The State of Commercial Laws: Scope of the term “public policy”under the Arbitration and Conciliation Act 1996

In the first column under “The State of Commercial Laws” series, Anirudh Krishnan examines the scope of the term “public policy” under the Arbitration and Conciliation Act, 1996 and the tendency of courts to interfere in arbitral awards..Arbitration, contract and company law are some of the fastest developing areas of laws in India today. It is therefore difficult yet important to stay abreast with the latest developments in these fields. I attempt to provide the readers with an update on the position of law on one different aspect of these areas in every edition of the “The State of Commercial Law”. .The power of the Courts to set aside an arbitral award (under the UNCITRAL model law and under the Arbitration and Conciliation Act, 1996 (the “Act”)) was never meant to be a license to overturn an arbitral award on merits.[1] The Courts were supposed to merely act as Courts of Review rather than as Courts of Appeal, even while examining whether the arbitral award was “in conflict with the public policy of India”.[2] Accordingly, the Supreme Court, in Renusagar[3]– a case under the Arbitration Act, 1940, had provided a narrow interpretation to the term “public policy”. However, such an interpretation of “public policy” was short lived. .The decision in ONGC Ltd v. Saw Pipes Ltd.[4] (“Saw Pipes”) opened the floodgates so far as judicial interference in arbitrations is concerned. The Supreme Court, in Saw Pipes declared that:.“Therefore, in our view, the phrase ‘Public Policy of India’ used in Section 34 in context is required to be given a wider meaning…. 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…(the) award could be set aside if it (sic) contrary to:–.(a) fundamental policy of Indian law; .(b) the interest of India; or.(c) justice or morality,.(d) in addition, if it is patently illegal..Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy.”.An award would therefore be patently illegal if it violated any statutory provision or a provision of the contract. Hence Courts, while supposedly reviewing the award have started going into the merits and analyzing whether the awards, on merits, violated any statutory provision or the terms of the contract..For instance:.a) Where the arbitrator ignored the settled principles relating to ‘mistake’ in contract while making the award, this was found to be against public policy and the award was set aside by the Delhi High Court.[5].b) An award granting a time barred claim was set aside by the Jammu and Kashmir High Court.[6].The position post Saw Pipes is best summarized by a decision of the Andhra Pradesh High Court[7]. The court stated as follows –.“[I]t is obvious that the concept ‘Public Policy’ is to be understood in the context of each and every case. To illustrate, if the mala fides are attributed to the arbitrator or dispute referred to the arbitrator on the face of it is not capable of being referred to arbitration or if the arbitrator goes beyond the scope of the reference and the adjudicatory process of the arbitrator is again beyond the scope of the [contract]. Therefore, it is further obvious that the arbitrator has to necessarily confine his jurisdiction and adjudicate the matter only within the scope of the [contract] and also the substantive laws of the land. Strict adherence to [the contract] is essential.”.Criticisms noted by the Supreme Court.The Supreme Court[8], subsequently, has noted that Saw Pipes has come in for criticism from academic circles, but has left the issue of over-ruling Saw Pipes to a larger Bench. Justice Sinha, observed:. “we are not unmindful that the decision of this court in ONGC had invited considerable adverse comments but the correctness or otherwise of the said decision is not in question before us. It is only for a larger bench to consider the correctness or otherwise of the said decision. The said decision is binding on us.”.The same judge, in Centrotrade Minerals & Metals Inc v. Hindustan Copper Ltd[9] observed:.“one may agree with the said view [i.e. rationale expressed in Saw Pipes] or one may not but as at present advised, we have to abide by the decision.”.One might have assumed that these observations were indicative of a judicial resolve to shake off its interventionist avatar. However, in the light of more recent jurisprudence analyzed in the next section of this piece, it appears that Justice Sinha’s is a lone voice of a non-interventionist judge..Extending Saw Pipes to non-enforcement of foreign awards.One of the grounds for not enforcing foreign awards is if “the enforcement of the award would be contrary to the public policy of India.” The popular international view has been that since enforcement of foreign awards is regulated by the New York Convention (“NYC”), the term “public policy”, as contained in Article V(2)(b) of the NYC and incorporated in Section 48(2)(b) of the Act, must be interpreted in consonance with the objectives of the NYC. There are a plethora of international decisions which state that one of the major objectives of the NYC is to remove impediments to enforcement of foreign awards.[10] These cases go on to say that when any term of the NYC can be interpreted in two ways, the pro-enforcement interpretation should be adopted. Consequently, the international view is that the term “public policy” must be construed narrowly.[11] This was reflected in the Delhi High Court decision in Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain (India) Co.[12] (“Harnarain”) where the Court relied on Renusagar, and not Saw Pipes, to construe the term “public policy”. Yet, in another case, the Delhi High Court observed that Saw Pipes would be applicable to interpret Section 48(2)(b).[13].The hope was that the view in Harnarain would become the law of the land. However, the latter view has been recently accepted by the Supreme Court. In a recent case- Phulchand Exports Ltd. v. OOO Patriot[14](“Phulchand”), the Supreme Court held that “patent illegality” under the term “public policy of India” needs to be looked into even while examining the enforcement of a foreign award under Section 48 (2) (b) of the Act..This decision opens the pandoras box even with respect to enforcement of foreign awards. Phulchand joins a long list of cases that have led to increased intervention by Indian Courts in domestic and international arbitration..In light of the academic critiques[15], the Law Commission and the Government of India have decided to step in..Amendments suggested.The Law Commission had recommended that the term “public policy” be defined to echo the wording in ONGC but exclude the term “patent illegality”.[16] Following this the Law Ministry has recommended that a provision be inserted which states that an award would fall foul of public policy only if “the award is contrary to.(i) fundamental policy of India, or.(ii) interests of India, or.(iii) justice or morality”..Presumably, this would reduce judicial interference under the guise of the award being “patently illegal”. However, the Parliament has decided to treat international commercial arbitrations and domestic arbitrations differently. There is a proposal to have a separate provision including “patent illegality” as a ground for setting aside a domestic arbitral award..These suggestions pre-date Phulchand. The intention behind these suggested amendments was to pre-empt a decision such as Phulchand but to reinforce the ratio of Saw Pipes..However, the Legislature has failed to consider the huge risk involved in giving statutory effect to the wording of Saw Pipes. The principles of interpreting a statute are different from the principles used to interpret a judgment of the Supreme Court. While interpreting a Statute, the Courts must ensure that no word in the Statute is rendered redundant. Therefore it would be highly plausible to argue that the term “justice” should be interpreted widely in order to mean something more than “patent illegality”. It could therefore, for instance, be possible to argue that any kind of misconstruction of evidence by the arbitrator would result in injustice and therefore such misconstruction of evidence would constitute a ground for setting aside an arbitral award. Such an interpretation would result in Courts, while hearing applications under Section 34 of the Act, becoming Courts of appeal- much against the objective of the institution of arbitration. .It is likely that if such an amendment is incorporated into the Act, this issue will come up before Courts repeatedly. However, none of these amendments have been incorporated into the Act as yet and hence are merely of academic interest. Despite the legislative proposals and the criticism of the Supreme Court, Saw Pipes and Phulchand remain the law of the land..Anirudh Krishnan is a graduate of NALSAR and completed his BCL at the University of Oxford. He is a qualified solicitor, England and Wales and is currently an advocate in the Madras High Court. He is also Chief Editor, Justice R.S. Bachawat’s Law of Arbitration and Conciliation. .[1] Jean-Paul Beraudo, Egregious Error of Law as Grounds for Setting Aside an Arbitral Award, Journal of International Arbitration, (Kluwer Law International 2006 Volume 23 Issue 4 ) pp. 351 – 361; Patricia Nacimiento, Article V(1)(a) in Herbert Kronke , Patricia Nacimiento , et al. (eds), Recognition and Enforcement of Foreign Arbitral Awards: A Global Commentary on the New York Convention, (Kluwer Law International 2010) pp. 205 – 230..[2] Ibid..[3] Renusagar Power Co. Ltd. v. General Electric Co. (1994) 2 Arb LR 405..[4] (2003) 5 SCC 705..[5] Mahanagar Telephone Nigam Limited v. SPS Rana 160 (2009) DLT 390, it was found that a party had agreed to the contract under the mistaken impression that this contained the same clauses as an older agreement, it was held that parties were not ad idem in relation to the terms of the contract, arbitrator’s award on the basis of such new terms was set aside..[6] Mir Ghulam Hussain v. State 2005 (3) Arb LR 628, 639 (J&K).[7] L Nagi Reddy v. Union of India 2005 (3) Arb LR 607, 617 (AP) (DB).[8] McDermott International Inc v. Burn Standard Coal Company 2006 (2) Arb LR 498, 531 (SC).[9] 2006 (2) Arb LR 547, 575-576 (SC)..[10] Oltchim, S.A v. Velco Chemicals, Inc , Yearbook of Commercial Arbitration, Vol. XXXI(2006), US No. 528, p.992; GreCon Dimter Inc (Germany) v. J.R.Normnand Inc. (Canada) and Scierie Thomas Louis Tremblay Inc. (Canada), Canada No. 22, p.611; . See also Theresa Ballard v. Illinois Central Railroad Company and R.L.Clark, Yearbook of Commercial Arbitration, Vol. XXXI(2006), US No. 526, p.978.[11] Brostrom Tankers AB (Sweden) v. Factorias Vulcano SA (Spain), Yearbook of Com-mercial Arbitration, Vol. XXX(2005), Ireland No. 1, p.591, See also Seller v. Buyer, Yearbook of Commercial Arbitration, Vol. XXIX(2004), Germany No. 59, p. 697; Exclusive Distributor v. Seller, Yearbook of Commercial Arbitration, Vol. XXIX(2004), Germany No. 61, p.715; Fotochrome, Inc. v. Copal Company, Limited (2nd Cir. 1975) 517 F.2d 512..[12] 2008(4)ARB LR 497(Delhi)..[13] Toepfer International Asia Pvt. Ltd. v. Priyanka Overseas Pvt. Ltd. 2007(4)ARB LR 499(Delhi).[14] 2011(11) SCALE 475..[15] Fali S Nariman, “Problems of Public Policy – The Indian Perspective”, ICCA CONGRESS SERIES NO 3, p. 337 (1986); D.R. Dhanuka, “Critical Analysis of the Judgment ONGC Ltd v. SAW Pipes”, 2003 (2) ARB LR 1; O.P. Malhotra, “Scope of Public Policy under the Indian Arbitration and Conciliation Act, 1996”, 2007 (1) MLJ 4..[16] See 176th Law Commission Report.