Decoding the Public Policy of India and Patent Illegality on the Face of an Award

Introduction

A conspectus of the Arbitration and Conciliation Act, 1996 read with a plethora of case laws goes to show that courts in India have taken a view that arbitral award can be challenged only if it is perverse or erroneous in law. An award based on an alternative and reasonable interpretation of the law does not make it perverse. In  NTPC Ltd. v. Deconar Services (P) Ltd.,[1] Chief Justice of India N.V. Ramana held:

 

 “In order to succeed in a challenge against an arbitral award, it must be shown that the award of the arbitrator suffered from perversity or an error of law or that the arbitrator has otherwise misconducted himself. Merely showing that there is another reasonable interpretation or possible view on the basis of the material on the record is insufficient to allow for the interference by the court.” 

 

Section 34 of the Arbitration and Conciliation Act, 1996 sets out a comprehensive list of grounds under which an award passed in a domestic arbitration or an international commercial arbitration seated in India can be challenged before the appropriate court in India. A three-Judge Bench of the Supreme Court in Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd.,[2] has highlighted that the opening phase of Section 34 read as “recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and  (3)”. The court emphasised that the use of term “only” as occurring under the provision served two purposes of (i) making the enactment a complete code; and (ii) laying down the procedure.

 

The present article aims to decode the growth of public policy of India and patent illegality on the face of an award as interpreted by various courts in India.

 

Development of Public Policy Jurisprudence in India

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the New York Convention itself lays down relevant conditions for refusal of execution of awards in situations where the awards go against the public policy of the signatory country.

 

Under Article 5(2)(b) of the Convention, recognition has been given to the country where enforcement of the award has to be made. The convention does not lay down a universally accepted definition but allows the States to create their standards for the same.[3] It is not the convention that is implemented in such cases but the domestic legislations dealing with this question.[4] In case of India, the standard applicable for public policy for an award made in foreign arbitration has been laid down under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996.

 

Since each country has the authority to decide the standard of public policy for itself, several issues arise in the question of international public policy rather than in domestic public policy.[5] This might be so because an award arising out of international commercial arbitration may be declared in one country and seek execution in another. In most of the cases, the Tribunal may not have competent knowledge regarding the public policy standards used in the country where the award has to be executed. Public policy has been aptly described in an English case as “a very unruly horse, and when once you get astride it you never know where it will carry you”.[6] It has been so described because of the unexpected turn it might take while the domestic courts are dealing with the question of their State’s public policy. Complete State autonomy over this issue allows them to move this law in any direction and prescribe any standards to be followed.

India has witnessed several landmark judgments in the arena of public policy for enforcement of foreign awards.

 

The first such case in the Indian jurisprudence was Renusagar Power Co. Ltd v. General Electric Co.[7] Even though the question arising out of the case dealt with legislation which stands repealed now, the precedent set in the case is still good in law. The Supreme Court in the case laid down standards of public policy to be followed in the country while dealing with foreign awards. It held that while deciding upon the validity of an award concerning public policy in the State, the court could not delve into the merits of the award. It is solely allowed to comment on its validity in light of the public policy standards in place. It further laid down the standards of public policy which needs to be followed while judging upon the validity of an award. Enforcement of an award could only be refused if the award was against the

(i) fundamental policy of Indian law;

(ii) interests of India or;

(iii) justice or morality.

 

To test any award against the standard of the public policy, the effect of enforcement of the award would be looked into rather than different aspects of the award.[8] In certain situations where the enforcement of the award would not lead to a violation of public policy of India but a component of the ruling on merits may lead to such violation, the latter would be ignored and enforcement may be carried without any case.

 

It was after the Renusagar case[9] that the Arbitration and Conciliation Act, 1996 came into being. The Act was supposed to deal with all situations arising out of arbitration proceedings in the country and through foreign proceedings as well. The issues arising out of domestic awards fell under Part 1 of the legislation while questions of foreign awards were dealt with in Part 2 of the legislation. This Act was largely based on the UNCITRAL Model Law and was a means to bring Indian law under the ambit of international regulatory framework.[10] Public policy as a ground of refusal of enforcement of award was retained for both the domestic and the foreign awards. For the foreign awards, the standard applicable was laid down in Section 48(2)(b).

 

The next decision with respect to foreign public policy came in the ONGC Ltd. v. Saw Pipes Ltd.[11] The issue in the case dealt with the question of public policy under Section 34 of the Act which is in Part 1. The decision of the Supreme Court broadened the standard of public policy laid down in the Renusagar case[12]. The distinction made in the former case for a violation of public policy from enforcement of the award and violation arising out of other components of the award was removed. As per the decision in the ONGC case[13], a patently illegal award cannot be allowed to be enforced and must be set aside. The concept of patent illegality was read into the principles of public policy laid down in Section 34 of the Act.[14] Thereby, the court added another standard of violation of public policy in addition to the heads mentioned in Renusagar case[15] which was “patent illegality” of the award. Such illegality must go to the core of the matter to be against public policy. An award will not be set aside if the illegality is trivial.

 

One difference between the two cases discussed above is the issues they are dealing with. While Renusagar case[16] deals with the question of foreign awards which will fall under Section 48 of the latest Act, ONGC case[17] deals with domestic awards under Section 34 of Part 1 of the Act. Although the two provisions in question are almost identical, there is one very fundamental difference. While Section 34 in Part 1 of the Act uses the words “setting aside” of an award, Section 48 uses the term “refusing enforcement of” instead. The major difference lies in the stage of arbitration proceedings that are being dealt with. In Section 34, the award has not been given finality by the Tribunal and maybe set aside on grounds of violation of public policy before that. On the other hand, Section 48 solely deals with the enforcement of award which only comes into question once the final award has been passed by the Tribunal. The court opines that wider jurisdiction should be granted in a case of setting aside of an award where the validity of the award can be questioned. Hence, the Court did not overrule the decision given in the Renusagar case[18] but only widened the concept of public policy laid down in that case.[19]

 

However, the question arises on the applicability of the decision in ONGC case[20] to Part 2 of the Act and whether the concept of patent illegality would also apply to foreign awards falling under Section 48 of the Act. This issue was dealt with by the Supreme Court in Phulchand Exports Ltd. v. O.O.O. Patriot.[21] The issue in the case was the applicability of the definition of “public policy” laid down in the ONGC case[22] to Section 48(2)(b) of the Act.

 

The Supreme Court decided that there is no logical distinction between foreign and domestic awards to hold different standards of public policy for them. They held that the wider interpretation laid down in the ONGC case would apply to the foreign awards as well. Such awards maybe set aside if there is patent illegality on the face of it.[23] This case brought significant hardships and apprehensions within individuals involved in such commercial agreements in India. Furthermore, it allowed reopening of the entire case at the time of enforcement of the award which would eventually lead to much longer proceedings, thereby, nullifying the entire idea behind having arbitration in the first place.[24]

 

This issue was again brought to the Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano Spa.[25] The dispute arose between an Indian supplier and an Italian buyer in a contract for the supply of Indian origin durum wheat. The buyer claimed that the suppliers were in a breach of the contract for shipping non-contractual goods and asked for damages. The dispute was heard by an Arbitral Tribunal under the Grain and Feed Trade Association (GAFTA) contract, seated in London. The awards were made in the favour of the buyer, who instituted a suit for the enforcement of the awards in the Delhi High Court. The High Court decided in favour of the buyer and rejected the claims of the seller. The case was eventually heard by a Full Bench of the Supreme Court. The Bench rejected the argument that the wider meaning given to the expression “public policy” in the ONGC case[26] would apply to the award made under Section 48 of the Act. The court reinstated the precedent made in the Renusagar case[27]. It was established that the expression “public policy” should be given a narrower meaning when it comes to foreign awards. The Court overruled the decision of Phulchand[28] in this case and stated that the additional ground of patent illegality will not apply to foreign awards.[29]

The decision brought a better and a pro-environment for arbitration in the country. Such precedents have ensured that the courts in India do not intervene unnecessarily within arbitration proceedings.[30]

 

Supreme Court elaborated on this issue again in Associate Builders v. DDA,[31] in which the court laid down three juristic principles for the concept of fundamental policy of Indian law to include judicial approach, natural justice and absence of perversity or irrationality. It was stated that an award would be set aside only when it is fundamentally problematic and shocks the conscience of the court.

 

Further changes were made to the concept of public policy under arbitration law through the amendment of 2015. Considering the plethora of judgments that were laid down by the Supreme Court on this issue, the amendment clarified the concept and laid down the standards for an award to be against the public policy of India which includes:

 

(i) the award is vitiated by fraud or corruption;

(ii) it is in contravention to the fundamental policy of Indian law; and

(iii) it is in conflict with basic notions of morality and justice.

 

Furthermore, the amendment clarified that the ground of “patent illegality” cannot be taken in international arbitrations and the same is solely applicable in domestic arbitrations.

 

Post the amendment of 2015, this issue was again brought before the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI,[32] wherein the court clarified that the appeals submitted post the amendment would fall under its ambit. Court also reaffirmed that the any challenge to an award under Section 34 would only be allowed if a fundamental principle has been breached which shocks the conscience of the court.

 

Supreme Court on Public Policy

The Supreme Court has had several instances of dealing with the question of public policy under this legislation. The following sections would be discussing the law laid down by the Supreme Court about this question. Supreme Court gave out its judgment in Govt. of India v. Vedanta Ltd.,[33] and laid down the law concerning amended Section 48 of the Act.

 

The facts of the case include a dispute arising out of Article 15 of the production sharing contract executed by the parties in 1994. This provision imposed a cap on the payment of the development costs to be made for the construction of the production capacity of 35,000 barrels of oil per day to a particular sum. An award was made in favour of Vedanta Ltd. by a Tribunal seated in Malaysia, which was challenged in the Malaysian High Court on the grounds of public policy by the Indian Government. They were unsuccessful in their approach to the Malaysian Courts and lost up to the last resort possible. In the same time, Vedanta Ltd. applied for the enforcement of the award where the contentions of Government of India were rejected once again. Hence the appeal to the Supreme Court.

 

The court upheld the law laid down in Renusagar case[34]. It has been stated that the defence of public policy should be construed narrowly and should only be permitted if they violate the standard laid down in Renusagar case[35]. The court commented upon the scope of amended Section 48 of the Act as well. The Explanation laid down to the section uses the words, “for removal of doubts” which have introduced a specific criterion for the application of public policy doctrine and should be considered prospectively. The same would be applied to the current case as the proceedings had begun before the amendment coming into force. Furthermore, if the enforcement of the award is supposed to be carried out in India, the courts in the country have the authority to apply the standards of Indian public policy and would not be restrained from the proceedings with public policy carried in Malaysia.

 

For the said reasons, the court dismissed the contentions made by the Government of India and gave a decision in favour of Vedanta Ltd. The approach carried out by the court, in this case, is consistent with the pro-arbitration view the State wishes to stick with.

 

In another case of Vijay Karia v. Prysmian Cavi E Sistemi SRL,[36] the Supreme Court reiterated their pro-arbitration stance. Facts of the case are as follows. Four arbitral awards were passed by a sole arbitrator in arbitrations administered by the (London Court of International Arbitration) LCIA. Material breaches were alleged by the respondents. Counterclaims were filed by the appellants regarding non-compete obligations and interference with the management of the joint venture company. The sole arbitrator decided in the favour of the respondents and directed the appellants to sell their share of the company to the respondents at a discounted price. It was only when the respondents sought enforcement of awards before the Bombay High Court that the appellants raised contentions under Section 48 of the Act. It was contented that the award is contrary to the Foreign Exchange Management Act, 1999, as the same prohibits sale of shares at a discounted price to a non-resident entity, making the award against the fundamental policy of Indian law. These contentions were not accepted by the High Court and it allowed enforcement of the awards, hence an appeal was made before the Supreme Court.

 

Supreme Court considered several precedents laid down in respect of this issue and reiterated the principle of minimum interference with foreign arbitral awards. As per the principles laid down in the Renusagar[37] and Lal Mahal cases[38], the Court laid down that the violation of the fundamental policy of Indian law must entail a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental policy” was held to be the core values of India’s public policy as a nation, which may find expression not only in statutes but also a time honoured, hallowed principles which are followed by courts. As per the amended Section 48 of the Act, it was laid down that the same does not permit review of foreign awards on merits. The Court also laid down that refusal to enforce a foreign award is completely discretionary and the courts may choose to execute it even if some ground exists under Section 48.

 

Thus, the courts did not accept the contentions raised by the appellants since there was no violation of the FEMA guidelines and declared their suit to be speculative. The court also directed the appellants to pay costs to the respondents along with enforcement of the award.

 

Ironically, in another judgment of the Supreme Court, it took a step back on its journey towards the development of public policy jurisprudence right up to the case of Vijay Karia[39].

 

In its judgment of National Agricultural Cooperative Marketing Federation of India v. Alimenta SA,[40] the court dealt with a 31 year old award in a dispute between the parties. Just like the Renusagar case[41], the foreign award in question was made under the Foreign Awards (Recognition and Enforcement) Act, 1961.

 

The dispute arose in 1979-1981 where NAFED was required to supply certain commodities under the Federation of Oils, Seeds and Fats Associations Ltd. contract. NAFED was unable to supply the entire amount owing to natural calamities. Parties agreed to supply the balance amount in the subsequent year. Since NAFED was an agency of the Government of India, they applied for permission from the Ministry of Agriculture. They were prohibited from making any shipments for the leftover quantities from previous years and NAFED was unable to fulfil the contract.

 

The parties took to arbitration where a FOSFA-appointed arbitrator passed an award in favour of Alimenta directing NAFED to pay for the losses. While Alimenta filed for execution of the award, NAFED filed an SLP to the Supreme Court.

 

Supreme Court held that since the contract was contingent under Section 32 of the Contract Act, 1872, it was held unenforceable on account of lack of permission from the Government. The contract was declared to be invalid and void by the court. Enforcement of the award was also denied on the ground that it would be against the fundamental public policy of India to enforce such an award and any supply made would contravene India’s policy relating to export for which permission of the Government was necessary.

Supreme Court went against the precedents set by them and delved into the merits of the case despite a settled position that does not allow them to do so. The court discussed the landmark cases relevant to this question and still declared the award to be unenforceable by declaring the contract to be void.

 

Conclusion

Cases like that of NAFED would fall under the exception and not the rule. Supreme Court has kept a positive position for the development of principles of public policy and enforcing foreign awards. There has been no undue denial of enforcements of rights of foreign entities carrying out business with Indian individuals. This creates a safe environment and attracts foreign investment in the country. A pro-arbitration stance ensures individuals of their rights being protected. Given that arbitration as a means of dispute resolution is gaining popularity at a tremendous level, the judiciary needs to develop principles that would promote such ideas in the country. India actively seeks foreign entities to work in the country in different sectors as a means to escalate development in the country. For the said reason, there must be a better environment for these entities to take up their legal issues and expect a prompt resolution to their dispute.

 

As observed in this article, India has witnessed a tumultuous trajectory in the development of its jurisprudence dealing with the validity of an arbitral award, which has led to a confused and chaotic state for its stakeholders for a very long time. However, the latest developments made by the legislature and the judiciary has allowed for better conditions and a reduction in the reliance on adjudicatory mechanisms that are taken up post the arbitration proceedings by the parties. Having made stringent policies for admitting petitions in relation to final awards made ensures that sanctity of the procedure is maintained and there is no repetition of proceedings between the parties and finality is granted to resolution arrived at between the parties.


†  Senior Partner, Advani Law LLP.

†† Partner, Advani Law LLB..

††† Associates, Advani Law LLP.

[1] 2021 SCC OnLine SC 498.

[2] (2022) 1 SCC 75.

[3] Nivedita Shenoy, “Public Policy Under Article V(2)(B) of the New York Convention: Is there a Transnational Standard?”, SSRN Electron. J. (2018), <https://www.ssrn.com/abstract=3226757> (last visited 7-11-2020).

[4] Nivedita Shenoy, “Public Policy Under Article V(2)(B) of the New York Convention: Is there a Transnational Standard?”, SSRN Electron. J. (2018), <https://www.ssrn.com/abstract=3226757> (last visited 7-11-2020).

[5] M.S. Rawat, “International Commercial Arbitration and Transnational Public Policy”, 49 J. Indian Law Inst. 17 (2007).

[6] Richardson v. Mellish, 1824 All ER 258.

[7] 1994 Supp (1) SCC 644.

[8] Jahnavi Sindhu, “Public Policy and Indian Arbitration: Can the Judiciary and the Legislature rein in the ‘Unruly Horse’?”, 58 J. Indian Law Inst. 27 (2016).

[9] 1994 Supp (1) SCC 644.

[10] 1994 Supp (1) SCC 644.

[11] (2003) 5 SCC 705.

[12] 1994 Supp (1) SCC 644.

[13] (2003) 5 SCC 705.

[14] (2003) 5 SCC 705.

[15] 1994 Supp (1) SCC 644.

[16] 1994 Supp (1) SCC 644.

[17] (2003) 5 SCC 705.

[18] 1994 Supp (1) SCC 644.

[19] Sidharth Sharma, “Public Policy Under the Indian Arbitration Act: In Defence of the Indian Supreme Court’s Judgment in ONGC v. Saw Pipes, (2003) 5 SCC 705.

[20] (2003) 5 SCC 705.

[21] (2011) 10 SCC 300.

[22] (2003) 5 SCC 705.

[23] (2003) 5 SCC 705.

[24] Arpan Kumar Gupta, “A New Dawn for India: Reducing Court Intervention in Enforcement of Foreign Awards” 7 (2020).

[25] (2014) 2 SCC 433.

[26] (2003) 5 SCC 705.

[27] 1994 Supp (1) SCC 644.

[28] (2011) 10 SCC 300.

[29] (2011) 10 SCC 300.

[30] (2003) 5 SCC 705.

[31] (2015) 3 SCC 49.

[32] (2019) 15 SCC 131 : 2019 SCC OnLine SC 677.

[33] (2020) 10 SCC 1 : 2020 SCC OnLine SC 749.

[34] 1994 Supp (1) SCC 644.

[35] 1994 Supp (1) SCC 644.

[36] (2020) 11 SCC 1 : 2020 SCC OnLine SC 177.

[37] 1994 Supp (1) SCC 644.

[38] (2014) 2 SCC 433.

[39] (2020) 11 SCC 1 : 2020 SCC OnLine SC 177.

[40] 2020 SCC OnLine SC 381.

[41] 1994 Supp (1) SCC 644.

One comment

  • Useful Article;
    What about time limit for disposal of petitions u/s 34 as per amendments of the 1996 Act ?
    How to make the District Courts adhere to such time period (12 months) for deciding 34 objections ?

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