Introduction
The term “public policy” has not been defined in any Indian statute. In fact, in numerous cases, the Supreme Court itself held that the term “public policy” is like an “untrustworthy guide” or an “unruly horse”. Generally, public policy means the principle that injury to the public good is a basis for denying the legality of a contract or other transaction. We find a reference to “public policy” in the Arbitration and Conciliation Act, 1996[1] (“the Arbitration Act”) specifically under Section 34, whereby an arbitral award can be set aside on the ground of it being in conflict with the public policy of India. This article particularly deals with the interpretation of public policy by Indian courts and further discusses in detail the concept of fundamental policy of Indian law, basic notions of morality and justice, and patent illegality.
Relevant part of Section 34 of the Arbitration and Conciliation Act, 1996 as amended in 2015[2] to incorporate additions suggested by 246th Law Commission Report[3]
-
Application for setting aside arbitral award.— (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the Court only if—
* * *
(b) the Court finds that—
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation 1.— For the 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 arbitrations 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.…
(emphasis supplied)
What is public policy?
Public policy connotes some matter which concerns the public good and the public interest. The concept of what is for the 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.[4] It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the State are exercised.[5]
Clause (ii) of sub-section (2)(b) of Section 34 which inter alia provides that the Court may set aside arbitral award if it is in conflict with the “public policy of India”. The phrase “public policy of India” is not defined under the Act. Hence, the said term is required to be given meaning in context and also considering the purpose of the section and scheme of the Act. It has been repeatedly stated by various authorities that the expression “public policy” does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept “public policy” is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Lacking precedent the Court has to give its meaning in the light and principles underlying the Arbitration Act, Contract Act, 1872 and constitutional provisions.[6]
The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the Court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act.[7]
In Renusagar Power Co. Ltd. v. General Electric Co.[8], the Supreme Court considered Section 7(1) of the Arbitration (Protocol and Convention) Act, 1937 which inter alia provided that a foreign award may not be enforced under the said Act, if the Court dealing with the case is satisfied that the enforcement of the award will be contrary to the public policy.
- Article 5(2)(b) of the New York Convention of 1958[9] and Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961[10] do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to the law of the country of enforcement and the ground of challenge is confined to the recognition and enforcement being contrary to the public policy of the country in which the award is set to be enforced. There is nothing to indicate that the expression “public policy” in Article 5(2)(b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which it was used in Article 1(c) of the Geneva Convention of 1927 and Section 7(1) of the Protocol and Convention Act of 1937. This would mean that “public policy” in Section 7(1)(b)(ii) has been used in a narrower sense and in order to attract to bar of public policy the enforcement of the award must invoke something more than the violation of the law of India. Since the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are governed by the principles of private international law, the expression “public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act must necessarily be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality. (emphasis supplied)
What is included in fundamental policy of Indian law?
While discussing the case of ONGC Ltd. v. Western Geco International Ltd.[11], the three-Judge Bench of the Supreme Court comprising of T.S. Thakur, C. Nagappan and Adarsh Kumar Goel, JJ. elaborated on the expression “fundamental policy of Indian law”.
The Bench in the abovereferred judgment was of the opinion that fundamental policy of Indian law shall include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. The Supreme Court relied on:
- 35. … three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the Court or authority concerned is bound to adopt what is in legal parlance called a “judicial approach” in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the Court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of judicial approach in judicial and quasi-judicial determination lies in the fact so long as the Court, Tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. 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.
The Bench further stated that:
- It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest. (SCC at p. 280)
What does “basic notions of morality and justice” mean?
The third ground to set aside an arbitral award in conflict with public policy of India is, if an award is against justice or morality. These are two different concepts in law.
“Justice or morality” has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the court as understood in Associate Builders v. DDA[12]:
- … An illustration of this can be given. A claimant is content with restricting his claim, let us say to Rs 30 lakh in a statement of claim before the arbitrator and at no point does he seek to claim anything more. The arbitral award ultimately awards him 45 lakh without any acceptable reason or justification. Obviously, this would shock the conscience of the Court and the arbitral award would be liable to be set aside on the ground that it is contrary to “justice”.
The other ground is of “morality”. Just as the expression “public policy” also occurs in Section 23 of the Contract Act, 1872[13], so does the expression “morality”. Two illustrations to the said section are interesting for explaining the scope of the expression “morality”:
(j) A, who is B‘s mukhtar, promises to exercise his influence, as such, with B in favour of C, and C promises to pay 1000 rupees to A. The agreement is void, because it is immoral.
(k) A agrees to let her daughter to hire B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Penal Code, 1860 (45 of 1860).
What is construed as patent illegality?
If the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”.[14]
The expression of “patent illegality” has been discussed elaborately in ONGC Ltd. v. Saw Pipes Ltd.[15]:
Wider meaning is required to be given so that the “patently illegal award” passed by the Arbitral Tribunal could be set aside. If narrow meaning is given, some of the provisions of the Arbitration Act would become nugatory.
Illustration
A case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act which specifically provides that “Arbitral Tribunal shall decide in accordance with the terms of the contract.” Further, where there is a specific usage of the trade that if the payment this made beyond a period of one month, then the party would be required to pay the said amount with interest at the rate of 15 per cent. Despite the evidence being produced on record for such usage, if the arbitrator refuses to grant such interest on the ground of equity, such award would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2) specifically provides that arbitrator shall decide ex aequo et bono (according to what is just and good) only if the parties have expressly authorised him to do so.[16]
Conclusion
As discussed hereinabove, the term “public policy” is not defined in any statute. First time the Supreme Court categorised the meaning of public policy in Renusagar case[17] into three heads viz. (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality. ONGC Ltd. v. Saw Pipes Ltd.[18] further added the fourth category i.e. “patent illegality” to the interpretation of public policy. The 2015 amendment to the Arbitration and Conciliation Act, 1996, introduced these categories as explanation to public policy of India. Based on the abovementioned observation, it can be said that the pigeonhole principle cannot be applied while interpreting the concept of public policy. The Indian courts have interpreted meaning of public policy based on circumstance of various cases. The scope for this principle to evolve further remains intact even after 2015 amendment to the Arbitration Act.
† From ILS Law College, currently working as an in-house counsel in an Indian infrastructure company. Author can be reached at rpanganti@gmail.com.
[1]Arbitration and Conciliation Act, 1996. <http://www.scconline.com/DocumentLink/QWdt5a4f>.
[2] Arbitration and Conciliation (Amendment) Act, 2015. <http://www.scconline.com/DocumentLink/9ajA4z9b>.
[3] Law Commission of India, Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 (August, 2014). <http://www.scconline.com/DocumentLink/N7O69Zxv>.
[4] Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : (1986) 2 LLJ 171.
[5] Deutsche Schachtbau-Und Tiefbohrgesellschaft mbH v. R’as Al-Khaimah National Oil Co., (1990) 1 AC 295 : (1987) 3 WLR 1023 : (1987) 2 All ER 769, 779.
[6] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, 719, para 16.
[7] McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181; Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2006) 11 SCC 245.
[8] 1994 Supp (1) SCC 644, 682.
[9]Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. <http://www.scconline.com/DocumentLink/uqd961oJ>.
[10] Foreign Awards (Recognition and Enforcement) Act, 1961. <http://www.scconline.com/DocumentLink/hXK3cb7l>.
[11] (2014) 9 SCC 263, 278.
[12] Associate Builders v. DDA, (2015) 3 SCC 49, 77 : (2015) 2 SCC (Civ) 204.
[13] Contract Act, 1872. <http://www.scconline.com/DocumentLink/dsJF0yn9>.
[14] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, 724, para 22.
[16] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705.
[17] 1994 Supp (1) SCC 644. http://www.scconline.com/DocumentLink/Dd7RgLrr
