The Concept of Public Policy as a Ground for Challenging the Award under Arbitration Law

Written by Kapuluru Saivarun¹

The Concept of Public Policy as a Ground for Challenging the Award under Arbitration Law

This article critically analysis the concept of public policy as a ground to challenge the arbitral award as per the provisions contained in Arbitration and Conciliation Act, 1996 (“ACA 1996”) as well as the landmark judgements and recommendations of the Law Commission of India.

The term Public Policy is defined under ACA 1996. In other words, Public Policy can be termed as “Policy of Law”. However, the term Public Policy was used Section 34(2)(b)(ii) of the Act which states that when an arbitral award is in conflict with the Public Policy of India the court may set aside such award.

The Doctrine of Public policy was initially used in the case of Renusagar Power Electric Company v. General Electric Company,  the Supreme Court referred to the expression Public Policy in section 7 (1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961. since this case was adjudicated before 1996 Act. 

The court also laid down the certain principles as follows; enforcement of a foreign award would be refused on the ground of public policy if such enforcement is contrary to:

1. Fundamental Policy of Indian Law; or
2. The interests of India; or
3. Justice or morality.

In 2003 the Supreme Court in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd.[2], held that in case of an application under Section 34 of the Act to set aside an Arbitral award, the role of the Court was supposed to be that of an appellate/revision court, thereby giving it wide powers. The term ‘Public Policy of India’ used in Section 34 is required to be given a wider meaning. whereby, the concept of public policy means which concerns public good and the public interest.

The court also added Patent illegality as one of the grounds to set aside an arbitral award apart from the 3 grounds laid in the Renusagar Case.

In 2011, the Apex Court in Phulchand Exports Ltd. vs. Patriot[3], while deciding the meaning and scope of ‘public policy’ under Section 48 of the 1996 Act, it was held that the test laid down in Saw Pipes case must be followed in case of foreign awards as well, thereby allowing Courts in India to deny enforcement of a foreign award also on the grounds of “patent illegality”.

Subsequently, Phulchand Exports Ltd.[4] was overruled by the Supreme Court in the case of Shri Lal Mahal Ltd. vs. Progetto Grano Spa[5], Supreme Court once again upheld the Renusagar case[6] and it is contrary to the observations made in Saw Pipes.

Later on, in the case ONGC Ltd. vs. Western Geco International Ltd.[7], The three-judge bench Reinstated the Saw Pipes Case and given a wide interpretation to Public Policy by elaborating the meaning of ‘fundamental policy of Indian law’. 

• Firstly, the court or adjudicating authority must adopt a ‘judicial approach’ when determining the rights of the parties. This implies that it cannot ‘act in an arbitrary, capricious or whimsical manner’.
• Secondly, the court or adjudicating authority must determine rights and obligations of parties in accordance with principles of natural justice which includes that the authority deciding the matter must apply its mind to the attendant facts;
• Thirdly, a decision which is arbitrary or so irrational that a reasonable person could not have reached such a conclusion may not be sustained in a court of law.

In Feb 2015, the Law Commission issued a response to these judgments of Hon’ble Supreme Court, by issuing a recommendation to amendment Section 34 of the Act through 246th Law Commission Report. Subsequently, the Arbitration and Conciliation (Amendment) Act, 2015, made major changes to section 34. 

Since the 2015 amendment, the Courts are not going beyond Section 34 thereby not giving a wide interpretation to “Public Policy”. In the Nov 2018, the Supreme Court in Venture Global Engineering LLC & Ors vs. Tech Mahindra Ltd. & Ors.[8], observed that –

“The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court.”

The Vidya Drolia vs. Durga Trading Corporation[9] is a landmark judgment decided by the Supreme Court has significant implications for arbitration law in India. One of the key aspects addressed in this judgment is the concept of “public policy” as a ground for challenging arbitration awards. The Supreme Court emphasized that the scope of public policy as a ground for setting aside arbitral awards should be interpreted narrowly.

The court reiterated that only fundamental principles of Indian law, justice, morality, and basic notions of justice should be considered under public policy. Further, it was categorically held that courts should not interfere with arbitral awards on the basis of mere errors of fact or law, there should be minimal intervention of courts.

In this judgement court aligned its interpretation of public policy with international standards, particularly with the UNCITRAL Model Law on International Commercial Arbitration. This observation of court was intended to promote India as an arbitration-friendly jurisdiction. Also, this judgment revisited and clarified earlier Supreme Court decisions on public policy, particularly the Renusagar Power Co. Ltd. vs. General Electric Co.[10] case and the ONGC vs. Saw Pipes Ltd.[11] case. The court reaffirmed the narrow interpretation of public policy established in Renusagar[12] and sought to limit the expansive interpretation in Saw Pipes.

Through the catena of judgments, we can witness the evolution of the Doctrine of Public Policy. The Vidya Drolia case[13] is significant as it provided clarity on the boundaries of arbitration in India, reinforcing the principles of arbitrability and the interplay between arbitration and public policy. However, the legislative intent of the ACA 1996 is “minimal intervention of the Courts in the arbitral process” that is reflected by the court’s approach through these catena judgements.

To read more blogs on similar topics click here.

---

[1] AIR 1994 SC 860.

[2] AIR 2003 SC 2629.

[3] (2011) 10 SCC 300

[4] Id.

[5] (2014) 2 SCC 433

[6] Supra Note 1

[7] 2014 (9) SCC 263

[8] (2018) 1 SCC 656

[9] (2019) 20 SCC 406

[10] Supra Note 1

[11] Supra Note 2

[12] Supra Note 1

[13] Supra Note 9

1. Kapuluru Saivarun, Advocate, GRP Law Chambers, Co-Founder, Legal SYNK. ↩︎