed the expression "public policy" in relation to foreign awards as follows:
"This would mean that "public policy" in Section 7 (1) (b) (ii) has been used in narrower sense and in order to attract to bar of public policy the enforcement of the award must invoke something more than the violation of the law of India.. Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is 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."
In its later judgment of Oil & Natural Gas Corporation v. SAW Pipes, the Apex Court addressed a challenge to an Indian arbitral award on the ground that it was “in conflict with the public policy of India”. The said decision has been followed in a large number of cases. Despite precedent suggesting that “public policy” be interpreted in a restrictive manner and that a breach of “public policy” involves something more than a mere violation of Indian law, the Court interpreted public policy in the broadest terms possible. The Court held that any arbitral award which is violative of Indian statutory provisions is “patently illegal” and contrary to the canons of “public policy”.
By equating “patent illegality” to an “error of law”, the Court effectively paved the way for losing parties in the arbitral process to have their day in Indian courts on the basis of any alleged contraventions of Indian law, thereby resurrecting the potentially limitless judicial review which the 1996 Act was designed to eliminate. The doctrine of public policy undoubtedly is governed by precedents. Its principles have been crystallized under different heads. Recently in Patel Engineering case, the Supreme Court has sanctioned further court interventions in the arbitral process. It was held that the Chief Justice, while discharging this function, is entitled to adjudicate on contentious preliminary issues such as the existence of a valid arbitration agreement and the Chief Justice’s findings on these preliminary issues would be final and binding on the arbitral tribunal.
Further, the consequences of Venture Global are far reaching for it creates a new procedure and a new ground for challenge to a foreign award. The new procedure is that a person seeking the enforcement of a foreign award in India has not only to file an application for enforcement under Section 48 of the Act, it has to meet an application under Section 34 of the Act seeking to set aside the award. The new ground is that, not only must the award pass the New York Convention grounds incorporated in Section 48, it must pass the expanded "public policy" ground created under Section 34 of the Act.
The review should be “more or less extensive depending on the circumstances”. If the contractual claims were addressed and decided in an international arbitration, but (allegedly) wrongly, a court should satisfy itself that the institutional determination by such arbitration body was not perverse and in consonance with the legal dictates of the country.
Where absolute arbitral finality is inimical to a rational system of ‘public policy’ as recognized by the Apex court in several judgments and on the other hand, it is necessary for an effective international arbitral system. Balancing the conflicting claims of public policy and arbitral finality is difficult. In order to facilitate the International Arbitration process, it is important to exercise judicial restraint in scrutinizing the International arbitral awards. A new and narrower definition of the term public policy is required in the era of globalization to encourage the foreign investors to carry out healthy commercial relationships in India. A globally compatible definition of ‘public policy’ should be adopted or the court should abdicate the public policy to some extent so as to ensure the edifice of International Commercial Arbitration.
In order to limit the scope of public policy, the Apex Court is dealing with the case of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc., Civil Appeal No. 7019 of 2005. No order has been given by the court till now but five judges constitutional Bench is dealing with the same, which will work as stare decisis for the case of Saw Pipes. Perhaps, this time court will recognize the purpose of arbitration.
Suggestions for Change in International Commercial Arbitration:
It is suggested that a liberal view is necessary for the enforcement of International/ Foreign arbitral awards to enhance the development of International Commercial Arbitration. Suggestive measures made and its implications are discussed here under:-
i) Transnational Public Policy
International public Policy differs from the transnational Public policy, which is Supra-national, while the former is specific and subjective to each state. The terms “Transnational Public Policy” consist of principles that represent an International Consensus as to Universal Standards and accepted norms of conduct that must always apply. This concept is said to compromise of fundamental rules of Universal justice in Public International Law and the general principles of morality accepted by what are referred to as Civilised nations.”
It is further suggested that the states should bring their Domestic Laws in line with the emerging trend of “Transnational Public Policy” and allow only such grounds under their “Public Policy” which do not restrain the further development and growth of International Trade and Commercial Arbitration as well.
The suggestion of having “Domestic laws” and Public Policy in Conformity with “Transnational Public Policy” is considered appropriate for the developed Country, but not for developing country like India, where the public policy changes with the basic needs & economical conditions of the Public.
ii) International Arbitration Awards be Given Finality Effect on Merit
There is a voice that International Arbitration Awards be given finality effect on merits after the arbitral award is made by the arbitrator without interference and without considering the Public Policy of that Country. This aspect is maintainable only where the “Transnational Public Policy” is drawn and accepted by the developed countries and not for the developing countries, where the public policy of a country is based on economic conditions of the Public, which is variable. Therefore, the International Award in Developing Countries like India cannot be given finality effect on merits only.
Moreover, the altitude of the Apex Court of India has been supportive towards arbitration awards domestic/foreign as evident from the following judgments:-
“The award of the arbitrator is alleged to be final & conclusive. Wrong or right decision is said to be binding on the parties and the court are not competent to reexamine and re-appraise the evidence considered by the arbitrator and sit in appeal over the conclusion of a arbitrator. The arbitrator is alleged to have acted judicially and observed all required for the arbitration.”
Even the case of Smt. Shanta Sia Devi & Anr v. Dhirendra Nath Sen & Ors. also suggests that “A court should approach an award with a desire to support it, if that is reasonably possible rather than to destroy it by calling it illegal.”
iii) No Enhancement of Arbitrator's Power
Certain people demands that the Arbitrator’s power be enhanced to ignore the law of the Country whether mandatory or not in case they consider that Strict applications of such provisions would result in an unjust out come. Such people further add that no courts be empowered to pass any injunctions against the arbitral award, as such injunctions delays the enforcement of the arbitral awards and further defeat the purpose of arbitration. As regards this, there is need to enhance the powers of the arbitrator, because the Arbitration & Conciliation Act, 1996 have already given powers under Section 16 of the Act where in the arbitrator/ arbitral Tribunal is Competent to rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement. Besides this, the Apex court of India has held that “It is not necessary for a court to examine the merits of the award with reference to the material produced before the arbitrator. The court cannot sit in appeal over the view of the arbitrator by re-examining & re-assessing the materials.”
Thus there is no need to enhance the power of the arbitrator as adequate Power are vested to him under arbitration and conciliation Act, 1996.
May the tussle between the evangelists of arbitral finality and the advocates of Judicial review of International Arbitral awards continue, may the traditionalists yell on the uncertainty and illusion of the scrutiny of the arbitral awards and may the reformists stand for the respect of International arbitral awards, one thing that stands clear on every footing is that the Supreme Court has extra-ordinary dimensions and role to make the International arbitral awards challengeable on the touchstone of ‘public policy’ and further giving a strained interpretation to the applicability clause of the Act thereby bringing the International arbitrations taking place outside India reviewable by the Indian courts.
Where parties to the contract are choosing the mode of arbitration for solving the legal tussle, it shows the intention to avoid litigation procedure. The contrary judgments of various courts of the country are frustrating the purpose of arbitration and it has become a threat to International Commercial Arbitration.
Secondly, the countries interested to invest in India, will rescue themselves from doing the same seeing the prevailing circumstances of Arbitration and huge pendency of cases in courts.
In Konkan Railway Corporation v. Mehul Construction Co., the SC while comparing the 1940 Act to the present Arbitration Act of 1996, concluded that the statute of 1996 limits intervention of the Indian Courts with the arbitral process to the minimum. In this regard, the subsequent conclusions of the Apex Court in the ONGC v. Saw Pipesand Venture Global v. Satyan Computers creates contradictions. To concluded, it simply be said that the merits of these decisions have a need to be revisited.
The decision of ABC Laminart Pvt. Ltd v. AP Agencies and Max India Ltd. v. General Binding Corporation also attempts to reach to a conclusion restricting the judicial intervention in ICA. In this case, arbitration clause exreseely provided for the jurisdiction of Singapore. Furthermore, recently, in April 2010 the LCIA has established its seat in India and has introduced the ‘London Court of International Arbitration India Arbitration Rules’. This is the first ever instance where an international arbitration institution has drafted International Commercial Arbitration rules exclusively tailored for India. Much to the need of International Commercial Arbitration in India, these rules have brought in a draft arbitration clause which purposely excludes part I of the Indian Arbitration and Conciliation Act, 1996.
However, fact remains that fourteen years after the enactment of the Indian Arbitration and Conciliation Act, 1996 arbitration in India us at a junction where it has to choose between the concepts of party autonomy and finality of arbitral award’ or nere lawful by-pass of a domestic law to be a violation of the Indian Public Policy.
It may thus be seen that ‘public policy’ has had varied interpretations across the globe. Courts have interpreted it keeping in mind their own laws and morals. Almost common to all the courts has been the fact that ‘public policy’ has been narrowly constructed and very limited options are available for widening its scope, for the judiciary does not encourage the same. Amongst other reasons, the parties resort to arbitration as it has limited grounds for filing an appeal; enlarging the scope of public policy as a ground for refusal of enforcement of the arbitral award has the capacity to terminate the advantages inscribed in the very purpose of resorting to arbitration.
Now, it is expected from the five judges bench of Apex Court to settle the various interpretations.
# Anson's Law of Contract (28th ed., 2002), p.348.
# Farnsworth on Contracts (2nd ed., 1998), p.8.
# 1994 (2) Arb.L.R. 405 (S.C)
# 2003 (2) Arb. L.R.5 (SC)
# 1994 (2) Arb.L.R. 405 (SC)
# AIR 1994 SC 853
# AIR 1955 Nag 126
# (2003) 5 SCC 705
# (2005) 8 SCC 618
# AIR 2008 SC 1061
# Herold Goldman “Public Policy International Commercial Arbitration” (1985). 26 American Prosioners Law Journal 511.
# M/s Hindustan Tea Co v. Shashi Kani & Co & Anr AIR 1987 S.C. 81.
# AIR 1963 S.C. 1677.
# M/s Puri Construction (Pvt.) Ltd. v. Union of India – 1989 (I) Arb.L.R. 159 (SC); AIR 1989 S.C. 1263
# AIR 2000 SC 2821
# Ibid no. 9
# Ibid no. 11
# AIR 1989 SC 1239
# (2009) 3 Arb LR 162 (DEL) (DB)
# Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., C.A. No. 7019/2005
The author can be reached at: email@example.com
| Posted by Sneha Ghosh on July 22, 2015
this is just a rip off of the article posted by another law school student Tanuj Hazari from National Law Institute University, Bhopal. the article is available on
Legal Services ought to check the authenticity of the articles.
A very direct consequence which arises with the concept of separate legal identity of a corporation is the misuse of it by people. In reality a company is nothing but an association of persons, who are its beneficiaries, governed by the directors and shareholders of the company. It is nothing but a sum of its members. Thus a lot of times situations arise, when these beneficiaries try to misuse this veil and in such situations the corporate veil of separate legal entity of the company has to be removed and the members of the company are made liable directly
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