Public Policy in the Arbitration and Conciliation Act

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Arbitration and Conciliation

Arbitration is an institution of dispute decision. The system follows the mandate of “minimal court intervention” and Courts can intrude inside the arbitral process under the extremely restricted circumstances provided beneath the Arbitration and Conciliation Act, 1996. One such provision, section 34 presents grounds on which an arbitral award can be set aside through the court. Section 34 (2)(b)(ii) lays down that a court may additionally set apart an arbitral award if it unearths that the award is in battle with the general public policy of India. clarification 1 of S. 34(b) states three criteria on which an award could be overturned on the ground of public policy – whilst the award turned into caused by fraud, corruption or in violation of section 75 or section 81; or it’s miles in opposition to the fundamental policy of Indian law; or it is in conflict with the most primary notions of morality and justice. the second and third grounds are vague and are thus liable to being interpreted too broadly. As a consequence, some judgments have widened the scope of interpretation of public policy. In 2015, section 34 for amended with a view to limit the permissibility under “Public policy.”

ONGC v. SAW PIPES- Broadened outlook

The Supreme Court, in the case of Renusagar Power Co. Ltd. v General Electric Co[i], upheld the contention that an award against public policy would be an award that was passed in contravention of “(i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality”. In 2003, this scope under which public policy was interpreted was significantly widened in ONGC Ltd v Saw Pipes Ltd.[ii]The Court held that in case of an application u/s 34 to set an award aside, the role of the Court was deemed to be that of an appellate/revision court, thereby rendering it wide powers. Further, the Court also added a new ground – patent illegality to the grounds enumerated in Renusagar Power Co. Ltd; under which the arbitral award could be set aside.

“Therefore, in our view, the phrase ‘Public Policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.”

This opened a floodgate of litigation under S. 34 as every award where there was an alleged error of application statutory provisions could now be challenged.

ONGC v. WESTERN GECO- An extension of ONGC v. Saw Pipes

An extension of the interpretation of “public policy” was given in the Apex Court Judgment of ONGC Ltd v Western GECO Ltd.[iii]Here, a three-judge bench of the Supreme Court found flaws within the Saw Pipes Case, and remarked that the judgment was silent on the meaning of “fundamental policy of Indian Law”. The Courtinterpreted “fundamental policy of Indian Law” to consist of the following three separate heads – “duty (of the tribunal) to adopt a judicial approach”, “adhering to the principles of natural justice (by the tribunal)” and that the decision of the tribunal must not be “perverse or so irrational that no reasonable person would have arrived at the same” – thus expanding the definition of “Public Policy”, even further as each of these heads had become a subject of challenge. Additionally, the Court also held that the award of the arbitral tribunal resulted in a miscarriage of justice, the award could be set aside, or even modified to the extent the offending part was not severable.

Thus, firstly the judgment  allowed the courts to examine arbitral awards based on merits, secondly, it also stated that under the head of “fundamental policy of India Law” would permit the Courts to modify the arbitral award as well. This would thus defeat the purpose of arbitration and reduce trust in the arbitral process.

Interpretation of Morality & Justice

Further, in Associate Builders v Delhi Development Authority[iv] the Supreme Court also clarified the scope of interpretation of most basic notions of morality and justice. Accordingly, an award could be set aside under the ground of justice when the “award” would be such that it would shock the conscience of the Court. Further, an award against morality was considered to be something that was against the mores of the day that would shock the conscience of the Court.

The 246th Law Commission Report

In February 2015, the Law Commission of India issued a response to these judgments, by issuing a Supplement to the Report about the Act that it had published in August 2014, know as the 246th law commission report. The Law Commission emphasised that section 34 sets out an exhaustive list of grounds to challenge an award, and these relate to the procedural issues only without going into substantive problems. The Law Commission criticised Saw Pipes for “opening the floodgates“, and criticised ONGC vs Western Geco and Associate Builders -v – DDA for reinforcing the broad scope of public policy.

The Law Commission had stated previously, that section 34 must expressly state that an award cannot be set aside merely because the tribunal has made a mistake of law, or because the court takes a different view of the evidence. It has now suggested that section 34 also states: “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.” (emphasis added)

The 2015 amendments to the Act

The Arbitration and Conciliation (Amendment) Act, 2015 made major changes to section 34. These changes had been suggested by the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996 of August 2014.Further there was also a Supplementary to the 246th Report of the Law Commission of India issued on Amendments to the Arbitration and Conciliation Act, 1996 of February 2015. These were the changes that focused on restricting Courts from interfering with arbitral awards on the ground of “public policy.” Thus the amendment was added, “Explanation 2” to section 34(2) as well as Section 2A. Explanation 2 of section 34(2) states –

“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.”

Therefore, this explanation significantly limited the scope of interpretation supplied in ONGC v Western GECO. Due to the presence of this amendment, courts could no longer interfere with the award passed by the arbitrator. The explanation makes it especially clear that in no way would a Court be entailed to review the award on merits of the dispute. Similarly, section 2A also curtails the scope of interpretation of “patently illegal” as propounded in ONGC v Saw Pipes. Section 2A states –

“An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiate by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence.”

Thus the court Courts are no longer permitted to reappraise evidence or set aside awards merely because the Arbitral Tribunal has made errors when dealing with it. It is further to understand that the amendment did not make any changes to the interpretation of “justice and morality” as was laid down in Associate Builders.

Recent Trends in Interpretation of “Public Policy”

Since the amendment, Courts have avoided giving a wide interpretation to “public policy” or with interfering with the merits of the case. In the November2017 Supreme Court Judgment of Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors[v] the Court observed –

“The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the AAC Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court.”

This view has also been taken in other judgments such as Sutlej Construction v. The Union Territory of Chandigarh.[vi]

These judgments are proof of the recent trend of interpretation of “public policy” which has been one where the Courts have refused to examine the arbitral awards on merits, thereby following the legislative intent “minimal intervention of the Courts in the arbitral process” as reflected by the changes brought by the Arbitration and d Conciliation (Amendment) Act, 2015.

Edited by Shuvneek Hayer

Approved & Published – Sakshi Raje

Reference:

[i][1994] AIR 860 (SC)

[ii][2003] 5 SCC 705

[iii][2015] AIR 363 (SC)

[iv][2015] AIR 620 (SC)

[v][2017] 13 SCALE 91 (SC)

[vi][2017] 14 SCALE 240 (SC); Judgment dated December 5th, 2017