Apex Court v. the unruly horse: Journey from Renusagar to Ssangyong Engineering

Introduction

The Arbitration and Conciliation Act, 1996 (A&C Act) is based on the 1985 UNCITRAL Model Law and came into force on 25-1-1996. The Indian Legislature recognised the need to honour India’s obligations under 1958 New York Convention and implement the modern arbitration regime to promote comity of nations in the field of international commercial arbitration and to foster international trade. The A&C Act has in Section 5 embodied the policy of minimal judicial interference. Although, the principle of minimised judicial interference is recognised by the most leading arbitration jurisdictions, the national courts of the seat have a supervisory jurisdiction to oversee the arbitration proceedings. Some extent of judicial oversight is considered necessary to ensure that the justice rendered through this private method of adjudication is in conformity with the fundamental principles of law of those nations with which it has a territorial connection. Therefore, the parties to arbitration proceedings must approach the national court of the jurisdiction where it wishes to have the arbitral award enforced and that court has the exclusive power to ensure that the arbitral award is not in contravention with the fundamental principles of law recognised by it and is also in conformity with its idiosyncratic public policies. The term “public policy” is dynamic in nature and is subject to varying interpretations, each depending on the field of law to which it is applied. It is diverse depending on the peculiarities of each jurisdiction. An early comment connoting the complexities of the term “public policy” can be traced back to the opinion of Burrough, J. when he went to warn the courts of law by saying it is a  “very unruly horse and once you get astride it you never know where it will carry you”.[1]

 

The connotation “public policy” in the context of setting aside of an arbitral award should not be confused with a review of the award on merits. It is a recognised principle of arbitration law that an arbitral award is final and binding on the parties and cannot be reviewed by the courts on merits at the setting aside or enforcement proceeding. Section 34(2) of the A&C Act contains seven grounds on which an arbitral award may be set aside and is divided into two parts. The grounds in Section 34(2)(a) are procedural in nature and precise. The grounds in Section 34(2)(b) are substantive and have been subject to judicial controversy over the years. Section 34(2)(b)(ii) of the A&C Act has laid down that a court may set aside an award if the award is in conflict with the public policy of India. The term “public policy” in Section 34(2)(b)(ii) is ambiguous and has been subject to varied interpretations. The present article will be divided into 6 parts each based on a particular phase and will carefully examine the evolution in jurisprudence with regard to the fluctuating boundaries of the term “public policy of India” in the context of an application made under Section 34(2) of the A&C Act.

 

I : From Renusagar to the Saw Pipes Eclipse

 

The decision of the Supreme Court in Renusagar Power Electric Co. Ltd. v. General Electric Co.[2] (Renusagar) was an early decision under the pre-1996 regime where the Supreme Court had the opportunity to expound the concept of public policy of India in the context of the enforcement of a foreign arbitral award. In Renusagar[3], the Court was confronted with elucidating the expression “public policy” embodied in Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961 with respect to enforcement of an arbitral award passed by the International Chamber of Commerce. The appellant had raised a number of objections against the award that included a contention that the award is in blatant violation of the Foreign Exchange Regulation Act, 1973. At the time of opining on the invocation of the public policy ground, the Court observed that the said term could be subject to a narrow and a broad meaning. It went on to establish a dichotomy between the application of public policy to the domestic arena and the international arena. It is undoubted that this was the prevailing international standard at the time. The Court observed that the public policy of India should be narrowly construed in the context of private international law while keeping in mind the pro-enforcement bias that was envisaged by the 1958 New York Convention that abolished double exequatur. The Court adopted a narrow interpretation of the term “public policy” and held that a foreign arbitral award would not be refused enforcement only because it is in violation of an aspect of Indian public policy. Applying this criterion, it was held that a foreign award would be refused enforcement by the courts in India only on the ground of public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; (ii) the interest of India; and (iii) justice or morality. The dictum of the Supreme Court in Renusagar[4] was appraised internationally and it became a seminal authority on the rule that an arbitral award must not be reviewed on merits at the enforcement stage. It is in our opinion that this decision was exemplary, well balanced and judiciously nuanced rightly paying heed to the pro-arbitration bias that prevailed in international arena at the time.

 

After the enactment of the A&C Act in 1996, the Foreign Awards (Recognition and Enforcement) Act, 1961 stood repealed. The A&C Act served as a complete code for the practice of arbitration in India. Section 34 in Part I of the A&C Act made provisions of the enforcement of domestic arbitral awards whereas Section 48 in Part II of the A&C Act made provisions for the enforcement of foreign awards in India. The public policy ground to resist enforcement was retained in both Sections 34 and 48. The precedential value of Renusagar[5] was shadowed by uncertainty unless it were to obtain judicial endorsement under the new arbitration regime.

 

The Supreme Court was confronted with this challenge in the year 2003 in the infamous case of ONGC v. Saw Pipes Ltd.[6] (Saw Pipes), where it had to define the contours of public policy in Section 34(2)(b)(ii) of the A&C Act in the context of setting aside a domestic arbitral award. The decision in Saw Pipes[7] appeared to be in polar contrast with the decision in Renusagar[8]. The Court had to decide whether it had the jurisdiction under Section 34 of the A&C Act to set aside an award which was inter alia “patently illegal” or in contravention of the A&C Act or in other words whether the court could review the merits of the award. The Court propounding a meticulous ratio, undoubtedly flawed in many aspects answered this question in the affirmative. The Court held that an Arbitral Tribunal was a creation of the A&C Act and therefore if the Arbitral Tribunal violated the provisions of the A&C Act, it would warrant intervention by the Court. The Court employing the rule that every right should have remedy appears to have ignored the principle that parties to arbitration have the right to contract out of an appeal like recourse against the arbitral award. The Court appears to have forgone the sacrosanct principles of party autonomy and minimal judicial intervention while thwarting the mechanism employed in Section 34(2) that separates procedural from substantive irregularities. The Court conflated jurisdictional with procedural violations and wrongly held that every violation of the A&C Act by the Arbitral Tribunal would amount to a jurisdictional violation. The Court categorically opined that it could act as an appellate and revisional court in a proceeding under Section 34. Further to strengthen the precedential value of Saw Pipes[9], the Court added the ground “patent illegality” to those enumerated by the Court in the Renusagar[10]. It is our opinion that the decision of the Court in Saw Pipes[11] is extremely flawed and is against the true spirit of the 1958 New York Convention and 1985 UNCITRAL Model Law which can be discerned from its travaux préparatoires. Apart from opening the floodgates for proceedings under Section 34(2), another major issue that was brought about by the decision in Saw Pipes[12] was that the criterion adopted therein was to apply to Section 48 of the A&C Act with respect to foreign arbitral awards. It is needless to say that the exemplary approach adopted by the Supreme Court in Renusagar[13] was eclipsed by Saw Pipes[14]. The decision in Saw Pipes[15] received a considerable amount of criticism and therefore warranted attention by the legislature. It is pertinent to note that decision of the Supreme Court in Venture Global Engg. v. Satyam Computer Services Ltd.[16] (Venture Global) worsened the effect of Saw Pipes[17] as it went on to lay down that a foreign award may be challenged under Section 34 of the A&C Act. It is our opinion that that this decision suffered from many infirmities.

 

It is interesting to mention at this juncture, that in spite of the eclipse cast by Saw Pipes[18], there was a school of thought that was cognizant of its deficiencies and insinuated much-needed dissent. In a 2006 often cited judgment of the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd.[19] (McDermott International) the Court although following Saw Pipes[20] made succinct observations regarding the restrictive role of courts at the time of hearing applications for setting aside of arbitral awards under Section 34 of the A&C Act. Later in 2012, a similar observation was made in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran[21] (Rashtriya Ispat) in polar contrast to the dictum in Saw Pipes[22]. The Court in Rashtriya Ispat[23] laid down with regard to the interpretation of the substantive contract by an arbitrator, that if the view taken by the arbitrator is a possible one it cannot be capriciously subjected to judicial interference even if the contract is capable of two interpretations. It was hoped that these rulings would act as a hint and help the Supreme Court pre-empt more problematic jurisprudence.

 

II : Foreign Awards : The Transition from Phulchand Exports to Shri Lal Mahal

 

In Phulchand Exports Ltd. v. O.O.O. Patriot[24] (Phulchand Exports) the Supreme Court had to deliver an opinion on the scope of public policy in Section 48 of the A&C Act. The Court in a rather capricious manner departed from the commonly accepted norm that the public policy filter should be assessed narrowly with respect to foreign awards. Further in blatant ignorance to the comity of nations and the global pro-enforcement bias, it held that the criterion laid down in Saw Pipes[25] would be applicable to foreign awards. This decision was undoubtedly detrimental to the prospect of India becoming an arbitral-friendly jurisdiction as now Indian courts could set aside foreign awards on the unreasonably broad “patent illegality” test laid down in Saw Pipes[26] which was in fact propounded in the context of a domestic award. It is our opinion that this approach was gravely erroneous.

 

However, it was in 2012 where the Constitutional Bench of the Supreme Court made a corrective approach to the attitude of the judiciary when they were confronted with exercise of their supervisory jurisdiction with respect to foreign arbitrations. The Constitutional Bench in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[27] (BALCO) after a rather extensive analysis on the prevailing jurisprudence at the time prospectively overruled the position laid down in Bhatia International v. Bulk Trading SA[28] (Bhatia International) and that held Part I of the A&C Act would not apply to international arbitrations unless otherwise agreed by the parties.

 

In the aftermath of the landmark decision of the Supreme Court in BALCO[29], the Court delivered another much-awaited judgment. In Shri Lal Mahal Ltd. v. Progetto Grano Spa[30] (Shri Lal Mahal) when Lodha, J. was confronted with the enforcement of an arbitral award passed in London, it appeared he was inclined to reconsider his own decision in Phulchand Exports[31] by holding that the public policy criterion in Section 48 would have to be construed in conformity with decision in Renusagar[32] and held that foreign arbitral awards cannot be denied enforcement on the “patent illegality” ground laid down in Saw Pipes[33]. The decision in Shri Lal Mahal[34] undoubtedly remedied the negative effect that Saw Pipes[35] had cast on the international arena, although the menace played by Saw Pipes[36] did not end here.

 

It is pertinent to note the decision of the Constitutional Bench in BALCO[37] had only prospectively overruled the decision in Bhatia International[38] which meant BALCO[39] would apply from the date of the decision and therefore the arbitration agreements entered into before 6-9-2012 would continue to be governed by Bhatia International[40]. This meant that Saw Pipes[41] and Venture Global[42] would continue to be the standard that would be applicable to the arbitral awards rendered in these arbitrations and that foreign awards could be challenged on the ground “patent illegality”. It is also evident that the decisions in Phulchand Exports[43] and Venture Global[44] are the negative repercussions of the perspective adopted by the Supreme Court in Saw Pipes[45] and Bhatia International[46]. Thus, there was considerable anguish in the arbitration fraternity at the time and a much-awaited intervention was desired from the legislature, that came only after the labyrinth was made more complex by two more controversial decisions of the Supreme Court.

 

III: Western Geco and Associate Builders

 

The three-Judge Bench in ONGC v. Western Geco International Ltd.[47] (Western Geco) offset the improvements that were made on the subhead “patent illegality” by laying down a comprehensive exposition of the subhead “fundamental policy of Indian law”. The Court was confronted with an application to set aside an arbitral award passed in an international commercial arbitration that had its seat in India. In Western Geco[48] the parties had entered into an agreement for upgradation of the appellant’s seismic survey vessel by installing hydrophones. The performance could not be completed as the respondent was not able to obtain a licence from the regulatory bodies of the US Government for the sale of hydrophones. Due to this the respondent invoked the force majeure clause, the Tribunal held that the respondent was not entitled to invoke the force majeure clause as the delay that occurred was not solely attributable to the failure of the authorities to furnish the licence. However, the Tribunal also held that the entire period of delay was not attributable to the respondent. The appellant aggrieved by this sought to challenge the award under Section 34 of the A&C Act. Naturally, the respondent contended that these findings of the Tribunal cannot be re-examined by the Court as it would entail a reassessment of the case on merits. At this juncture, it was hoped that the 3-Judge Bench would in the light of all the criticism be inclined to remove the eclipse cast by the decision in Saw Pipes[49] and bring back Renusagar[50]. However, the Court followed Saw Pipes[51] decided to go a step further. The Court noted that the decision in Saw Pipes[52] although laying down the branches of public policy including “fundamental policy of Indian law” did not define their scope. Therefore, it held that it was an appropriate time to exposit the boundaries of “fundamental policy of Indian law”. The Supreme Court laid down that there are three important principles that are fundamentally embedded in Indian law to comprise the “fundamental policy of Indian law”. These are the duty of the judicial forum to follow a judicial approach, to strictly follow the principles of natural justice and be reasonable enough when passing a judgment. It is pertinent to note that the Court’s judgment in Western Geco[53] has permitted an inquiry into the merits of an arbitral award as is evident from a bare reading of the relevant portion of the judgment:

 

(a) A Judicial Approach: “Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.”[54]

(b) Principles of Natural Justice: “Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication.”[55]

(c) The Wednesbury Principle of Reasonableness: “a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury principle of reasonableness”.[56]

 

Thereafter, the Court found it appropriate to divide the delay into four components as against the method adopted by the Tribunal and thereby found that they are unable to agree with the decision of the Tribunal. The Court characterised this as an error resulting in the miscarriage of justice apart from the fact that it failed to appreciate and draw inferences that logically flow such proved facts. It is our opinion that this decision is flawed. Firstly, the Court has allowed an inquiry into the merits under the “fundamental policy of Indian law” violating the true essence of Renusagar[57]. Secondly, the Court has erred by failing to take cognizance of the fact that the test of public policy is to be applied to check whether the enforcement of the award would lead to a violation of public policy and not that arbitral award and the merits of the award. By employing this ratio and without realising its side effects, the Court has inextricably linked the public policy of India with the merits of an arbitral award. It is our opinion that the Court in Western Geco[58] has done exactly what its predecessors had pre-empted 20 years ago in Renusagar[59], where the Court refrained from reviewing the award for the grant of interest in arrears as a violation of the Foreign Exchange Regulation Act, 1973. In addition to this, in Renusagar[60] it was made clear that a court cannot set aside an award just because it disagrees with the reasoning of the arbitrator on law or facts. It is needless to say that court in Western Geco[61] has done the exact opposite and has disregarded the dictum of the judgment in Renusagar[62] in totality while contributing to the menace played by its decision in Saw Pipes[63]. Finally, it is pertinent to note that Court’s exposition of “fundamental policy of Indian law” has led to a duplication of the grounds already enumerated in Section 34(2)(a). The principles of natural justice is already a ground available in Section 34(2)(a)(iii), while following a judicial approach as explained in para 35 of Western Geco[64] would nonetheless entail following the principles of natural justice. Therefore, the procedural irregularities contemplated by Section 34(2)(a) are now also a part of Section 34(2)(b)(ii). This has left room for recalcitrant parties to play mischief by using a backdoor to challenge arbitral awards. It is in our opinion that this decision should have been the wake call for the legislature. However, it was not until another problematic decision, that the Law Commission of India pulled up the legislature.

 

The Division Bench of the Supreme Court comprising Nariman and Gogoi, JJ. in Associate Builders v. DDA[65] (Associate Builders) delivered soon after Western Geco[66] made some laudable observations in its dictum in spite of the precedential burden cast upon it by the decision of the three-Judge Bench in Western Geco[67] that followed and approved Saw Pipes[68]. The decision of the Court in Associate Builders[69] although compelled to follow the earlier judgments undoubtedly had a mitigating effect on the damaging ramifications of the earlier rulings. The Court appeared to be well intentioned and cognizant of the problems in the prevailing jurisprudence and decided to tackle them head on in spite of the doctrine of stare decisis. At first, the Court on a conjoint reading of Section 34 with Section 5 of the A&C Act categorically laid down that the merits of an arbitral award are assailable under Section 34 only when the award is in conflict with the public policy of India. The Court then went on to enumerate and lay down the contours of all the subheads of public policy while imposing some fetters in an attempt to remedy the nuisance created by Western Geco[70] and Saw Pipes[71].

 

At the time of defining the heads of “public policy of India”, the Court followed and elucidated Western Geco[72] and held that “fundamental policy of Indian law” would comprise (i) compliance with the statutes and judicial precedents; (ii) need for judicial approach; (iii) natural justice compliance; and (iv) Wednesbury reasonableness.[73] It is interesting to note here, that the Court found it appropriate to lay an emphasis on Wednesbury reasonableness as it observed with regard to it that where (i) a finding is based on no evidence; (ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; and (iii) ignores vital evidence in arriving at its decision, such a decision would necessarily be perverse.[74]

 

Moreover, it is also interesting to note that the Court in Associate Builders[75] endeavoured for the first time to lay down an exposition on the other two heads of “public policy of India” coined in Renusagar[76]. The Court with regard to the subhead “interest of India”, held that an award may be set aside if contrary to the interests of India and that this would entail it if concerns itself with India as a member of the world community in its relation with foreign powers.[77] The Court with respect to the subhead “justice or morality” held that an award can be said to be against justice when it shocks the conscience of the court.[78] Lastly, with regard to “patent illegality” the Court followed and elucidated Saw Pipes[79] in connoting that this would entail (i) contravention of substantive law of India; (ii) contravention of A&C Act, 1996; and (iii) contravention of the terms of the contract.[80]

 

It is evident that the Court has not been able to correct the erroneous duplication of procedural irregularities embodied in Section 34(2)(a) in the sub heads of public policy in India. Although, it has been held that the grounds mentioned in Section 34(2)(a) would strictly not entail a review on merits of the award, it is needless to say that this observation has been made redundant. The duplication of the procedural irregularities contemplated by Section 34(2)(a) are evident in the subheads of “fundamental policy of Indian law” and “patent illegality” as thus there is always a backdoor for parties to misuse the recourse in Section 34 by disguising procedural irregularities as violations of public policy of India and thus vandalising the ethos of the 1985 UNCITRAL Model Law.

 

At this juncture, it is important to observe the positive aspect of the judgment in Associate Builders[81] where in spite of being compelled to follow Western Geco[82] and Saw Pipes[83], the Court was successful in remedying some mischief. The method adopted by the Court to achieve this is worthy of appraisal, as it relied on the dictum of earlier judgments where the courts appeared conscious of their duty to exercise judicial restraint at the time of hearing an application under Section 34. The Court in Associate Builders[84] has tactfully relied on the dictum of McDermott International[85] and Rashtriya Ispat[86] to give primacy to the findings of the arbitrator with regard to interpretation of the contract in spite of having to concede to Saw Pipes[87] that the contravention of the terms of the contract would amount to “patent illegality”. The Court held that if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. It laid emphasis by stating that the construction of the terms of a contract is primarily for an arbitrator to decide and only if the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do, that it would warrant judicial interference.

 

The Court relying on three earlier judgments also laid down that when a court is applying the public policy test to an arbitral award it does not act as a court of appeal and consequently errors of fact cannot be corrected, clearly departing from the position adopted in Saw Pipes[88] and Western Geco[89]. It was also noted that a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Moreover, it supplemented this ratio by stating that an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score, provided that it is found that the arbitrator’s approach is not arbitrary or capricious.[90] The judgment in Associate Builders[91] can most definitely be considered as a remarkable one which marked an inception of a more pro-arbitration approach with regard to upholding arbitral awards, in spite of the precedential burden that was cast upon Nariman and Gogoi, JJ.

 

IV : The Law Commission of India admonishes the Legislature : The 2015 Amendment

 

The Law Commission of India published a comprehensive report known as the 246th Law Commission Report in August 2014 suggesting amendments to Section 34 of the A&C Act, heavily criticising judgment in Saw Pipes[92]. The Law Commission also made observations on all the landmark decisions of the Supreme Court in the arbitration domain such as Shri Lal Mahal[93], BALCO[94], Bhatia International[95], etc. while suggesting a reinstatement of Renusagar[96].

 

It is interesting to note that even after the scathing observations that were made in the Law Commission Report with regard to the broad scope of public policy, the 3-Judge Bench of the Supreme Court delivered the judgment in Western Geco[97] in September 2014 only a month after the publication of the Report. It is needless to say that the judgment in Western Geco[98] did exactly what the Law Commission warned the judiciary to refrain from doing. Subsequently, 2 months after this in November 2014 came the decision in Associate Builders[99] reinforcing the broad scope of public policy. In the aftermath of these two controversial decisions that were in blatant disobedience of the 246th Law Commission Report, the Law Commission was too quick to re-join by publishing a strongly worded supplement to the 246th Law Commission Report on 6-2-2015 titled as “Public Policy” – Developments Post Report No. 246. This supplement heavily criticised the judgments in Western Geco[100] and Associate Builders[101] and strongly urged to legislature to implement the amendments recommended by the Law Commission. It is interesting to see the exasperation and anguish expressed by the Law Commission by reproducing a small extract from the supplement where it stated at para 6 “the Supreme Court’s judgment in Western Geco[102] undermines the Commission’s attempts to bring the Act in line with international practices and will discourage the possibility of international arbitration coming to, and domestic arbitration staying in India”[103].

 

Thereafter, the legislature passed the 2015 amendment of the A&C Act incorporating the recommendations made by the Law Commission. The amendments that were made to Section 34(2)(b)(ii) of the A&C Act include two Explanations and an additional ground by insertion of Section 34(2-A). The amendments are reproduced below for better analysis:

 

Explanation 1.– For avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,–

(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) 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.

(2-A) An arbitral award arising out of arbitration other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated 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 the law or by reappreciation of evidence.

 

On a bare perusal of the amendments made to Section 34(2)(b)(ii) it is evident that the legislature has enumerated in Explanation 1 what constitutes a violation of public policy of India while endorsing statutory recognition to the subheads enumerated in Renusagar[104]. The legislature has then in Explanation 2 categorically laid down that a contravention of “fundamental policy of Indian law” shall not entail a review on merits, thereby statutorily superseding the Western Geco[105] and Associate Builders[106]. Moving on to the newly inserted Section 34(2-A) it is clear that the legislature has also statutorily endorsed the mischievous ground of “patent illegality” laid down in Saw Pipes[107]. However, in an attempt to prevent its misuse it has added a proviso disallowing any reappreciation of evidence thereby statutorily superseding Saw Pipes[108] while appearing to converge with the positive aspect of ratio laid down in Associate Builders[109]. The proviso has also protected the fate of awards passed in international commercial arbitrations from being challenged on the ground of “patent illegality” clearly adopting the Court’s opinion in Shri Lal Mahal[110]. It is our opinion, that the 2015 amendment of the A&C Act was long overdue and has correctly imposed fetters on the power of the courts when they are confronted with an application for setting aside of an arbitral award.

 

V : The Post-Amendment Renaissance

 

The 2015 amendment of the A&C Act had a drastic impact on the jurisprudence and the arbitration fraternity witnessed the conscious effort that was being made by the judiciary to correct their approach when they were confronted with Section 34 applications. A few exemplary judgments are briefly discussed in this part.

 

In November 2017, the Supreme Court in Venture Global Engg. LLC v. Tech Mahindra Ltd.[111] observed that an award can be set aside only on the grounds specified in Section 34 and no other grounds. It was further held that the Court is barred from acting as an appellate forum to examine the legality of the arbitral award and is strictly barred from reassessing facts.

 

Soon after this, in Sutlej Construction Ltd. v. State (UT of Chandigarh)[112] it was held that when the arbitrator has taken a plausible and reasonable view, the Court cannot capriciously substitute the view of the arbitrator with its own just because it has a different view or opinion. It was further laid down that setting aside of an arbitral award on the ground of public policy would be limited to a rare situation where the award shocks the conscience of the court and this would not include what the court thinks would be unjust on the facts of the case. It is evident that the Court has followed the legislative mandate and has employed the positive aspect of the ratio in Associate Builders[113].

 

More recently, in Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd.[114] the Court relying on Associate Builders[115], McDermott International[116] and Rashtriya Ispat[117] has held that if an arbitrator construes a term of the contract in a reasonable manner it will not mean that the award can be set aside on that ground as the construction of the terms of a contract is primarily for the arbitrator. Moreover, it went on to reiterate that when a court is applying the public policy test to an arbitration award it does not act as a court of appeal and therefore the errors on facts cannot be corrected. It is evident that the Saw Pipes[118] and Western Geco[119] regime was abandoned.

 

Lastly, with regard to applicability of the 2015 amendment, it has been held in the landmark decision of the Supreme Court in BCCI v. Kochi Cricket (P) Ltd.[120] (Kochi Cricket) that the 2015 amendment will apply prospectively both to arbitral and court proceedings which have commenced on or after the 2015 Amendment Act came into force unless otherwise agreed by the parties.

 

VI : Ssangyong Engg. and Construction Co. Ltd. v. National Highways Authority of India : The End of Western Geco and Restoration of Renusagar

 

In a recent landmark judgment of the Supreme Court in Ssangyong Engg. and Construction Co. Ltd. v. National Highways Authority of India[121] (Ssangyong Engg.), the Division Bench comprising Nariman and Saran, JJ. made extensive observations on the position after the 2015 amendment of the A&C Act and clarified its interplay with the judgments in Western Geco[122], Associate Builders[123] and Renusagar[124]. The Court held that the broad interpretation of “fundamental policy of Indian law” as propounded in Western Geco[125] and followed in Associate Builders[126] would be improper in the light of the 2015 amendment of the A&C Act. The Court relied on the 246th Law Commission Report and its supplementary and further laid down that the interpretation of the subhead “fundamental policy of Indian law” would now be in line with Renusagar[127]. Further it laid emphasis that this subhead would now entail (i) the contravention of a law protecting national interest; (ii) disregarding the orders of superior courts; and  (iii) the principles of natural justice. Thus, it is evident that the Court has done away with the ground of non-adoption of a judicial approach correctly pre-empting that this would force an entry into the merits of the award which is clearly prohibited by the legislative intervention.

 

The Court then went to make observations with regard to the other species of public policy of India, wherein it held that the head “interest of India” would no longer warrant place in our jurisprudence. However, Nariman, J. found it appropriate to preserve the head “justice or morality” by stating that this head would now have to be construed as a conflict with the “most basic notions of morality or justice” in line with his earlier opinion in Associate Builders[128]. Thus only those arbitral awards that shock the conscience of the Court could attract this ground.

 

The Court then recalibrated the subhead “patent illegality” in the light of its statutory recognition by the insertion of Section 34(2-A) by laying down that there must be “patent illegality” appearing on the face of the award which must mean that such an illegality goes to the root of the matter but excluding an erroneous application of law by the Tribunal or reappreciation of evidence as an appellate court. The Court enumerated the circumstances that would attract a “patent illegality” appearing on the face of the award by conclusively laying down that this ground may be invoked if (i) the arbitrator fails to give reasons in the award in violation of Section 31(3) of the A&C Act; (ii) the arbitrator has taken an impossible view in construing the contract; (iii) the arbitrator transgresses his jurisdiction, and lastly in complete consensus with Associate Builders[129]; and (iv) if the arbitrator has made a perverse finding based on no evidence, overlooking vital evidence or based on documents taken up as evidence without giving proper notice to the parties. The Court also affirmed the findings in Kochi Cricket[130] with regard to the prospective applicability of the 2015 amendment of the A&C Act.

 

It is in our opinion that the judgment in Ssangyong Engg.[131] has definitely been long awaited and the Court has correctly given effect to the intention of the legislature and the Law Commission of India by rectifying the shortcomings in its earlier decisions thus removing the eclipse that was cast by Saw Pipes[132] by reinstating Renusagar[133].

 

In a recent judgment of May 2020 in Patel Engg. Ltd. v. North Eastern Electric Power Corpn. Ltd.[134] (Patel Engg.) the 3-Judge Bench of the Supreme Court has held with regard to the newly inserted Section 34(2-A) affirmed the position laid down in Associate Builders[135] followed in Ssangyong Engg.[136] The Court in Patel Engg.[137] has also affirmed the judgment in Kochi Cricket[138].

 

Conclusion

 

After a concentrated examination of the expansion and contraction of the term “public policy of India” embodied in Section 34(2)(b)(ii) of the A&C Act beginning from the 1994 judgment in Renusagar[139] to the 2019 judgment in Ssangyong Engg.[140], it is apparent that there has been a long-drawn battle between the Supreme Court of India and the “unruly horse” that has lasted more than two decades and which still continues to persist. The Supreme Court has time again had sand thrown into its eyes when it had to construe the term “public policy of India” and has often deviated from giving effect to the essence of the 1958 New York Convention. The Court has diluted the rationales of the pro-enforcement bias and minimum judicial intervention both which are incorporated in the A&C Act.

 

In spite of the far-reaching effects of the judgments in McDermott International[141], Shri Lal Mahal[142], Associate Builders[143] and Ssangyong Engg.[144] there still appears to be room for mischief that could be detrimental to the arbitration landscape in India. It is in our opinion that there is need for a complete overruling of Saw Pipes[145] as its interplay with the other existing and future judgments could be problematic. In addition to this, it is evident that in spite of the efforts made to correct the semantics there still appears to be a duplication of procedural irregularities in the subheads of public policy of India.

 

It is also interesting to note that the term “public policy of India” has shadowed the subject-matter arbitrability of disputes in India for decades until the Supreme Court articulated the rights test in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[146] and more recently by articulating the fourfold test in Vidya Drolia v. Durga Trading Corpn.[147] The Indian courts have also erred by applying the domestic notions of public policy to foreign awards, although the courts have taken cognizance of this error it is in our opinion that this transgression is likely to occur again. In this context, I would like to give credit by citing the remarkable writings of Professor Pierre Lalive where he attempts to demonstrate that there exists a concept of a “truly” international or transnational public policy in the field of international commercial arbitration.[148] Professor Lalive in his writings stresses on the need to recognise the dichotomy between the two types of public policy when he attempts to explain the underlying objective of Article V of the 1958 New York Convention[149]. Professor Lalive says that this automatic assimilation or the confusion between those two kinds of “public policy” is particularly dangerous.[150] He lays emphasis by stressing on the importance of distinguishing domestic arbitration from the specificity of international arbitration by correctly improvising and applying to international arbitration those mandatory rules enacted and conceived for domestic arbitration.[151] It is our opinion that Supreme Court had correctly followed this approach in Renusagar[152] and then later was swayed by the “unruly horse”. Although, Nariman, J. in Ssangyong Engg.[153] has restored Renusagar[154], it is our opinion that there is a need for a more authoritative ruling by the Supreme Court that strictly imposes fetters on the powers of the judiciary thereby preventing it from reading deeper into the term “public policy of India” and thus emerging triumphant in its battle with the “unruly horse”.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

 

[1] Richardson v. Mellish, (1824) 2 Bing 229, 242 : 130 ER 294.

[2] 1994 Supp (1) SCC 644.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] (2003) 5 SCC 705.

[7] Ibid.

[8] 1994 Supp (1) SCC 644.

[9] (2003) 5 SCC 705.

[10] 1994 Supp (1) SCC 644.

[11] (2003) 5 SCC 705.

[12] Ibid.

[13] 1994 Supp (1) SCC 644.

[14] (2003) 5 SCC 705.

[15] Ibid.

[16] (2008) 4 SCC 190.

[17] (2003) 5 SCC 705.

[18] Ibid.

[19] (2006) 11 SCC 181.

[20] (2003) 5 SCC 705.

[21] (2012) 5 SCC 306.

[22] (2003) 5 SCC 705.

[23] (2012) 5 SCC 306.

[24] (2011) 10 SCC 300.

[25] (2003) 5 SCC 705.

[26] Ibid.

[27] (2012) 9 SCC 552.

[28] (2002) 4 SCC 105.

[29] (2012) 9 SCC 552.

[30] (2014) 2 SCC 433.

[31] (2011) 10 SCC 300.

[32] 1994 Supp (1) SCC 644.

[33] (2003) 5 SCC 705.

[34] (2014) 2 SCC 433.

[35] (2003) 5 SCC 705.

[36] Ibid.

[37] (2012) 9 SCC 552.

[38] (2002) 4 SCC 105.

[39] (2012) 9 SCC 552.

[40] (2002) 4 SCC 105.

[41] (2003) 5 SCC 705.

[42] (2008) 4 SCC 190.

[43] (2011) 10 SCC 300.

[44] (2008) 4 SCC 190.

[45] (2003) 5 SCC 705.

[46] (2002) 4 SCC 105.

[47] (2014) 9 SCC 263.

[48] Ibid.

[49] (2003) 5 SCC 705.

[50] 1994 Supp (1) SCC 644.

[51] (2003) 5 SCC 705.

[52] Ibid.

[53] (2014) 9 SCC 263.

[54] Id.,para 35.

[55] Id., para 38.

[56] Id., para 39.

[57] 1994 Supp (1) SCC 644.

[58] (2014) 9 SCC 263.

[59] 1994 Supp (1) SCC 644.

[60] Ibid.

[61] (2014) 9 SCC 263.

[62] 1994 Supp (1) SCC 644.

[63] (2003) 5 SCC 705.

[64] (2014) 9 SCC 263.

[65] (2015) 3 SCC 49.

[66] (2014) 9 SCC 263.

[67] Ibid.

[68] (2003) 5 SCC 705.

[69] (2015) 3 SCC 49.

[70] (2014) 9 SCC 263.

[71] (2003) 5 SCC 705.

[72] (2014) 9 SCC 263.

[73] Associate Builders, (2015) 3 SCC 49, paras 27-30.

[74] Id., para 31.

[75] (2015) 3 SCC 49.

[76] 1994 Supp (1) SCC 644.

[77] Associate Builders, (2015) 3 SCC 49, para 35.

[78] Id., paras 36 to 39.

[79] (2003) 5 SCC 705.

[80] Associate Builders, (2015) 3 SCC 49, para 42.

[81] (2015) 3 SCC 49.

[82] (2014) 9 SCC 263.

[83] (2003) 5 SCC 705.

[84] (2015) 3 SCC 49.

[85] (2006) 11 SCC 181.

[86] (2012) 5 SCC 306.

[87] (2003) 5 SCC 705.

[88] Ibid.

[89] (2014) 9 SCC 263.

[90] Associate Builders, (2015) 3 SCC 49, paras 32 to 34.

[91] (2015) 3 SCC 49.

[92] (2003) 5 SCC 705.

[93] (2014) 2 SCC 433.

[94] (2012) 9 SCC 552.

[95] (2002) 4 SCC 105.

[96] 1994 Supp (1) SCC 644.

[97] (2014) 9 SCC 263.

[98] Ibid.

[99] (2015) 3 SCC 49.

[100] (2014) 9 SCC 263.

[101] (2015) 3 SCC 49.

[102] (2014) 9 SCC 263.

[103] Supplementary to Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 at para 6.

[104] 1994 Supp (1) SCC 644.

[105] (2014) 9 SCC 263.

[106] (2015) 3 SCC 49.

[107] (2003) 5 SCC 705.

[108] Ibid.

[109] (2015) 3 SCC 49.

[110] (2014) 2 SCC 433.

[111] (2018) 1 SCC 656.

[112] (2018) 1 SCC 718.

[113] (2015) 3 SCC 49.

[114] (2019) 7 SCC 236.

[115] (2015) 3 SCC 49.

[116] (2006) 11 SCC 181.

[117] (2012) 5 SCC 306.

[118] (2003) 5 SCC 705.

[119] (2014) 9 SCC 263.

[120] (2018) 6 SCC 287.

[121] (2019) 15 SCC 131.

[122] (2014) 9 SCC 263.

[123] (2015) 3 SCC 49.

[124] 1994 Supp (1) SCC 644.

[125] (2014) 9 SCC 263.

[126] (2015) 3 SCC 49.

[127] 1994 Supp (1) SCC 644.

[128] (2015) 3 SCC 49.

[129] Ibid.

[130] (2018) 6 SCC 287.

[131] (2019) 15 SCC 131.

[132] (2003) 5 SCC 705.

[133] 1994 Supp (1) SCC 644.

[134] (2020) 7 SCC 167.

[135] (2015) 3 SCC 49.

[136] (2019) 15 SCC 131.

[137] (2020) 7 SCC 167.

[138] (2018) 6 SCC 287.

[139] 1994 Supp (1) SCC 644.

[140] (2019) 15 SCC 131.

[141] (2006) 11 SCC 181.

[142] (2014) 2 SCC 433.

[143] (2015) 3 SCC 49.

[144] (2019) 15 SCC 131.

[145] (2003) 5 SCC 705.

[146] (2011) 5 SCC 532.

[147] (2021) 2 SCC 1.

[148] Pierre Lalive, “Transnational (or Truly International) Public Policy and International Arbitration” in Pieter Sanders (ed.), Comparative Arbitration Practice and Public Policy in Arbitration (ICCA Congress Series, vol. 3, Kluwer Law International 1987).

[149] Id., para 9.

[150] Id., para 9.

[151] Id., para 9.

[152] 1994 Supp (1) SCC 644.

[153] (2019) 15 SCC 131.

[154] 1994 Supp (1) SCC 644.

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