PUBLIC POLICY IN ARBITRATION

Submitted as per the requirement of the course curriculum of

“Alternate Dispute Resolution” in School of Law

Submitted by: Submitted to:

Ishaan Vats Arpan Acharya
L18BALB020 Professor
BA LLB School of Law
Bennett University
 Acknowledgement

The present research work is a result of great efforts put by the researcher. However, it would not
have been possible without the kind support and help of many individuals. The researcher would
like to extend his sincere thanks to all of them.

He is highly indebted to Mr Arpan Acharya for his constant supervision and help in
understanding the complex subject of Alternate Dispute Resolution and providing necessary
information regarding the research paper and for support in completing the research work.

With profound gratitude

Ishaan Vats
L18BALB020
BA LLB

1
 INDEX

I. Introduction..........................................................................................3

II. Jurisprudence of Public Policy in a globalized world...............................5

III. Opinion...............................................................................................10

IV. Relation Between Public Goods in Economics and Public Policy in

Arbitration...............................................................................................11

V. Conclusion..........................................................................................14

2
 Public Policy in Arbitration

I. INTRODUCTION
Arbitration has been widely recognized as an efficient and effective mode of dispute settlement
by the international community. Globalization, multifaceted growth of world economies and an
increase in international commercial activities has led to tremendous growth in jurisprudence of
arbitration law. Arbitration across the globe is based on certain fundamental principles, which
include inter alia party autonomy in choosing arbitrators, process of arbitration and laws, finality
of arbitral awards, and minimum judicial interference. However, the autonomy of arbitration has
often been subjected to intervention and subjugation of national laws. The public policy of a
country is one such ground upon which challenge to the validity of arbitral award and its
enforcement, can be made. Therefore, interpretation and conceptualization of the term ‘public
policy’ is vital to understand the extent and scope of its applicability as a ground to challenge the
arbitral awards.

The idea of “Public Policy” is notorious among judges and scholars as a concept not susceptible
to definition. Theory and practice generally agree that public policy reflects some moral, social,
economic or legal principles. Although heavily criticised as a vague and ambiguous concept, the
role of public policy is nevertheless said to be a fundamental one from the viewpoint of the
respective legal system. The purpose of the public policy exception is to protect the fundamental
principles of the society.

Public policy as a ground for setting aside an arbitral award sometimes overlaps with the ground
of in arbitrability of the subject-matter. Sometimes, violation of public policy refers to procedural
violation of minimum due process requirements.1 Although parties are free to enter into any
agreement as they like, but they cannot make a binding contract in violation of law or of public
policy. Public policy imposes certain restriction on the freedom to enter into contract.

1 Kr Gupta, A. (n.d.). Indian Journal of Arbitration Law A NEW DAWN FOR INDIA-REDUCING COURT
INTERVENTION IN ENFORCEMENT OF FOREIGN AWARDS.

3
 II. JURISPRUDENCE OF PUBLIC POLICY IN A GLOBALIZED WORLD
The term “Public Policy” or the phrase “as opposed to the Public Policy” has not been defined in
the Indian Contract Act, 1872 or the Arbitration and Conciliation Act, 1996 (Hereinafter the Act).
The term “Public Policy” connotes the matter concerning the interest of public at large.

The Doctrine of Public Policy in the context of Contract is encapsulated in the Section 23 of the
Indian Contract Act, 1872. Section 23 of Indian Contract Act, 1872 states that “if the
consideration of the contract or agreement is fraudulent; or defeating the provisions of the Law;
or court regards it as immoral or opposed to public policy, such consideration will be declared
unlawful and will be void”.2 In the case of Gherulal Parakh v. Mahadeodas Maiya3, the Supreme
Court summarised the doctrine of public policy or the policy of the law as an illusive concept,
“untrustworthy guide”, “variable quality”, “unruly horse” etc. and crystallised the same under
different heads.

The Doctrine of Public Policy in the context of arbitration is encapsulated in the Sections 34 and
48 of the Arbitration and Conciliation Act, 1996 which are based on Article 34 of the United
Nations Commission on International Trade Law (UNCITRAL) Model Law, 1958. Article 34(2)
(b)(ii) of UNCITRAL Model Law, 1958 provides that an arbitral award can be set aside if the
court finds that the award is against the Public Policy of the State. 4 Section 34(2)(b)(ii) and
Section 48(2)(b) of the Act also provide for the same conditions as that of the UNCITRAL
Model Law, 1958. As the phrase is susceptible to definitions, the Supreme Court of India has
interpreted the term “Public Policy” and the phrase “as opposed to the public policy” many a
times.

2 Section 23 of the Indian Contract Act, 1872: What consideration and objects are lawful, and what not.--The
consideration or object of an agreement is lawful, unless--The consideration or object of an agreement is lawful,
unless--" it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or
is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral,
or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is void.
3AIR 1959 SC 781.
4 Article 34(2)(b)(ii) of the UNCITRAL Model Law, 1958: An arbitral award may be set aside by the court specified
in article 6 only if: the court finds that the award is in conflict with the public policy of this State.

4
The first instance was back in the case of Renusagar Power Co. Ltd. v. General Electric Co. 5 in
which the apex court interpreted the term public policy as the principles of law of the country. In
this case, pursuant to provision of contract between Renusagar Power Co Ltd (‘Renusagar’) and
General Electronics Company (‘GE’), arbitration was initiated under the auspices of the
International Chamber of Commerce (ICC) in Paris, against which Renusagar applied to the
Bombay High Court for injunction to prevent GE and the ICC from proceeding with the
arbitration. GE filed an application to obtain stay on judicial proceeding initiated by Renusagar
pursuant to section 3 of the Foreign Awards (Recognition and Enforcement) Act 1961. The single
judge found in favour of GE and, following Renusagar’s appeal, so did the Court of Appeal.
Renusagar appealed the decision of the Court of Appeal to the Supreme Court arguing that the
suit it filed was for a declaration that the dispute fell beyond the scope of the arbitration
agreement. The Supreme Court by referring to the Geneva Convention of 1927 and New York
Convention 1958 observed that the term public policy should be construed narrowly in the sense
that the principle of public policy must be applied in the field of private international law. By
applying the various observations, the Supreme Court held that a foreign award will be set aside
on the ground of public policy if the award is contrary to fundamental policy of Indian law or the
interests of India or justice or morality.

In 2002, the Indian Supreme Court decided, in Bhatia International v Bulk Trading SA6 that
Indian courts had exclusive jurisdiction to test the validity of an arbitral award made in India
even when the proper law of the contract was the law of another country. The court interpreted
section 2 of the Indian Arbitration and Conciliation Act, 1996 to mean that Part I of the Act
applied even to arbitrations seated outside India, thereby giving the Indian courts broad scope to
intervene in foreign arbitrations. This was widely regarded as a low point for arbitration in India.

In Oil and Natural gas Corporation (ONGC) Ltd v. Saw Pipes 7, an arbitral award, rendered with
regard to a dispute relating to supply of equipment for offshore oil exploration by the
Respondent, was challenged. The delivery was delayed due to a general strike of mill workers in
Europe, which could not be complied with even after extension of time. The Arbitral Tribunal

5 AIR 1994 SC 860.

6 (2002) 4 SCC 105.
7 AIR 2003 SC 2629.

5
while deciding the matter rejected the contention of Saw Pipes relating to force majeure but at
the same time held that Oil & Natural Gas Corporation Limited (ONGC) could not establish real
damage. ONGC challenged the arbitral award as it was contrary to public policy. Supreme Court
accepted this contention and set aside the award, holding that in addition to the grounds laid
down in Renusagar, an award would be contrary to public policy if it were ‘patently illegal’. The
Court further defined patently illegal as being ‘contrary to law’. Public policy was interpreted in
light of principles underlying the 1996 Act, the Indian Contract Act, 1872, and the Constitutional
Provisions. The apex court found that public policy concerns public good and public interest
matters and not the policies of a particular government. The Court also concluded that a wider
meaning of the term public policy was necessary so that a patently illegal arbitral award could be
set aside.

The judgement given by the Supreme Court in the case of Saw Pipes was widely criticised on
various grounds such as:8

1. The inclusion of term “patent illegality” has led to diluted the spirit of the 1996 Act. It is
the same as retaining the grounds for challenge that were already available in section 30
of the 1940 Act.

2. Act of 1996 already provided two conditions for setting aside the award, contrary to the
express provisions of the contract and substantive law, under sections 34(2)(a)(iv) and
34(2)(a)(v), respectively, if it dealt with a dispute not contemplated by or not falling
within the terms of the submission to arbitration and if the composition of the arbitral
tribunal or the arbitral procedure was not in accordance with the agreement of the parties.
Therefore, to include illegalities under a new head of public policy was unnecessary.

3. The judiciary failed to adhere to the principles of the separation of power and did not pay
head to the parliamentary intention behind the 1996 Act. When enacting the 1996 Act,
Parliament followed Model Law in an attempt to reduce the supervisory role of the court
in the arbitral process and to give more powers to the arbitrators. These aims are clearly
8 Arjit Oswal and Balaji Sai Krishnan, Arbitration International, PUBLIC POLICY AS A GROUND TO SET
ASIDE ARBITRAL AWARD IN INDIA.

6
 defeated by introducing a new ground under public policy, which increases the scope of
judicial intervention.

4. The Saw Pipes judgment has clearly impinged upon arbitration as an effective method of
dispute resolution and has undermined certain benefits of Arbitration, namely those of
speed and efficiency and the finality of award.

Despite being criticised widely, the Supreme Court followed the judgement of Saw Pipes in
several judgements where the Court rejected the contention of non-interference of the courts and
held that the arbitral award can be challenged on the ground of public policy.9 The Court further
tried to explain the term ‘patently illegal’ as something being against the terms of the contract or
affecting the rights of the parties. Illegality must go to the root of the matter and if it is of a trivial
nature then the award cannot be held to be against public policy. Award can also be set aside if it
is so unfair and unreasonable that it shocks the conscience of the Court.10

In 2012, in Bharat Aluminium v Kaiser Aluminium Technical Services11, a five-judge

constitutional bench of the Supreme Court overruled these controversial decisions. The court
in Bharat held that Part I of the Act only applies to arbitrations seated within India and therefore,
Indian courts cannot order interim relief in support of foreign seated arbitrations 5. The court
further ruled that awards rendered in foreign seated arbitrations are only subject to the
jurisdiction of Indian courts when they are to be enforced in India under Part II of the Act. This
set the tone for reduced intervention by the Indian courts in arbitrations seated outside India. The
decision reflects the principles of certainty, commerciality and party autonomy.

On the other hand, the laws relating to the arbitration in countries like France, USA, UK etc.
provide for limited scope of the judicial intervention and also limits the grounds of challenging
the arbitral award. For instance the English Court in the case of Dalmia Dairy Industries Ltd. v.
National Bank of Pakistan12 refused to extend the doctrine of public policy to embrace the
principle that the English courts should refuse to enforce an award arising out of a contract

9 Oil and Natural Gas corporation Ltd. v. Western Geco International Ltd.
10 McDermott international Inc. v. Burn standards Co. Ltd.
11 Civil Appeal No. 7019 of 2005.
12 [1978] 2 Lloyd’s Rep. 223

7
between persons who are nationals of foreign States which were at war with each other but each
of which was in friendly relationship with England. In support of the applicability of the
doctrine, it was argued that it would be harmful to international relations of the United Kingdom
with friendly countries if it were to allow the machinery of its courts to be used to enforce a
judgment, or an arbitral award in favour of a national of one foreign State friendly to the United
Kingdom, against the national of another foreign State, also friendly to the United Kingdom,
when the two foreign States are enemies of one another.

In France, a distinction is made between international public policy ("order public international")
and the national public policy. Under the new French Code of Civil Procedure, an international
arbitral award can be set aside if the recognition or execution is contrary to international public
policy. In doing so it recognises the existence of two levels of public policy the national level,
which may be concerned with purely domestic considerations, and the international level, which
is less restrictive in its approach.13

The approach of the American courts to the doctrine of public policy in its application to
recognition and enforcement of foreign arbitral awards under the New York Convention is
reflected in the decision of the US Court of Appeals in Parsons & Whittemore Overseas Co. Inc.
v. Societe Generale De L'Industrie Du Papier (Rakta) and Bank of America 14 wherein it has been
observed: "The general pro-enforcement bias informing the Convention and explaining its
supersession of the Geneva Convention points toward a narrow reading of the public policy
defense”. Further the court stated that: “We cannot have trade and commerce in world markets
and international waters exclusively on our terms, governed by our laws, and resolved in our
Courts.”

13 The view was given by the Supreme Court in the judgement of Renusagar Power Co. Ltd. v. General Electric Co.
AIR 1994 SC 860.
14 508 F 2d 969 (1974).

8
9
 III. OPINION

Arbitration in India has definitely travelled a long way since 1940s but the recent judicial
interpretations of public policy have pushed Indian law backwards. Initially, the basic grounds
for setting aside arbitral award was an act of mischief which was also furthered in the 1996 Act
to include other grounds like bias, procedural irregularities, illegal composition, excluded subject
matter, etc. The Saw Pipes judgment reinforced the existence of concurrent grounds in 1996 Act
and the ambit of public policy today is so wide that other grounds of challenge come within it.
Liberal interpretation of the grounds of challenge of an award by the judiciary is harmful for the
parties and tends to make India an arbitration-unfriendly state. There is no doubt that the Saw
Pipes judgment needs to be reconsidered.

The term public policy has varied interpretation across the globe. Generally, while construing it,
courts have kept the national morals and values in mind. Internationally, it is very common to
construct the term narrowly and limited options are left to widen the scope of the term. The
Supreme Court of India, by widening the scope of the term public policy has made judicial
intervention much easier. It is for the judiciary to show substantial faith in arbitration process as
parallel of dispute settlement, especially in commercial matters. Enlarging the scope has the
capacity to terminate the advantage inscribed in the very purpose of resorting to arbitration.

Certain recommendation could be as follows:

1. Specialized benches for dealing with arbitration matters could be a very viable solution to
scrutinize the ambit of public policy defence. Such benches could be formed with a panel
of judges, which would look into petition related to Arbitration. This would help in the
speedy disposal of cases and development of clear jurisprudence related to the
interpretation of public policy.

10
2. Another recommendation is the need for a supervisory and regulatory body to regulate
the practice of arbitration. Also, the need for trained and professional arbitrators and
mediators, including non-lawyers, cannot be overemphasized.

11
 IV. RELATION BETWEEN PUBLIC GOODS IN ECONOMICS AND
PUBLIC POLICY IN ARBITRATION

Pure public goods have two defining features. One is ‘non‐rivalry,’ meaning that one person’s
enjoyment of a good does not diminish the ability of other people to enjoy the same good. The
other is ‘non‐excludability,’ meaning that people cannot be prevented from enjoying the good.
Air quality is an important environmental example of a public good. Under most circumstances,
one person’s breathing of fresh air does not reduce air quality for others to enjoy, and people
cannot be prevented from breathing the air. Public goods are defined in contrast to private goods,
which are, by definition, both rival and excludable. A sandwich is a private good because one
person’s consumption clearly diminishes its value for someone else, and sandwiches are typically
excludable to all individuals not willing to pay.

From an economics perspective, public goods are of public interest because--unlike private
goods--they are a source of market failure. The problem is ‘free riding’: individuals have little
incentive to voluntarily provide public goods when they can simply enjoy the benefits of non‐
rival and non‐excludable pubic goods provided by others. To see free riding at work, consider the
challenge of constructing a bridge where the societal benefits of doing so would exceed the costs.
How successful do you think a campaign would be to finance the bridge with voluntary
donations? It is not hard to imagine how such a campaign would fail, because many (if not most)
individuals would choose to make no donation, hoping others would contribute enough to
finance the bridge for everyone to enjoy. In this scenario, the market failure would be that no
bridge is constructed despite the fact that a bridge would make everyone better off.

Public goods include national defence, law enforcement, air, primary education, primary health
services etc. The defence of a country from foreign aggressors is a classic example of public
good. Once the country is defended, it is impossible to prevent any single person from enjoying
the benefit of this defence. Moreover, when one person enjoys the benefit of national defence, he
does not reduce the benefit to anyone else. Thus, national defence is neither excludable nor rival
in consumption. The same applies to law enforcement also as it is a duty the of the State to
maintain law and order in the area to which the State cannot exclude anybody from the

12
protection of law. Also, the law enforcement does not reduce the benefit of one person when
others are enjoying the same.

Through these examples one can observe that these examples contain an element of interest of
public at large. As held by the Supreme Court in the cases of Renusagar15 and Saw Pipes16, the
term public policy was categorised in fundamental policy of India, interest of public, justice and
morality. The interest of public acts as a bridge between public goods and public policy. For
example, a dispute arose between Steel Manufacturing Company and Hindustan Aeronautics
Limited regarding the manufacture of HAL Tejas fighter and the matter is taken to the arbitration
where the arbitral award hampers the production of the said fighter which is an important part of
the Indian Air Force. Therefore, the same arbitral award can be set aside on the grounds of being
contrary to the public policy of India as the same award in affecting the interest of public at
large. Another example with reference to defence and law enforcement can be that of regarding
the supply of ammunition and basic equipment to the Police force and Army posted in the State
of Jammu and Kashmir. As we all know Jammu and Kashmir faces serious issues regarding
enforcement of law and order, therefore the enforcement agencies like Police and Army require
ammunition and equipment in heavy amount. Now a dispute arose between the supplier and the
manufacturing unit of the ammunition and the same is resolved by an arbitrator by deciding an
arbitral award which affects the supply of the ammunition and equipment to the Police and Army
which also leads to the worsening of the situation in the State of Jammu and Kashmir. The said
award can be set aside by the Supreme Court by applying principles laid under the case of
Renusagar and Saw Pipes, and under relevant provisions of the Arbitration and Conciliation Act,
1996.

Third example (apart from National Defence) can be that of primary health services that are
provided by the Government hospitals. If a dispute arises between the Administration of Govt.
Hospital and Supplier of Oxygen Cylinders regarding the supply of oxygen cylinders to the
hospital and the arbitral award is such that the company stops the supply of the cylinders with the
immediate effect then the said award can be set aside under Section 34 of the Arbitration and
Conciliation Act, 1996 as the same award can lead to chaos if some emergency situation arises in
the hospital while searching for a new supplier of the oxygen cylinders.
15 Supra note 4.
16 Supra note 5.

13
14
 V. CONCLUSION
The government and various authors have regarded the term Public Policy as an unruly horse
which is which is open to interpretations. The Supreme Court in a catena of judgements has ruled
that arbitral awards can be set aside on the grounds of public policy on the count of violation of
an existing law, patent illegality, violation of the fundamental policy of Indian law, an anything
so unreasonable which shocks the consciousness of the court. There is a lot of jurisprudence
surrounding public policy, but the researcher concludes that public policy is a term which has
been really misused and therefore public policy is one of the basic structure which reflects the
fundamental principles and morality of a society.

Dictating public policy is one of the most important things which can be made out in account of
the continuation of the major policies of the government but due to public policy the government
is able to dictate the terms of the distribution of resources. Therefore, in conclusion the public
policy bar is quite high, and it has been one of the terms which has been repeatedly interpreted
and defined by the judiciary since time immemorial therefore the researcher concludes that there
needs to be a drafting of some constant guidelines which completely define the term “public
policy”. There needs be limited judicial interference with regard to the setting aside of arbitral
awards on the ground of public policy.

15