Arbitration Reforms: Achieving Equivalence in Domestic and International Arbitration & a Case against Separate Laws

The Expert Committee is currently examining the feasibility of enacting separate laws for domestic arbitration and international arbitration, as well as enforcing foreign awards. In this article, I present a counter-argument to this proposition and propose that domestic arbitration should instead be brought at par with international arbitration. And towards this end, I suggest that the test of “patent illegality” be either removed entirely from the Arbitration and Conciliation Act, 1996 (“ACA”) or, at the least, the implementation of a time-bound expiration for its applicability.

Arbitral awards can be set aside in accordance with Section 34(2) of the ACA. Additionally, a domestic award can be set aside by the court under Section 34(2A), provided the arbitral award is patently illegal on the face of the award.

Having deeply analysed the meaning ascribed to “patent illegality” by various decisions, particularly Associate Builders v. DDA [(2015) 3 SCC 49] and Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India [(2019) 15 SCC 131)], it is my view that the court’s power to set aside an award on the ground of “patent illegality” is more or less the same as “justice and morality”, which is a subset of public policy, with one notable exception, i.e. the Wednesbury principles of perversity and irrationality.

While the Supreme Court recognised that Wednesbury had been legislatively excluded from the doctrine of “public policy” by the 2015 Amendments in HRD Corporation (Marcus Oil & Chemical Division) v. GAIL Limited (formerly Gas Authority of India Limited) [(2018) 12 SCC 471], the Supreme Court re-introduced these principles into “patent illegality” in the Ssangyong Case.

Although the 2015 amendment envisaged a different standard for interference with ICA/foreign awards compared to domestic awards, it did not intend to include Wednesbury principles in the “patent illegality” doctrine. In fact, the Supplementary LCR made the legislative intent quite clear with regard to Wednesbury and stated quite categorically that the applicability of Wednesbury principles to “public policy” would render the construction of the term “public policy” “nugatory”. Explanation 2 was added to the ACA vide the 2015 Supplementary amendments in this context. While it can be speculated that Explanation 2 was always intended to apply solely to “public policy”, and therefore the addition of Wednesbury to “patent illegality” was not prohibited, it is important to note that “patent illegality” was not a topic within the scope of consideration of the Law Commission at the time. Furthermore, Wednesbury principles are a concept of administrative law and “finds no purchase in the context of private arbitrations, where parties have contractually agreed to abide by the decision of the arbitral tribunal.” [Sui Southern Gas Co Ltd. v. Habibullah Coastal Power Co (Pte) Ltd. [2010] SGHC 62].

Incorporating Wednesbury principles into the definition of “public policy”, as rightly pointed out by the Law Commission, is contrary to legislative intent, the object of the ACA and international practice,  and “will discourage the possibility of international arbitration coming to, and domestic arbitration staying in India”.

One of the justifications often cited for greater interference in domestic arbitration is the perceived "quality" of arbitrators in India. If this is indeed the case, in my view, the focus then should be on finding mechanisms to improve the quality rather than creating a separate standard for domestic awards and turning the clock back to the days of ONGC v. Saw Pipes [2003 (5) SCC 705]. In this context, it would be important to consider: how can India aspire to become an international arbitration hub if the implicit message conveyed is a lack of trust in domestic arbitrators while expecting the world to repose that trust?

The rationale for proposing a different standard for international commercial arbitration (ICA)/foreign awards and domestic awards was based on "the circumstances prevalent in our country" (246th LCR, para 35). Indeed, there has to be an expiry date to change these “prevalent circumstances” if India is to establish herself as a sought-after arbitration destination.

It is also important to consider the impact of PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Private Limited [(2021) 7 SCC 1] on domestic arbitration, which is one of the most progressive judgements on arbitration. This landmark judgement, which should ideally have positively impacted India’s image as an arbitration-friendly jurisdiction, unfortunately, has the potential to negatively affect India’s larger domestic arbitration.

According to PASL Wind, two Indian parties can choose a foreign seat to arbitrate their disputes. Such an award will be a foreign award and subject to Part II of the ACA. When two Indian parties opt for a foreign seat, they also choose to subject themselves to lesser scrutiny of the arbitral award compared to a domestic arbitration. For instance, by selecting Switzerland as the seat, disputing Indian parties would be treated as engaged in an international commercial arbitration and subject to a lower level of scrutiny than in a domestic arbitration in Switzerland. While most grounds for setting aside an award are identical for ICA and domestic arbitration in Switzerland, the threshold is high for both. However, the scope of review on the merits is wider for a domestic award. Therefore, Indian parties engaging in arbitration in foreign countries like Switzerland would be entitled to marginally milder scrutiny and, in countries such as England and Belgium, to no different scrutiny. Consider why two Indian parties, particularly those with the resources to arbitrate outside India, would willingly subject themselves to a higher level of scrutiny for their arbitral awards when they could potentially benefit from a comparatively milder level of scrutiny both in the seat country and during the enforcement stage in India.

Since the 2015 amendments, India has made significant progress in arbitration reform. It is imperative we learn from our past mistakes and avoid taking any regressive steps. I believe implementing separate acts for ICA and domestic arbitration would be a monumental mistake in a regressive move.

Payal Chawla is a practising advocate specialising in arbitration and commercial litigation and is the founder of JUSCONTRACTUS.

Read the earlier columns on Arbitration Reforms:

Arbitration Reforms: The Case for Statutory Recognition of Arbitrability of Fraud

Arbitration Reforms: The Imperative for Codifying the Residual Power of Courts to Modify Arbitral Awards

Arbitration Reforms: Codify Perkins & End the Ambiguity in the Appointment of Arbitrators