28 December 2015

Arbitration Ordinance, 2015 – ‘Public Policy’ defined

by Anup Koushik Karavadi

In order to facilitate the ease of doing business, the Government of India (‘Government’), intends to overhaul the regulations  governing business by abolishing many outdated laws and making extensive changes to the existing ones to allow companies to concentrate on their business and profits. The Government has introduced the Arbitration and Conciliation (Amendment) Ordinance, 2015, (‘Ordinance’) which was promulgated by the President of India on 23rd October, 2015 to remove the anomalies in the existing dispute resolution framework for expeditious resolution of commercial disputes.

The Ordinance introduces several changes to the Arbitration & Conciliation Act 1996 ('Arbitration Act') to increase fairness, make the process economically sound for the parties participating in resolution of disputes through arbitration; and most importantly,  reduce extensive judicial intervention in arbitration matters.

Even though arbitration was proposed to be less complicated and faster than the primordial legal proceeding in Courts, judiciary played a very large role before the commencement or during and even after the completion of the arbitral proceedings.

Section 34 of the Arbitration Act enables the parties to an arbitral award to file an application with the Courts seeking for setting aside the arbitral award after the same is passed by an arbitral tribunal. Section 34(2)(b)(ii) empowers the Courts to set aside the arbitral award if an award is in conflict with the “public policy of India”. Additionally, the courts are empowered to refuse the enforcement of a foreign award at the request of a party against whom it is invoked on the ground that the arbitral award is contrary to the “Public Policy of India” under Section 48(2)(b).

The ground that an arbitral award is in conflict with the public policy of India had turned out to be one of the best defense available for the losing party to challenge the arbitral award.

As the term ‘Public Policy’ is not defined, either in the Arbitration Act or in any other statute , the Supreme Court, in various cases has accepted that the term public policy is like an ‘untrustworthy guide’ or an ‘unruly horse’ but from time to time considerably extended the meaning of this term to permit judicial intervention on arbitration awards.

Interpretation of the term ‘Public Policy’

The Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co. [(1994) SCC Supp. (1) 644] (‘Renusagar Case’) while dealing with the provisions of the Arbitration Act, 1940, had held that the enforcement of foreign award is to be refused on the ground if it is contrary to public policy and if its enforcement would be contrary to (i) fundamental policy of India; or (ii) the interests of India; or (iii) justice or morality.

Subsequent to the said interpretation which had a limited impact on the way the courts interfered with the arbitration proceedings, the division bench of the Supreme Court in Oil and Natural Gas Corporation Limited v. Saw Pipes Ltd. [(2003) 5 SCC 705] (Saw Pipes Case) broadened the scope of the term ‘public policy’ to include ‘patent illegality’ in addition to the attributes as mentioned by the Supreme Court in the Renusagar Case. Further, the Court had clarified that the illegality as referred to must go to the root of the matter and illegality trivial in nature cannot lead an award to be against public policy.

It is relevant to note that the Supreme Court in its decisions in McDermott International Inc. v. Burn Standard Coal Company [(2006) 11 SCC 181] and Centrotrade Minerals & Metals Inc. v. Hindustan Copper Limited [(2006) 11 SCC 245] had acknowledged the criticism against the interpretation provided in the Saw Pipes Case. However, they chose to abide by the said decision as the same was binding upon them.

Further, while dealing with the question of enforcing the foreign arbitral award, under Section 48 of the Arbitration Act, the Delhi High Court in Glencore Grain Rotterdam B. V. v. Shivnath Rai Harnarain (India) Co.[ 2008 (4) ARB LR 497 (Del)], followed the Renusagar case in tandem with the Explanation provided under Section 48(2) of the Arbitration Act. It was held that the scope and ambit of the expression ‘public policy of India’ must necessarily be construed narrowly to mean the fundamental policy of India and, as clarified by the Explanation to Section 48(2), conflict with the public policy must involve an element of fraud or corruption. Such a limitation in the interpretation of the term is required.

246th Law Commission Report :

After considering the above provided interpretations of the Indian judiciary, the Law Commission of India in its 246th Report, proposed an amendment of Section 34 relating to grounds for challenge of an arbitral award, to restrict the interpretation of the term “Public Policy of India" by furnishing an explanation stating that only where making of award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian law or is in conflict with the most basic notions of morality or justice, the award shall be treated as one against the public policy of India.

However, the term ‘fundamental policy of India’ was constructed widely by a three-judge bench of Supreme Court in ONGC Ltd. v. Western Geco International Ltd [2014 (9)SCC 263]. The court referred to three distinct and fundamental juristic principles to be a part of fundamental policy of Indian law. It was held that firstly, adoption of a judicial approach, in a fair, reasonable and non-arbitrary manner in determination of rights is an essential part of fundamental policy of India. Secondly, determining the rights and obligations in accordance with principles of natural justice and by recording reasons for decision; and thirdly, decision should pass the test of Wednesbury principle of reasonableness, meaning, the decisions should not be so perverse or so irrational that no reasonable person would have arrived at the same.

It may be argued that such an extensive interpretation of  the term ‘fundamental policy of India’   distorts the objective of the Arbitration Act and international practice. Further, such an interpretation may make the amendment suggested to Section 34 of the Arbitration Act by the Law Commission through its 246th Report non-effective. In light of these developments even though the Law Commission of India had given its recommendations for amending the Arbitration Act in the month of August, 2014, it rightly felt the necessity to give a supplementary to Report No. 246 exclusively on the concept and regime of ‘Public Policy of India’ and had further contained the said term by defining ‘fundamental policy of India’.

The Codification – Ordinance:

It may be noted that the Ordinance had included the following Explanations in Section 34 to achieve the objective of the Arbitration Act:

Explanation1.- For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-

  • The making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or
  • It is in contravention with the fundamental policy of Indian law
  • It is in conflict with the most basic notions of morality or justice

Explanation 2:- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

It is indeed a welcome move towards simplifying dispute resolution through arbitration and in the view of the said inclusion of the definitions to the terms ‘Public Policy of India’ and ‘fundamental policy of India’ it remains to be seen whether ‘Public Policy’ will be constructed narrowly, addressing the major concerns of investors by reducing judicial interference and improving the efficacy of dispute resolution.

[The author is a Principal Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad]

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