The Goals Of Arbitration As A Means Of Dispute Resolution And Application

Of Public Policy

Introduction

Alternate dispute resolution is fast becoming one of the most preferred dispute
resolution mechanisms in the world. ADR has gained widespread acceptance among
both the general public and the legal profession in recent years. Nowadays, certain
courts recommend some parties to try an alternate dispute resolution mechanism like
mediation or arbitration, before permitting the parties’ cases to be tried. Another reason
for the rising popularity of alternate dispute resolution is the ever-increasing caseload in
traditional courts. Alternate dispute resolution generally incurs lesser expenses than
litigation. The parties can keep certain information confidential and also can have a
better say over the selection of the individuals who will preside over their dispute and
decide it.

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The most important of the working assumptions is that of humans conflicting. Conflicts
have existed in all cultures, religions, and societies since time immemorial, as long as
humans have walked the earth. All societal interactions have been fundamentally an
argument over the control of the resources. All philosophies and theologies have
primarily been attempts a solving this perpetual conundrum of conflict. These
philosophies and procedures for dealing with conflicts have been part of the human
heritage, differing between cultures and societies. We find in The Bible and similar
religious and historical documents in different cultures an account of conflicts that were
resolved by various processes, including negotiation, mediation, arbitration, and
adjudication.

The essence of arbitration is the settlement of disputes by a tribunal chosen by the

parties themselves, rather than by the Courts constituted by the State.  The popularity of
arbitration as a mode of settling disputes is due to the fact that “the arbitration is
regarded as speedier, more informal and cheaper than conventional judicial procedure
and provides a forum more convenient to the parties who can choose the time and
place for conducting arbitration and the procedure.  Further, where the dispute concerns
a technical matter, the parties can select an arbitrator who possesses appropriate special
qualifications or skills in the trade”.
As a concept and as a process, arbitration is well embedded in commercial practices and
social life.  Arbitration is the means by which parties to a dispute get the same settled
through the intervention of a third person, but without having recourse to a court of
law.  When two persons agree to have a dispute settled through arbitration, what they
really mean is that the actual resolution of the dispute will rest with a third person called
the arbitrator.  The essence of arbitration, therefore, is that it is the arbitrator who
decides the case and not the ordinary civil courts established by the state.  The law of
arbitration is based upon the principle of referring the disputes to a domestic tribunal
substituted in the place of a regular Court. The goals of alternative dispute resolution in
general and arbitration in particular can safely be deduced to be the following:

 Arbitration is a means by which the parties reduce the transaction costs in terms
of delays due to procedural rigidities as well as monetary costs in terms of costs
of protracted litigation.
 Further, alternative dispute resolution aims at settlement such that there is
reconciliation and some modicum of gain or loss for both parties without further
embitterment of their relationship, be it personal or commercial.

In the old Indian system for arbitration is Panchayat. In India arbitration has a very
ancient heritage. Indian civilization expressly encouraged the settlement of differences
by Tribunals chosen by the parties themselves.

Alternate dispute resolution is comprised of several advantages as, it is less expensive,

and it is less time consuming. It is free from technicalities as in the case of conducting
cases in law Courts.

With the advent of the alternative dispute resolution, there is new avenue for the people
to settle their disputes. The settlement of disputes in Lok Adalat quickly has acquired
good popularity among the public and this has really given rise to a new force to
alternate dispute resolution and this one without doubt has reduced the pendency of
cases in law Courts. The scope of alternate dispute resolution system should be
increased to such an extent so that the Courts are compelled to try settlement of cases
more effectively by using alternate dispute resolution system so as to bring down the
large pendency of cases in law Courts. An efficient alternate dispute resolution will really
achieve the goal of rendering social justice to the parties to the dispute, which is really
the goal of the successful judicial system

ADR is generally classified into at least four types: negotiation, mediation, collaborative
law, and arbitration. (Sometimes a fifth type, conciliation, is included as well, but for
present purposes it can be regarded as a form of mediation.
The expression Public Policy is not defined either by the Arbitration Act or the Contract
Act, it is a changing concept and it has nexus with public good and public interest which
may vary form time and place.

Alternative Dispute Resolution In India And U.S

ADR traditions vary somewhat by country and culture. There are significant common
elements which justify a main topic, and each country or region’s difference should be
delegated to sub-pages. ADR or Alternative Dispute Resolution is of two historic types.
First, methods for resolving disputes outside of the official judicial mechanisms. Second,
informal methods attached to or pendant to official judicial mechanisms. There are in
addition free-standing and or independent methods, such as mediation programs and
ombuds offices within organizations. The methods are similar, whether or not they are
pendant, and generally use similar tool or skill sets, which are basically sub-sets of the
skills of negotiation. ADR can be used alongside existing legal systems such as “Sharia
Courts” within Common Law jurisdictions such as the UK.

Alternative dispute resolution in India is not new and it was in existence even under the
previous Arbitration Act, 1940. The Arbitration and Conciliation Act, 1996 has been
enacted to accommodate the harmonization mandates of UNCITRAL Model. To
streamline the Indian legal system the traditional civil law known as Code of Civil
Procedure, (CPC) 1908 has also been amended and section 89 has been introduced.
Section 89 (1) of CPC provides an option for the settlement of disputes outside the
court. It provides that where it appears to the court that there exist elements, which may
be acceptable to the parties, the court may formulate the terms of a possible settlement
and refer the same for arbitration, conciliation, mediation or judicial settlement.

The amendment of the CPC referring pending court matters to ADR was not welcomed
by a group of lawyers and the amendment was challenged. The modalities to be
formulated for effective implementation of Sec. 89 also came under scrutiny. For this
purpose, a Committee headed by former Judge of the Supreme Court and Chairman of
the Law Commission of India, Justice M. Jagannadha Rao, was constituted to ensure that
the amendments become effective and result in quick dispensation of justice. The
Committee filed its report and it was accepted and the Hon’ble Supreme Court of India
has pronounced a landmark decision in Salem Advocate Bar Association, Tamil Nadu v.
Union of India case, where it held that reference to mediation, conciliation and
arbitration are mandatory for court matters. This judgment of the Supreme Court of
India was the real turning point for the development of mediation in India.

In the United States, mediation, or “conciliation” as it is sometimes known, has been a

staple of Alternative dispute resolution for generations, typically presided over by a
town elder or respected figure in the community. The emergence of mediation as a
device to resolve litigation in the United States can probably be traced to the seminal
work in negotiation theory done by Roger Fisher and William Ury of the Harvard
Negotiation Project, popularized in their 1981 book Getting to Yes.

After the British adversarial system of litigation was followed in India, arbitration was
accepted as the legalized ADR method and is still the most often utilized ADR method.
Mediation (as is now understood globally and unlike the ancient methods, which is by
definition non-binding, and encourages the parties to voluntarily reach an agreement
that meets all the parties’ needs) has only in the past few years begun to become
familiar to lawyers and judges generally, except in traditional community settings and
except where mediation has been court-directed or statutorily-prescribed, such as in the
intragovernmental disputes between government agencies and undertakings, in labour
disputes and in public utility services disputes. So when we compare the US and Indian
system, over the last twenty (20) years, American lawyers and judges have warmly
embraced mediation as a primary tool for resolving conflicts in court and out of court,
while Indian lawyers and judges are still cautiously examining mediation, discussing
whether and in which types of cases mediation should be used – similar to what was
happening in the US in the 1980’s. In the United States, mediation, or “conciliation” as it
is sometimes known, has been a staple of Alternative dispute resolution for generations,
typically presided over by a town elder or respected figure in the community.

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Application Of Principle Of Public Policy In India And United States.

Public Policy In India.

The Arbitration and Conciliation Act, 1996 governs the law of arbitration in India. The
Act incorporates the concept of public policy in two situations. First, under Section 34 (2)
(b) (ii) for setting aside an arbitral award and secondly, under Section 48 (2) (b) for a
refusal to enforce a foreign award. This paper will discuss the scope and ambit of the
principle of public policy under Section 34 (2) (b) (ii) only. The principle of public policy
rests on the premise that though the individuals are free to conduct their business
through contractual agreements, yet if such agreements are injurious to the public
good, then the Courts shall refuse to enforce such agreements. The principle of public
policy means that no subject can lawfully do that which has a tendency to be injurious
to the public, or against the public good. The principle thus reflects the primacy given to
public interest over individual interests. , as early as 1824, Burrough, J. in Richardson v.
Mellish, described public policy as an ‘unruly horse’ and recently in Deutshe v. National
Oil Co., Sir John Donaldson MR emphasized that public policy could never be
exhaustively defined, and that it should be approached with extreme caution. The
Arbitration Act of 1940 did not contain any specific reference to public policy. Under
Section 34(2) (b) (ii) of the Arbitration and Conciliation Act, 1996, an arbitral award shall
be set aside by the Court if it is in conflict with the public policy of India from here
onwards Public Policy came in to effect and in the landmark judgment given in
Renusagar Power Co. Ltd. v. General Electric Co., by the Supreme Court which identified
three such elements of public policy. These are: (i) fundamental policy of Indian law, (ii)
the interests of India, (iii) justice or morality. If an arbitral award is contrary to any of
these, it would be regarded as against the public policy of India. Though this case came
under the Foreign Awards (Recognition and Enforcement ) Act, 1961, several decisions
of the Supreme Court have extended its dicta to the Arbitration and Conciliation Act of
1996.

One of the earliest expositions of this principle was given by Lord Mansfield in Holman
v. Johnson as follows: “the principle of public policy is this: ex dolo malo non oritur actio.
No court will lend its aid to a man who founds his cause of action upon an immoral or
illegal act.” Thus, it is something which is immoral, unfair or fundamentally against the
current values and norms of a particular society or nation, that is sought to be rejected
through the use of the principle of public policy.

The most important and controversial decision of the Supreme Court which has come
under the present Act is ONGC v. SAW Pipes Ltd. In this case, the Supreme Court added
one more aspect to the phrase ‘ public policy of India’, namely, “ patent illegality”. This
would mean that if the arbitral award is, on the face of it, patently in violation of
statutory provisions, it would be against the public policy of India. This decision has
been criticized by several scholars on the ground that it gives a very wide meaning to
the term public policy, thereby making an arbitral award highly susceptible to judicial
scrutiny.

In the Arbitration Act of 1940, there was no specific provision for setting aside an
arbitration award on the ground that it was in conflict with the public policy of India.
But, Section 30 (c) of this Act provided three grounds for setting aside an arbitral award.
These were : (i) an arbitrator or umpire has misconducted himself or the proceedings. (ii)
an award has been made after issue of an order by the Court superceding the
arbitration or after the arbitration proceedings have become invalid under Section 35;
(iii) an award has been improperly procured or is otherwise invalid. Moreover, Section
161(c) of this Act authorized the court to remit an award to the tribunal for
reconsideration ‘where an objection to the legality of the award is apparent on the face
of it. None of these provisions mentioned specifically the phrase ‘public policy’, though
they gave wide powers to the courts in the matter of reviewing arbitral awards.

The Foreign Awards (Recognition and Enforcement ) Act, 1961 mentioned the word
public policy . Section 7(1) (b)(ii) of this Act provided that a foreign award may not be
enforced under this Act if the court dealing with case is satisfied that ‘the enforcement
of the award will be contrary to public policy’.

to the Arbitration and Conciliation Act of 1996, three sections of it provide for public
policy. These are:

1. Section 34(2) (b) (ii): It states that an arbitral award may be set aside by the Court
if it finds that the award is in conflict with the public policy of India. It also
explains that an award is in conflict with the public policy of India if the making of
the award was induced or affected by fraud or corruption or was in violation of
Section 75 or Section 81.
2. Section 48(2)(b): It states that enforcement of a foreign award ( New York
Convention Award) may be refused if the Court finds that its enforcement would
be contrary to the public policy of India
3. Section 57(1) (e): It states that a foreign award (Geneva Convention Award) may
be enforceable, only if it is not contrary to the public policy of India.

Public Policy In United States:

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (New York Convention) and, the U.S. Arbitration Act say about whether U.S.
courts should enforce foreign arbitration awards that have been set aside in the state
where the arbitration is held. When an international arbitration award is set aside or
nullified in the state where the arbitration was held (the primary jurisdiction), the
prevailing party may attempt to enforce the award in another jurisdiction (the secondary
jurisdiction). This presents unique challenges for the secondary jurisdiction, whose
courts must balance the rights of the parties under the award with respect for the
judgment of the court that nullified the award. Article III of the 1958 United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York
Convention) requires courts in signatory states to recognize and enforce foreign
arbitration awards in accordance with the conditions set forth in the convention.
However, Article V provides that recognition and enforcement of an award “may be
refused, at the request of the party against whom it is invoked” in certain enumerated
circumstances. The circumstance relevant to this discussion is covered by Article V(1)(e),
which allows a court to refuse enforcement if the award “has been set aside by a
competent authority of the country in which, or under the law of which, that award was
made.”

Chapter 2 of the Federal Arbitration Act (FAA) implements the New York Convention in
the United States, and Section 201 makes it enforceable by U.S. courts. A key operative
provision, Section 207, requires U.S. courts to enforce awards under the convention,
stating that the court “shall confirm the award unless it finds one of the grounds for
refusal or deferral of recognition or enforcement of the award specified in the said
Convention.”

The United States applies a restrictive concept of public policy. For example, the
definition of public policy most often quoted in the context of international arbitration is
that of Judge Joseph Smith in Parsons & Whittemore (United States Court of Appeals,
1974) in which he held that enforcement of a foreign arbitral award may be denied on
public policy grounds “only where enforcement would violate the forum state’s most
basic notions of morality and justice”. In the same year (1974), the Supreme Court, in
Scherk v. Alberto-Culver Co. Case recognized the difference between international and
domestic public policy. It enforced an agreement to arbitrate a claim arising in
international trade, although arbitration of a similar claim would have been barred had it
arisen from a domestic transaction. The Supreme Court in the case of Matter of Board of
Education of Arlington Cent. School Dist. v. Arlington Teachers Assn. held that an
arbitration award may be vacated on three grounds: If it violates a strong public policy,
is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s
power. In the Matter of New York City Tr. Auth. v. Transport Workers Union of Am. Local,
the court established a two-prong test for determining whether an arbitration award
violates public policy. First, where a court can conclude, ‘without engaging in any
extended fact finding or legal analysis’ that a law ‘prohibits, in an absolute sense, the
particular matters to be decided by arbitrations’ an arbitrator cannot act.’ Second, an
arbitrator cannot issue an award where, the award itself violates a well-defined
constitutional, statutory or common law of this state.

Conclusion

The essence of arbitration is the settlement of disputes by a tribunal chosen by the

parties themselves, rather than by the Courts constituted by the State.  The popularity of
arbitration as a mode of settling disputes is due to the fact that “the arbitration is
regarded as speedier, more informal and cheaper than conventional judicial procedure
and provides a forum more convenient to the parties who can choose the time and
place for conducting arbitration. The goals of the law of arbitration must be simple, less
technical and more responsible to the actual reality of the situations, responsive to the
canons of justice and fair play.

The issue of public policy as a ground for setting aside arbitral awards has raised much
controversy in recent years. The crucial issue is the content of public policy. On the one
hand, it is argued that it should have a narrow scope while on the other hand; wider
interpretation of it is advocated. This issue relates to the broader issue of the
harmonization of arbitration law in India. The Act of 1996 tried to lessen judicial
interference in the area of arbitration process in India, basing itself upon the UNCITRAL
model law. The United States applies a restrictive concept of public policy. On the basic
notions of morality and justice an award is set aside as was held in the Parsons case. The
setting aside of an award in both India and U.S can be done when it violates morality
and justice or against public policy.

Bibliography

Primary Source:

 The Arbitration and Conciliation Act, 1996

 The Arbitration and Conciliation ( Amendment ) Bill, 2003
 The 176th Report of the Law Commission Of India

Secondary Source:

 Chawla, S.K., Law of Arbitration and Conciliation, 2nd ed., 2004, Eastern Law
House, New delhi
 H. K Saharay, Law of Arbitration and Concilliation, Eastern Law House, New Delhi,
2001
 Malhotra, O.P., Law of Arbitration and Conciliation, 2nd ed., 2006, Lexis Nexis ,
New Delhi
 Mohta. V.A, Arbitration Conciliation and Mediation, 2nd ed. Manupatra
information solution pvt. Ltd. 2008
 Narayana P.S J. The Arbitration and Conciliation Act, 1996, 4th ed. ALT
Publications, 2007

Electronic Sources:

 Goodin A. Robert; Mediation: An overview of alternate dispute resolution,

http://lawcommissionofindia.nic.in/adr_conf/Mediation%20Goodin8.pdf.
 Raju KD; Alternate Dispute Resolution system
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1080602;
 http://www.dst.org.in/kinds_of_arbitration.htm; Dispute-settlement-trust.