LL.B. IV Sem and BA LL.B.

VIII Sem
Subject: ADR & Arbitration
Dr. Rajnish Kumar Singh
Law School, BHU

Arbitration and Conciliation Act, 1996

Chapter VII: Recourse Against Arbitral Award
Document 2

Violation of Public Policy of India as a Ground to Set aside an Arbitral Award

Meaning of Public Policy of India:

In Central Inland Water Transport Corporation Limited and another v. Brojo

Nath Ganguly and another [(1986) 3 SCC 156] the court has observed thus: - "The
Indian Contract Act does not define the expression "public policy" or "opposed to public
policy". From the very nature of things, the expressions "public policy", "opposed to
public policy", or "contrary to public policy" are incapable of precise definition. Public
policy, however, is not the policy of a particular government. It connotes some matter
which concerns the public good and the public interest. The concept of what is for the
public good or in the public interest or what would be injurious or harmful to the public
good or the public interest has varied from time to time. As new concepts take the place
of old, transactions which were once considered against public policy are now being
upheld by the courts and similarly where there has been a well recognized head of public
policy, the courts have not shirked from extending it to the new transactions and changed
circumstances and have at times not even flinched from inventing a new head of public
policy. There are two schools of thought- "the narrow view" school and "the broad
view" school. According to the former, courts cannot create new heads of public
policy whereas the latter countenances judicial law-making in this area. The
adherents of "the narrow view" school would not invalidate a contract on the
ground of public policy unless that particular ground had been well- established by
authorities. Hardly ever has the voice of the timorous spoken more clearly and loudly
than in these words of Lord Davey in Janson v. Driefontein Consolidated Gold Mines
Ltd. [(1902) AC 484, 500] : "Public Policy is always an unsafe and treacherous ground
for legal decision". That was in the year 1902. Seventy-eight years earlier, Burrough, J.,
in Richardson v. Mellish [(1824) 2 Bing 229, 252] described public policy as "a very
unruly horse, and when once you get astride it you never know where it will carry you."
The Master of the Rolls, Lord Denning, however, was not a man to shy away from
unmanageable horses and in words which conjure up before our eyes the picture of the
young Alexander the Great taming Bucephalus, he said in Enderby Town Football Club
Ltd. v. Football Assn. Ltd. [(1971) Ch. 591, 606]; "With a good man in the saddle, the
unruly horse can be kept in control. It can jump over obstacles". Had the timorous always
held the field, not only the doctrine of public policy but even the Common Law or the
principles of Equity would never have evolved. Sir William Holdsworth in his "History
of English Law", Volume III, page 55, has said:

In fact, a body of law like the common law, which has grown up gradually with the
growth of the nation, necessarily acquires some fixed principles, and if it is to maintain
these principles it must be able, on the ground of public policy or some other like ground,
to suppress practices which, under ever new disguises, seek to weaken or negative them.

It is thus clear that the principles governing public policy must be and are capable,
on proper occasion, of expansion or modification. Practices which were considered
perfectly normal at one time have today become obnoxious and oppressive to public
conscience. If there is no head of public policy which covers a case, then the court
must in consonance with public conscience and in keeping with public good and
public interest declare such practice to be opposed to public policy. Above all, in
deciding any case which may not be covered by authority our courts have before
them the beacon light of the Preamble to the Constitution. Lacking precedent, the
court can always be guided by that light and the principles underlying the
Fundamental Rights and the Directive Principles enshrined in our Constitution.

In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp. (1) SCC 644] the
supreme court adopted a narrow meaning of public policy of India to include the
following:
(i) fundamental policy of Indian law; or
(ii) the interests of India; or
(iii) justice or morality.

In the case of ONGC Ltd v. Saw Pipes Ltd [2003] 5 SCC 705 it was argued that that the
narrow meaning given to the term 'public policy' in Renusagar's case is in context of the
fact that the question involved in the said matter was with regard to the execution of the
award which had attained finality. It was not a case where validity of the Award is
challenged before a forum prescribed under the Act. He submitted that the scheme
of Section 34 which deals with setting aside the domestic arbitral award and Section
48 which deals with enforcement of foreign award are not identical. A foreign award by
definition is subject to double exequatur. This is recognized inter alia by Section 48 (1)
and there is no parallel provision to this clause in Section 34. It was further submitted that
in foreign arbitration, the award would be subject to being set aside or suspended by the
competent authority under the relevant law of that country whereas in the domestic
arbitration the only recourse is to Section 34.
It is settled law as well as it is provided under Code of Civil Procedure that once
the decree has attained finality, in an execution proceeding, it may be challenged only on
limited grounds such as the decree being without jurisdiction or nullity. But in a case
where the judgment and decree is challenged before the Appellate Court or the Court
exercising revisional jurisdiction, the jurisdiction of such Court would be wider.
Therefore, in a case where the validity of award is challenged there is no necessity of
giving a narrower meaning to the term 'public policy of India'.
The court in ONGC thus held that in addition to narrower meaning given to the
term 'public policy' in Renusagar's case (supra), it is required to be held that the award
could be set aside if it is patently illegal. Result would be - award could be set aside if it
is contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it
cannot be held that award is against the public policy. Award could also be set aside
if it is so unfair and unreasonable that it shocks the conscience of the Court. Such
award is opposed to public policy and is required to be adjudged void.

In the instant case the award was ignoring the terms of the contract. Referring to
the Section 28(3) which provides that the arbitral tribunal shall decide the dispute in
accordance with the terms of the contract; the court held that the award is violative of a
provision of statute and thus illegal and liable to be set aside. (students are advised to
refer to the unamended section 28(3). It is relevant to note that the new section 28(3)
requires the tribunal to keep in mind the term of the contract and thus one may
argue that this change has been done to reverse the decision of ONGC case).

The decision in Saw Pipes provoked considerable adverse comments from practicing
lawyers and academics. Advocate Fali Nariman said that the judgment: “…virtually set at
naught the entire Arbitration and Conciliation Act of 1996.. If courts continue to hold that
they have the last word on facts and on law – notwithstanding consensual agreements to
refer matters necessarily involving facts and law to adjudication by agreement – the1996
Act might as well be scrapped.” He also said that the judgment puts the clock back to
where we started under the old 1940 Act.

Another trend which needs mentions here is the approach of the courts in India in
extending Saw Pipes to challenging foreign arbitral awards. Section 48(2)(b) of the
Act provides for the non-enforcement of a foreign arbitral awards if “the enforcement of
the award would be contrary to the public policy of India”

The popular view is that the provision must be interpreted in the light of the object of
New York Convention. One of the main objectives of the convention is to remove
impediments to the enforcement of foreign awards i.e. we must adopt pro enforcement
interpretation for the provision. Thus the phrase public policy of India must be interpreted
narrowly. The Delhi High Court in the case of Glencore Grain Rotterdam B.V. v.
Shivnath Rai Harinarayan (India) Co. (2008) relied on Renusagar and not on ONGC to
construe the term ‘public policy’. However, the Supreme court in Phulchand Exports
Ltd/ v. OOO Patriot (2011) held that ‘patent illegality’ under the term ‘Public Policy of
India’ needs to be considered even while examining the enforcement of a foreign award
under section 48(2)(b) of the Act.

The judgment of Phulchand was overruled by a three judge bench of the Supreme Court
in Shri Lal Mahal Ltd. v. Progetto Grano Spa (2014) and narrow interpretation in
Renusagar was held to be applicable in the context of section 48 of the Act.

The 246th Report of the Law Commission

The commission suggested the following provisions:

S. 34(2)(b)(ii) the arbitral award is in conflict with the public policy of India.
Explanation. – For the avoidance of any doubt, it is clarified that an award is in
conflict with the public policy of India only if:
(a) the making of the award was induced or affected by fraud or corruption
or was in violation of section 75 or 81;
(b) it is in contravention with the fundamental policy of Indian law; or
(c) it is in conflict with the most basic notions of morality or justice.
(2A) An arbitral award arising out of arbitrations other than international
commercial arbitration, 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.
 Provided that an award shall not be set aside merely on the ground of an erroneous
application of the law or by re-appreciating evidence.

The above amendments were suggested on the assumption that other terms such as
“fundamental policy of Indian law” or conflict with “most basic notions of morality or
justice” would not be widely construed.

In August 2014 (a month after the submission of the report by the commission) the
term “fundamental policy of Indian law” was construed widely by the three judge bench
of Supreme Court on ONGC Ltd. v. Western Geco International Ltd (2014) 9 SCC 263
to include an award that “no reasonable person would have arrived at”. This permitted the
review of an arbitral award on merits on the basis of it violating public policy. The
Supreme Court’s decision was followed by a subsequent two-judge bench in Associate
Builders v. Delhi Development Authority 2014 (4) ARBLR 307 SC.

The court in Western Geco includes the following within the scope of fundamental
policy of Indian law:
 Principles for administration of justice
 Principles for enforcement of law

Three distinct and fundamental juristic principles that must necessarily be understood as
a part and parcel of the fundamental policy of Indian law:
1. Judicial approach to be adopted by any court or authority that affects the
rights of citizen or lead to civil consequences. It means the authority must not
act in whimsical manner.
2. Principles of natural justice: A court and so also quasi-judicial authority
must act in accordance with principles of natural justice.
3. A decision which is perverse or so irrational that no reasonable person would
have arrived at the same will not be sustained in a court of law. Perversity
and irrationality of decisions is tested on the touchstone of wednesbury
principle of reasonableness.
Thus the wednesbury principle of reasonableness has now been incorporated into the
public policy test under section 34, as it is deemed to be part of “fundamental policy of
Indian law”. Such a power to review an award on merits is contrary to the object of the
Act and international practice. Thus the Law Commission of India proposed further
changes through the Supplementary to 246th Report in section 34(2)(b)(ii) by
suggesting inclusion of Explanation 2.
 “For the avoidance of doubt the test as tp whether there is a contravention
with the fundamental policy of Indian law shall not entail a review on the
merits of the dispute”
The proposal of the Commission was accepted by the legislature to amend the
provision. It is clear now that public policy of India shall have narrow interpretation, in
fact narrower than the so called narrow meaning given in Renusagar case. It is also
important to mention that the phrase ‘interests of India’ was discarded by the Law
Commission on the ground that it is too vague.
Another significant change is that now patent illegality is not covered by public
policy of India thus it is not a ground to set aside an arbitral award, however it is a
separate ground mentioned only for the purposes of awards coming from an arbitration
other than international commercial arbitration. The approach of the legislature is now to
treat International Commercial Arbitration similar to arbitrations done outside India. The
same is evident from the definition of Court in section 2(e).

Going back to the decision of ONGC v. Saw Pipes, as mentioned before because of
the amendment in section 28(3) the decision is reversed. I am leaving my students
with the question as to what shall be the decision of the court on the facts of ONGC
if the case is to be decided today? Will your answer be different if both the parties
are Indian parties? Try to answer the question after reading the case of ONGC v.
SawPipes.

Note 1: the above document is based on the 246th report of Law Commission of
India.
Note 2: the other aspects including arbitrability of disputes and limitation etc. will
be discussed in the next document.