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Published : June 06, 2012 | Author : Ananya
Category : Arbitration | Total Views : 5913 | Rating :

Ananya Kapoor 4th year student, B.A.LLB(H), Amity Law School, affiliated to GGSIPU, New Delhi

The Ambit of Public Policy as a ground for setting aside an arbitral award under Arbitration and Conciliation Act, 1996

Concept of Public Policy
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 that concerns public good and public interest. Public Policy means the principles and standards regarded by the legislature or by the Court as being of fundamental concern to the State for the welfare of whole of the society. In simpler words, it is an attempt by the Government to address a public issue. The Government develops public policy by enforcement of laws, regulations, decisions, and actions.

I believe that the Doctrine of Public Policy has a direct nexus with Rule of Law. If a law or a statutory provision is against Public Policy, the stability of Rule of Law is affected. Public Policy is the guiding principle that has to be kept in mind before enacting a law or taking any administrative action.

Lack of a precise, concise and a straight definition of Public Policy has lead the Judiciary to pronounce judgments with statements for and against the extension of public policy leading to ambiguity as to the scope of this concept.

The Arbitration and Conciliation Act, 1996
The Arbitration and Conciliation Act, 1996 (herein after referred to as “the Act”) sets out its objectives in the Statement of Objects and Reasons as “An act 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”.

The UNCITRAL Model Law Commission stated in its report 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.

Following are the statutory provisions in the Act which provide for setting aside an arbitral award on ground of ‘Public Policy’-

a. Section 34 (2) (b) (ii) states that arbitral award may be set aside if the Coutrt finds that arbitral award is in conflict with public policy of India. It further explains that an award is conflict with public policy of India if the making of award was induced or affected by fraud, corruption or was violation of Section 75 or Section 81.

b. Section 48 (2) (b) enforcement of foreign arbitral award as defined in Section 44 of (New York Convention Award) may be refused if court finds enforcement would be contrary to the Public Policy of India.

c. Section 57 (1) (e) also states that for a foreign award as defined in Section 53 (Geneva Convention Award) to be enforceable, it shall be necessary that the enforcement of is not contrary to Public Policy or Law of India.

Judicial Interpretation
An attempt to define public policy was made by Winfield when he identified it as “a principle of judicial legislation or interpretation founded on the current needs of the community”.

The controversy has been because of the two conflicting positions with respect to ‘public policy’ - the ‘narrow view’ and the ‘broad view’. According to the ‘narrow view’, Courts cannot create new heads of Public Policy while the ‘broad view’ permits judicial law making.

In 1959, in the case of Gherulal Parekh vs. Mahadeodas Maiya, the Hon’ble Supreme Court of India acknowledged that there could be a broad and narrow view of interpreting the expression Public Policy and favored the narrow view. The Court held

…though the heads of public policy are not closed and theoretically it may be possible to evolve a new head under exceptional circumstances of a changing world, it is admissible in the interest of stability of society not to make any attempt to discover new heads of public policy in these days.”

However in later cases, till 1994, Courts in India took a relatively broad stance with respect to Public Policy by equating the phrase on the pillars of public welfare, public interest and public conscience.

In the landmark decision of Renusagar Power Co. Ltd. vs. General Electric Company, a three judge bench of the Apex Court in deciding the enforcement of an award, considered the following as grounds to be proved to set aside the award for being in conflict with Public Policy in India-

(a) Fundamental policy of Indian law;
(b) Interest of India;
(c) Justice or morality.

The Court expounded on the scope of ‘Public Policy’ and held that mere error apparent on the face on record or error of law could not be said to be in conflict with Public Policy of India. The Court in this case while acknowledging that the expression ‘Public Policy’ can be construed both in the narrow and wide sense observed that-

“It is obvious that since the Act is calculated and designed to sub serve 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. This would imply that the defense of public policy which is permissible under S. 7(1)(b)(ii) should be construed narrowly…”

However, the position adopted by Indian Judiciary that was much inclined towards the narrow interpretation after the Renusagar case, was again challenged in 2003 wherein the Apex Court, again broadened the concept of Public Policy.

Despite precedents stating that the term ought to be interpreted in a restrictive and a narrower manner, and that a breach of Public Policy involves something more than mere violation of law, the Court in this case, interpreted ‘Public Policy’ in the widest terms possible. The Court held that any arbitral award which is violative of statutory provisions of the country is ‘patently illegal’ and contrary to the established and well defined canons and principles of Public Policy. The Court expressed its opinion in favor of a broad interpretation and held that once an award becomes final, its grounds for annulment are quite narrow, however an award is not deemed final the moment it is passed by the arbitrator but only once it satisfies the standards set forth in Section 34 of the Act. The Court justified its stance by stating that-

in a case where judgment and decree is challenged before the appellate court or the court exercising revisional jurisdiction, the jurisdiction of such court would be wider. Therefore, in a case where validity of an award is challenged there is no necessity of giving a narrower meaning to the term public policy of India.”

This judgment, though, broadened and clarified the scope and horizon of the concept of Public Policy in India, faced criticism by various quarters. It not only changed the settle law leading to chaos, it also brought in the concept of ‘platently illegal’. No clear definition was given to this phase, thereby, it lead to more vagueness.

The aim and intent of Alternate Dispute Resolution (hereinafter referred to as “ADR”) today, is to do away with the adversarial system of litigation. Hence, the laws should be made in such a way that they permit minimum interference by the Judiciary. The Saw Pipes case unfortunately, diverted from the very purpose of the Act and role of ADR.

The Supreme Court itself has been trying to water down the Saw Pipes case. For instance, in McDermott International Inc. v. Burn Standard Co. Ltd, S. B. Sinha J stated-

“The 1996 Act makes provision for the supervisory role of courts, for the review of arbitral awards only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice etc. The Court cannot correct the errors of arbitrators. It can only quash the award leaving the parties free to begin the arbitration again, if it is desired. So the scheme of arbitration aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

Recently, in Sumitomo Heavy Industries Ltd. v. ONGC which was decided on 28th July 2010, the Supreme Court has again said that the Courts cannot interfere merely because the Arbitral Tribunal took a view that the Courts are not satisfied with. Unless it is an error apparent on face of award or where the arbitrators have exceeded their jurisdiction, the Courts have no power to intervene. In the case of Indian Oil Corporation v. Langkawi Shipping Ltd, the Bombay High Court held that to accept literal construction of Saw Pipes case would be to radically alter the legislatively and judicially defined limits of Court’s power to interfere.

The aforementioned judgments have adopted a very strained interpretation of the Act that raises questions regarding our very commitment to the arbitral process.

The Ministry of Law & justice has issued a Consultation Paper, on proposed amendments to the Arbitration & Conciliation Act 1996. In the said Consultation Paper it is proposed to eliminate the concept of “patent illegality” from the concept of Public Policy.

The researcher is of the opinion that if the parties have adopted arbitration as a mode of resolving disputes, it clearly shows their intent to avoid the judicial process. In such a situation to allow an expansive reading of ‘Public Policy’ would nullify the entire purpose.

Both the April 2001 Arbitration and Conciliation (Amendment) Bill and December 2003 Arbitration and Conciliation (Amendment) Bill, have proposed amendments to the 1996 Act as follows:

34A(1) In the case of an arbitral award made in an arbitration other than an international arbitration (whether commercial or not), recourse to the following additional grounds can be had in an application for setting aside an award referred to in sub-section (1) of section 34, namely--(a) that there is an error which is apparent on the face of the arbitral award giving rise to a substantial question of law; ...”

Also, the Law Ministry has recommended inserting Explanation-II to Sec. 34 of the Act, as follows:

Explanation II : For the purposes of this section “an award is in conflict with the Public Policy of India” only in the following circumstances, namely: When the award is contrary to the:-

1) fundamental policy of India; or
2) interests of India; or
3) justice or morality

However, these are yet proposals and recommendations and nothing has been concretely accepted and thus the law in India at present is still the law as declared in Saw Pipes case. It is hoped that soon the Legislature will realize the need for changing the present situation and do the same to avoid uncertainty and ambiguity in coming cases and situations of the similar nature.

# 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, Also see, Murlidhar Agarwal and Anr vs. State of U.P and Ors. 1974 2 SCC 472. Where the court observed, “…the difficulty of discovering what public policy is at any given moment certainly does not absolve the judges from the duty of doing so…the judges must look beyond the narrow field of past precedents…judges will have to look beyond the jurisprudence and that in doing so, they must consult not their own personal standards or predilections but those of the dominant opinion at a given moment or what has been termed customary morality.

# Para 4 (v) and (vii) of the Statement of Objects and Reasons of the Arbitration and Conciliation Act, 1996
# UNCITRAL Report on the work of its 18th session, June 3-21, 1985, para.296
# Public Policy in the English Common Law, Percy H. Winfield, Harvard Law Review,Vol. 42, No. 1 (Nov., 1928), pp. 76-102
# AIR 1950 SC 781
# (1994) Suppl. (1) SCC 644
# Renusagar Power Co. Ltd. vs. General Electric Company (1994) Suppl. (1) SCC 644
# ONGC v. SAW Pipes Ltd. 2003 (2) Arb.LR 5 (SC)
# (2006) 2 ArbLR 498
# 2004 (3) Arb. LR 508

The  author can be reached at: ananya123@legalserviceindia.com

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