Introduction

Arbitration is an alternative system of dispute resolution which is aimed to be

far speedier thus saving time and money of the litigants. The system follows
the mandate of "minimal court intervention" and Courts can interfere in the
arbitral process only under the limited grounds provided under the Arbitration
and Conciliation Act, 1996. One such provision, section 34 provides grounds
on which an arbitral award can be set aside by the Court. Section 34 (2)(b)(ii)
states that a Court may set aside a domestic arbitral award if it finds that the
award conflicts with the public policy of India. Explanation 1 of Section 34(b)
states three criteria on which an award could be overturned on the ground of
public policy – when the award was induced by fraud, corruption or in violation
Section 75 or Section 81; or it is against the fundamental policy of Indian Law;
or it is in contrast with the most basic notions of morality and justice. The
second and third grounds are vague and are susceptible to being interpreted
too widely. This apprehension was confirmed when several Supreme Court
judgments had widened the scope of interpretation of public policy.
The scope and width of the concept of ‘public policy’ as a ground for setting
aside an arbitral award has been the source of much debate across all
jurisdictions, but India has been perceived to be a forerunner in stirring this
debate. The two landmark decisions in ONGC v. Saw Pipes Ltd. [1] and
Phulchand Exports Ltd. v. Ooo Patriot [2] (which distinguished Renusagar
Power Co. Ltd. v. General Electric Co. [3]) caused significant uproar in India
and the international arbitral community. Perhaps as a result of the severe
criticism received, there was an attempt by the Indian Courts in subsequent
decisions to water down the effects of these decisions. Just when India was
beginning to receive some appreciation for having ‘tamed the unruly horse’ the
decision in Associate Builders. v Delhi Development Authority [4] and ONGC
v. Western Geco International Ltd. [5] have breathed new life in the debate.
Also, post the 2015 amendment the decisions given in cases thereafter have
narrowed down the scope of public policy.

What is Public Policy?

The Arbitration and conciliation Act, 1996 or the Contract Act, 1872 does not
define the expression “Public Policy” or “opposed to public policy.” “Public
Policy” is not the policy of an executive authority. It connotes some matter
which concerns the public good or the public interest. ‘Public Policy’ is
equivalent to the “Policy of Indian Law.” Therefore any acts that have a
mischievous tendency so as to be injurious to the interest of the state or the
public or against justice and morality is stated to be against “Public Policy” or
against the ‘Policy of Indian Law.”

Doctrine of ‘Public Policy’ is somewhat open ended and flexible, and this
flexibility has been the cause of judicial subjectivity and misinterpretation of
the doctrine. There is a general agreement that the courts may extend existing
concept of ‘Public Policy’ to new situations and the difference between
extending on existing principle as opposed to creating a new one will often be
wafer thin like a butterfly wing. ‘Public Policy’ is not absolute. In the broader
view, the doctrine of “Public Policy” is equivalent to the “Policy of Law,”
whatever leads to obstruction of justice or violation of a statute or is against
the good morals when made the object of contract would be against ‘Public
Policy of India” and being void, would not be susceptible to enforcement.

Though misconduct of Arbitral Tribunal or of the proceedings before an arbitral

tribunal by themselves are not made as grounds for recourse against an
arbitral award under section 34 of the 1996 Act. Interpreting the doctrine of
public policy of India in its broader view, courts of law may intervene
permitting recourse against an arbitral award based on irregularity of a kind
which the court considers has caused or will cause substantial injustice to the
applicant. Extreme cases where arbitral tribunal has gone so wrong in its
conduct of arbitration that justice calls out for it to be corrected may justifiably
fall within the ambit of the doctrine of ‘Public Policy of India” to enable courts
of law in India to intervene under section 34 of the 1996 Act permitting
recourse against arbitral award.

Court pronouncements regarding Public Policy

Renusagar Power Electric Company v. General Electric Company

case[3]
Renusagar Power Co. Ltd. (for short 'Renusagar') is a company incorporated
under the Indian Companies Act, 1956 engaged in the production and sale of
electric power. General Electric Company (for short 'General Electric'), is a
company incorporated under the laws of the State of New York in United
States of America and is engaged in the business of manufacturing, selling
and servicing electrical products and various ancillary activities. After
negotiations, the parties arrived at an arrangement whereunder General
Electric was to supply to Renusagar the equipment and power services for
setting up a thermal power plant to be known as 'Renusagar Power Station' at
Renukoot and, on November 27, 1963, Renusagar moved the Government of
India for its approval. By its letter dated January 2, 1964, the Government of
India gave its approval to the proposals and thereafter a formal contract was
executed by the parties on August 24, 1964. Under the said contract, General
Electric undertook to supply equipment and services for a plant having a
capacity of 135,800 K.W. The total price for the electrical and mechanical
equipment, spare parts, freight forwarding services, plant design and
consulting services was US $ 13,195,000. A dispute arose, and General
Electric referred the matter to arbitration. Renusagar argued that the dispute
did not fall within the scope of the arbitration agreement, but the Supreme
Court of India ruled against it. An award was rendered in favour of General
Electric which it sought to enforce before the High Court of Bombay. The High
Court enforced the award and Renusagar appealed to the Supreme Court,
arguing that (i) the arbitral tribunal had failed to inform it of the potential effects
of certain of the Tribunal's decisions, thereby rendering it unable to present its
case in violation of Section 7(1)(a)(ii) of the Foreign Awards (Recognition and
Enforcement) Act 1961 (the “1961 Act”) (mirroring Article V(1)(b) NYC); and,
(ii) the terms of the award were grossly unfair, so enforcement would be
contrary to public policy, in violation of Section 7(b)(ii) of the 1961 Act
(mirroring Article V(2)(b) NYC). The Supreme Court dismissed Renusagar’s
appeal and affirmed the lower court's decision. The Court rejected
Renusagar’s contention that it had been unable to present its case in violation
of Section 7(1)(a)(ii) of the 1961 Act because Renusagar voluntarily refused to
appear before the arbitral tribunal. Therefore, it could not complain of the
alleged effects this had on presentation of its case at this stage in the
proceedings. The Court also rejected Renusagar’s public policy argument.
First, it held that the term “public policy” in Section 7(1)(b)(ii) of the 1961 Act
referred to the public policy of India and not the public policy of New York. It
based this conclusion on Article V(2)(b) NYC, which it found to clearly refer to
the public policy of the country enforcing the award. Second, it held that the
award was not contrary to the public policy of India. The Court determined that
under Section 7(1)(b)(ii) of the 1961 Act, the enforcement an award violates
the public policy of India if enforcement would be contrary to (i) a fundamental
policy of Indian law; (ii) the interests of India; or, (iii) justice or morality. The
Court found that no aspect of the award or interest was excessive or unjust,
and therefore enforcing the award would not be contrary to India's public
policy. SC commented:

33. Similarly in the matter of enforcement of foreign arbitral awards at

common law a foreign award is enforceable if the award is in accordance with
the agreement to arbitrate which is valid by its proper law and the award is
valid and final according to the arbitration law governing the proceedings. The
 award would not be recognised or enforced if, under the submission
agreement and the law applicable thereto, the arbitrators have no justification
to make it, or it was obtained by fraud or its recognition or enforcement would
be contrary to public policy or the proceedings in which it was obtained were
opposed to natural justice The English courts would not refuse to recognise or
enforce a foreign award merely because the arbitrators (in its view) applied
the wrong law to the dispute or misapplied the right law.

After that we move to the judgement given in ONGC v. Saw pipes Limited [2]
which widened the horizons of public policy .The facts of the said case – Oil
and Natural Gas Commission had placed an order on Saw Pipes for supply of
equipment for off shore exploration, to be procured from approved European
manufacturers. The delivery was delayed due to general strike of steel mill
workers in Europe. Timely delivery was the essence of the contract. ONGC
granted extension of time, but it invoked the clause for recovery of Liquidated
Damages by withholding the amount from the payment to the supplier. ONGC
deducted from the payment $3,04,970.20 and Rs 15,75,557 towards customs
duty, sales tax and freight charges. Saw pipes disputed the deduction and
matter was referred to arbitration. While the arbitral tribunal rejected Saw
Pipe’s defence of force majeure, it required ONGC to lead evidence to
establish the loss suffered by breach and proceed to hold, in absence of
evidence of financial losses, that the deduction of Liquidated damages was
wrongful. The award was challenged by ONGC; inter alia as being opposed to
public policy. ONGC’s case was that the arbitral tribunal failed to decide the
dispute by not applying the prevailing substantive law, ignoring the terms of
the contract and customary practices of usage of trade in such transactions.
ONGC challenged the award as being patently illegal. The single judge and
division bench of Bombay High Court dismissed the challenge. The Supreme
Court set aside an arbitration award directing ONGC to refund $3,04,970.20
and Rs 15.76 Lakhs towards liquidated damages retained by it while making
payment to the company.

The Court held that in case of an application u/s 34 to set an award aside, the
role of the Court was similar to an appellate/revision court, therefore, it had
wide powers. Further, the Court also added a new ground – patent illegality to
the grounds enumerated in Renusagar Power Co. Ltd; under which the arbitral
award could be set aside.

“Therefore, in our view, the phrase ‘Public Policy of India’ used in Section
34 in context is required to be given a wider meaning. It can be stated that
 the concept of public policy connotes some matter which concerns public
good and the public interest. What is for public good or in public interest or
what would be injurious or harmful to the public good or public interest has
varied from time to time. However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be said to be in public
interest. Such award/judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view 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.”

This opened a floodgate of litigation under Section 34 as every award where

there was an alleged error of application statutory provisions could now be
challenged.

Moving further, in Penn Racquet Sports v Mayor International, Delhi HC [6]

the Delhi High Court held that the term ‘public policy’ in the context of
enforcement of a foreign award under Section 48 is to be construed more
narrowly than the context of setting aside under Section 34.

Penn Racquet Sports (“decree holder”), a company incorporated in the United

States had entered into a Trademark License Agreement (“TLA”) with Mayor
International Limited (“judgment debtor”), a Company incorporated in India,
whereunder the decree holder had granted the judgment debtor license to use
the trademark “Penn” for use in certain territories and for certain products. In
consideration of the license the judgment debtor agreed to pay an annual
royalty to the decree holder. The dispute arose when the judgment debtor
refused to pay the annual royalty claiming the decree holder had breached the
contract by granting a similar license to Nebus Loyalty Limited (“Nebus”).
Subsequently the dispute was referred to arbitration and thereafter the decree
holder obtained an award in his favour. It is for the enforcement of this award
that the decree holder preferred the present enforcement application u/s 47 of
the Arbitration and Conciliation Act (“Act”). Needless to state, the judgment
debtor challenged the enforcement of the award u/s 48 of the Act.

The judgment debtor contented before the Delhi High Court that the impugned
award was against public policy as (i) the award was against the express
terms of the contract which rendered it patently illegal and (ii) the arbitral
tribunal refused to entertain the counter claim of the judgment debtor, denying
it an opportunity to present its case. The judgment debtor relied on Venture
Global Engineering v. Satyam Computer Services Limited (AIR 2008 SC
1061) to contend that the foreign award is subject to challenge u/s 34 of the
Act, and then relied on Saw Pipes [2] to contend that since the award was
patently illegal it could not be enforced. Contrarily, the decree holder
contented that while enforcing an award u/s 47-49 of the Act, the court is not
mandated to adjudicate on the merits of the dispute. The decree holder further
contended that the law laid down in Saw Pipes [2] is only applicable to
domestic awards and that the term “Public Policy” has a different connotation
u/s 48(2)(b) to that in S. 34(2)(b)(ii) of the Act.

The Delhi High Court upholding the contention(s) of the decree holder, held
that the term “public policy” in S. 48(2)(b) of the Act carries a narrower
meaning when compared to the meaning assigned to the same term u/s 34(2)
(b)(ii) of the Act. The court relied on the Supreme Court decision in Furest
Day Lawson v. Jindal Exports (AIR 2001 SC 2293) and its own decision
in Jindal Exports v. Furest Day Lawson to hold that a narrow meaning must
be given to the term “public policy” u/s 48(2)(b) and only when the most “basic
notions of morality and justice” are violated should the court refuse the
enforcement of the foreign award. Having drawn a distinction between s. 48(2)
(b) and s. 34(2)(b)(ii), as far the tem “public policy” is concerned, the court
further seems to have agreed that the ratio of Venture Global was not
applicable to the present case as the substantive law governing the contract
was not Indian Law (arguably suggesting an implied exclusion of Part I of the
Act).             

In 2011, the Supreme Court in Phulchand [4] while deciding the meaning of
‘public policy’ under Section 48 of the 1996 Act held that the test laid down in
ONGC v. Saw Pipes case must be followed in case of foreign awards as well,
thereby allowing Indian Courts to deny enforcement of a foreign award on
additional grounds of “patent illegality”. Notably however, the Supreme Court
expounded no reasons for ignoring the distinction drawn between foreign
awards and domestic awards in Saw Pipes itself or for departing from
Renusagar [3] which although dealt with a separate statute, had in fact
interpreted a provision identical in text and intention to that of Section 48.

The appellant, an Indian company, challenged an award that had been

passed by the International Court of Commercial Arbitration at the Chamber of
Commerce and Industry of the Russian Federation, Moscow in favour of the
respondent, a Russian company. The appellant and the respondent had
entered into a contract through which the appellant had undertaken to supply
a specific quantity of polished rice to the respondent at Novorossiysk, Russia
on a cost, insurance and freight basis. Although the respondent had paid the
consideration for the goods in advance through a letter of credit, the goods
ultimately did not reach the respondent.

Consequently, the respondent lodged a claim against the appellant for

recovery of the contracted amount before the Russian arbitral tribunal. The
arbitral tribunal found no merit in the defense given by the appellant and
rejected its arguments. It ultimately held the respondent liable for payment of
half of the amount in dispute in the arbitration. The respondent then filed an
arbitration petition before the Bombay High Court for enforcement of the
award under Sections 47 and 48 of the act. This petition was challenged by
the appellant claiming the arbitral award was not enforceable, as it was
against 'public policy' and therefore liable to be set aside under Section 48(2)
(b) of the act. The single judge of the Bombay High Court rejected the
appellant's contentions and held that the arbitral award could be enforced as a
decree of the court. The appellant appealed the judgment before the Division
Bench of the Bombay High Court. This appeal was also dismissed, in view of
the Supreme Court's decision in Renusagar Power Co Ltd v General Electric
Co. [3].

The appellant then brought its appeal before the Supreme Court. The
appellant argued that the wider meaning attributed by the Supreme Court
in Saw Pipes [2] to the definition of 'public policy' (under Section 34 of the act)
in the context of setting aside a domestic award should also be applied to the
definition of the same expression under Section 48(2)(b) of the act. While
accepting the wider definition of 'public policy' in Saw Pipes over the narrow
scope ascribed in Renusagar Power, the Supreme Court held that a foreign
award can be set aside under Section 48(2)(b) of the act "if it is patently
illegal". The court therefore decided to consider the arbitral award based on
patent illegality. However, on the merits, the court did not find the impugned
arbitral award to be patently illegal and consequently dismissed the
appellant's civil appeal.

Section 48 of the act contains limited grounds on which enforcement of an

arbitral award can be refused, one of which is that the arbitral award is against
Indian public policy. The Supreme Court's decision in Phulchand
Exports increases judicial intervention in the enforcement of foreign arbitral
awards by expanding the contours of the definition of 'public policy'. In support
of an expansive interpretation of this expression, the court relied on its
previous decision in Saw Pipes, where a wider scope was assigned in the
context of setting aside a domestic award. It may not have been brought to the
attention of the court that the decision in Saw Pipes had recognised that the
scope of intervention for foreign awards should be much less than that for
domestic awards, and hence wider meaning should be assigned to the
definition of 'public policy' in Section 34 alone and not to that in Section 48.
The Delhi High Court had also taken the view that 'public policy' carried a
narrower meaning under Section 48 of the act than that under Section 34(ii)
(b).

In the past, the increasing judicial intervention shown by Indian courts in

enforcing or recognizing arbitral awards has been widely criticized. The
introduction of 'patent illegality' as a new ground for challenging the
enforcement of a foreign arbitral award in Phulchand Exports gives rise to a
valid apprehension that this could lead to potentially limitless judicial review of
foreign arbitral awards in India. Further, a foreign award brought to India for
enforcement may be based on a substantive law other than Indian law. Thus,
under the amorphous concept of 'patent illegality', the Indian courts may be
called on to rule on a foreign award by applying a foreign legal system,
leading to inevitable complexities and delays in the process of enforcing a
foreign award in India.

Phulchand Exports case came to be overruled by the Supreme Court in 2013

in Shri Lal Mahal Ltd. v. Progetto Grano Spa [7]. The Court reinstated the
Renusagar case’s position with respect to enforcement of foreign awards and
confirmed that the Renusagar case’s test shall apply for refusal of
enforcement of a foreign award on the grounds of conflict with public policy of
India. The wider import of the term as laid down in Saw Pipes therefore
ceased to apply to Section 48 and the possibility of an attack to a foreign
award in India on grounds of “patent illegality” at the stage of enforcement was
averted.

The case of Shri Lal Mahal concerned a dispute between an Indian supplier

and an Italian buyer in a contract for the supply of wheat. The seller relied on
a certificate of quality provided by a certifying agency at the port of loading in
India to argue that the wheat supplied was of the requisite quality. The buyer
questioned the reliability of the quality certificate at the port of loading and on
the basis of numerous other reports argued that the quality of wheat was
below that which was contractually agreed. The dispute was heard by an
arbitral tribunal constituted under the aegis of the Grain and Feed Trade
Association (GAFTA) which was seated in London. The arbitral tribunal found
in favour of the buyer and awarded damages against the seller. The award of
the tribunal was unsuccessfully appealed by the seller before the Board of
Appeal of the GAFTA – as provided for under the GAFTA Arbitration Rules.
An application by the seller before the High Court of Justice in London to set
aside the award under section 68 of the English Arbitration Act 1996 was also
rejected.

The buyer sought to enforce the award before the Delhi High Court. The seller
opposed enforcement, contending that the arbitral tribunal had placed greater
reliance on quality certificates prepared by non-contractual agencies than on
the quality certificate prepared by the agency nominated under the contract.
The seller argued that the arbitral award delivered on this basis was contrary
to the express provision in the contract and enforcing such an award would be
contrary to the public policy of India. The High Court refused to interfere with
the award on the basis that it was not expected to re-determine questions of
fact in enforcement proceedings. The seller appealed against this decision to
the Supreme Court of India. The seller relied on Phulchand and argued that
the court had the power to consider the merits of a case where there was a
patent illegality in the award, even in enforcement proceedings. On the other
hand, the buyer relied on the decision of the Supreme Court in Renusagar
Power Co Ltd. v General Electric Company – which predated the decision
in Phulchand but was delivered by a larger bench than Phulchand – and
argued that patent illegality cannot be a ground to challenge an award in
enforcement proceedings especially in the context of foreign awards where,
as laid down in Renusagar, the relevance of Indian law is more limited.
A three-judge bench of the Supreme Court speaking through Justice RM
Lodha (who was interestingly also the author of the decision in Phulchand),
overruled Phulchand and accepted the contentions of the buyer. The court
held that during setting aside proceedings, the arbitral award is not yet final
and executable, and this is in contradistinction to a challenge during
enforcement where the award is final and binding. On this basis the court
refused to apply the definition of the term ‘public policy’ as applied in the
context of setting aside proceedings and as laid down in ONGC v Saw
Pipes in the context of a challenge during an enforcement action. The court
followed the decision in Renusagar and held that enforcement can only be
opposed on grounds of public policy where it is contrary to:
 Fundamental policy of Indian law;
 The interests of India; or
 Justice and morality.
In particular, the court expressly declined to allow a challenge on the grounds
of ‘patent illegality’. Since the challenge raised by the seller required
reconsideration of the merits of the case and re-looking at the facts, the court
declined to entertain the challenge and allowed enforcement.

In 2014, the two Supreme Court decisions, Associate Builders and Western
Geco, once again tangled the interpretation with respect to the meaning and
scope of the term ‘public policy’ under Section 34 of the Act.

ONGC v. Western Geco case [7]:

It was widely anticipated that the three-judge bench hearing this case, which
had the opportunity of reviewing the interpretation of ‘public policy’ under S. 34
of the 1996 Act might overrule the wide interpretation given by Saw Pipes,
which was a decision of the division bench. However, the larger bench of the
Supreme Court referred to the Saw Pipes ratio, and went a few steps further
to add additional vague terminologies.

In order to appreciate the decision, a brief factual background would be

helpful. In this case, the Appellant (ONGC) invited offers for the upgrade of a
seismic survey vessel for which one of the main items required were
‘steamers’ fitted with ‘hydrophones’. Western Geco (the Respondent)
submitted a bid offering to supply steamers with hydrophones of U.S. origin.
The Respondent did not deliver the vessel back to the Appellant by the due
date and, notably, made an application for obtaining a licence from the U.S
authorities for the sale of US origin hydrophones only after the due date. Due
to certain problems with obtaining licence from U.S. authorities for the sale of
the hydrophones, the Respondent intimated to the Appellant that it would not
be able to supply U.S. origin hydrophones and proposed to replace the same
with Canadian hydrophones a few months later. After several months of
communication between both parties, the Appellant acceded to the
replacement on the condition that the Appellant would deduct liquidated
damages and damages for excess engagement of the vessel. The Appellant
accordingly made deductions from the Respondent’s invoice on account of
liquidated damages which the Respondent contended were inflated.

The arbitrator inter alia held that deductions made by the Appellant for delay
after the intimation that Respondent was not seeking to pursue the request for
licence before the U.S. authorities was unjustified. Aggrieved by the award,
the Appellant challenged the award under section 34 of the 1996 Act before
the Bombay High Court, which was rejected. The Appellant then preferred an
appeal before the Supreme Court.

The Apex Court was required to decide whether the award violated the public
policy of India. The Court while agreeing with ratio of Saw Pipes, went a step
further to elaborate the meaning of ‘fundamental policy of Indian law’. It
determined that three ‘distinct and fundamental juristic principles’ form a part
and parcel of fundamental policy of Indian law: first, the court or adjudicating
authority must adopt a ‘judicial approach’ when determining the rights of a
citizen. This implies that it cannot act in an ‘arbitrary, capricious or whimsical
manner’; second, the court or quasi-judicial authority must determine rights
and obligations of parties in accordance with principles of natural justice which
encompasses that the authority deciding the matter must apply its mind to the
attendant facts; and third, a decision which is perverse or so irrational that a
reasonable person could not have reached such a conclusion may not be
sustained in a court of law.

On such expansive interpretation of the concept ‘fundamental policy of India’,

the Court concluded that in the instant case the decision reached by the
arbitrators could not have logically flowed from the proved facts, and that the
tribunal erroneously clubbed the entire period since intimation for holding the
Appellant responsible for the delay. The Court went on to reduce the period
for which the deductions were held to be invalid, thereby partly allowing the
Appellant’s contention.
Associate Builders v. Delhi Development Authority (DDA) [8]:
The latest decision concerning public policy, is the Associate Builders case by
a division bench of the Apex Court. While on facts, the court reinstated the
award set-aside by the lower court, the probably unnecessary and elaborate
exposition of the law in this case has added further fuel to fire in what now
seems to be an ever expanding scope of the public policy ground in India.

In this case, the Appellant entered into a works contract with the Respondent
for construction of a residential colony. There was a delay in the completion of
the project which the Appellant attributed to the Respondent. The arbitrator
held that the entire delay of 25 months was attributable to the Respondent.
Aggrieved by the decision, the Respondent challenged the award before a
Single Judge of the High Court of Delhi where the application was dismissed.
An appeal was preferred to the Division Bench where the judgment of the
Single Bench was set aside. The Appellants then came before the Supreme
Court in appeal against the order of the Division Bench.

The Court in Associate Builders not only referred to Saw Pipes and
Renusagar, but also relied on the Western Geco decision. It further elaborated
on the concept of fundamental policy of Indian law, interest of India, justice,
morality and patent illegality as held in several prior decisions and in particular
further expounded the position of law laid down in Western Geco. As a result,
Associate Builder accelerated the expansion of challenge jurisdiction, despite
having upheld the award on facts.

The Court however, also stated that “while applying the public policy test to an
arbitration award, it [the court] does not act as a court of appeal and
consequently errors of fact cannot be corrected” and that “the arbitrator is the
ultimate master of the quantity and quality of evidence relied upon when he
delivers the arbitral award.” Whilst on one hand, the Apex Court held that the
Division Bench had exceeded its jurisdiction by interfering with a possible view
of the Arbitrator; on facts the Apex Court upheld the award based on its own
assessment that the arbitrator’s views were indeed correct.

How foreign Awards were impacted?

The ONGC vs Saw Pipes decision has been widely criticized in domestic and
international arbitration circles for opening the door for courts to review an
arbitral award on merits. By overruling Phulchand case, the Supreme Court in
Lal Mahal case successfully saved at least the foreign awards from such
scrutiny at the stage of enforcement by clarifying that the ‘patent illegality’ test
of Saw Pipes was inapplicable. Therefore, the storm surrounding the concept
of public policy which focussed mostly on the concept of patent illegality came
to be restricted only to domestic arbitrations.

However, Western Geco case and Associate Builders case have, by

expanding the meaning of “fundamental policy of India”, given seasoned and
unruly litigants a fresh impetus to delay enforcement of foreign awards. By
introducing judicial principles applicable in the sphere of public law into the
concept of ‘fundamental policy of Indian law’, Western Geco has created more
opportunities for parties to resist enforcement of an award under the ambit of
public policy. This is further aggravated by the decision in Associate Builders
case where the Court has not only affirmed such an expansive interpretation
to the words ‘fundamental policy of India’ but also elaborated and expanded
the concepts of ‘justice’, ‘interest of India’ and ‘morality’.

Although Western Geco and Associate Builders were decisions under Section
34 of the 1996 Act , it became apprehensive that they would apply with equal
force to cases under Section 48 of the 1996 Act (enforcement of foreign
award) which were then governed by the Renusagar case test which inter alia
includes ‘fundamental policy of India’.

How domestic Awards were impacted?

The Parliament incorporated Section 34 of the Model Law without any

changes into the 1996 Act. Unlike other statutes from several different
jurisdictions which subject domestic awards to a different rigour of scrutiny
from that of foreign awards, the 1996 Act makes no such distinction. Yet, by
judicial pronouncements, and in particular, the ONGC v. Saw Pipes case
introduced ‘patent illegality’ test, domestic awards came to be subjected to a
far greater judicial scrutiny and review than was perhaps contemplated by the
legislature.
With Western Geco case having further expanded the test of ‘fundamental
policy of India’ the problem was somewhat compounded. Western Geco case
has been a setback as it is further damaging as a precedent since the court
set aside the award on its own interpretation of the facts in issue. On the other
hand in Associate Builders case, although the Court acknowledged that
examination of the facts is beyond limits in a challenge proceeding, the Court
saved the award on its de novo determination that the award was correct – a
determination which the Court made based on its own assessment of the facts
and arguments.

Western Geco case opened the floodgates for further scrutiny and review of
domestic arbitral awards on merits by introducing well-established judicial
principles having a long line of precedents in common law, into the concept of
‘fundamental policy of Indian law’.

Changes made by the Arbitration and Conciliation

(Amendment) Act, 2015

The Arbitration and Conciliation (Amendment) Act, 2015 made major

amendments to section 34. These changes were suggested by the 246th
Report of the Law Commission of India on Amendments to the Arbitration and
Conciliation Act, 1996 of August 2014 and the Supplementary to the 246th
Report of the Law Commission of India on Amendments to the Arbitration and
Conciliation Act, 1996 of February 2015. These amendments were aimed at
restricting Courts from interfering with arbitral awards on the ground of “public
policy.” Accordingly, the amendment added “Explanation 2” to section 34(2) as
well as Section 2A. Explanation 2 of section 34(2) states –

“For the avoidance of doubt, the test as to whether there is a contravention

with the fundamental policy of Indian Law shall not entail a review on the
merits of the dispute.”

Thus, this explanation significantly pared down the scope of interpretation

supplied in ONGC v Western GECO. Because of this amendment, Courts
would no longer be able to interfere with the award passed by the arbitrator.
The explanation makes it expressedly unambiguous that in no way would a
Court be entailed to review the award on merits of the dispute. Similarly,
section 2A also curtails the scope of interpretation of “patently illegal” as
propounded in ONGC v Saw Pipes. Section 2A states –

“An arbitral award arising out of arbitrations other than international

commercial arbitrations, 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 law or by reappreciation of evidence.”

Thus, Courts can no longer reappraise evidence or set aside awards merely
because the Arbitral Tribunal has made errors when dealing with the same. It
is interesting to note that the amendment did not make any changes to the
interpretation of “justice and morality” as explained in Associate Builders.

Recent trends in Arbitration judgments on ‘Public Policy’

after 2015 Amendment

Since the amendment, Courts have refrained from giving a wider interpretation
to “public policy” or interfering with the merits of the case. In the November
2017 Supreme Court Judgment of Venture Global Engineering LLC and Ors v
Tech Mahindra Ltd. and Ors [9] the Court observed –

“The Award of an arbitral Tribunal can be set aside only on the grounds
specified in Section 34 of the AAC 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.”

An arbitral award dated 3 April 2006 (the Award) was passed against Venture
in an arbitration initiated by Satyam directing Venture to transfer its interest,
i.e., 50% of the shares in a Joint Venture Company (JVC) to Satyam (the
other shareholder holding 50%). Thereafter, Venture filed a civil suit before the
City Civil Court, Secunderabad which was transferred to the City Civil Court
Hyderabad (Trial Court). Venture sought a declaration that the Award was
illegal and without jurisdiction, and requested an injunction restraining Satyam
from enforcing the Award.

In 2009, Mr Raju gave statements in writing, where he admitted that the

balance sheets of Satyam had been manipulated to inflate its profits to the
tune of INR 7,080 crores. Thereafter, Venture filed an application to bring the
additional facts on record. This application was allowed by the Trial Court and,
upheld by the SC. Thereafter, the petition filed by Venture under Section 34 of
the Arbitration and Conciliation Act, 1996 (the Act) was heard and the Trial
Court set aside the Award. The award was set aside primarily claiming that
the Award was induced by "fraud" and could not be enforced in India in light of
the financial irregularities committed by Satyam, including violations of
numerous provisions of the Companies Act, 1956, the Foreign Exchange
Management Act, 1999 (FEMA), etc.
In the appeal filed by Satyam before the Andhra Pradesh High Court (HC), the
Trial Court's decision was over-ruled, and the Award was restored. The HC
held that the "fraud" was yet to be proved and the Trial Court, despite having
held that the Award had violated public policy, had given no finding as to how
public policy had been violated. The HC also ruled that the action taken by
Venture to challenge the Award in India was barred by "issue estoppel".
Aggrieved by this Judgement, both parties filed appeals to the SC. The appeal
filed by Satyam was against the finding of the HC that the Trial Court had
jurisdiction to examine the legality of the Award, whereas the appeal filed by
Venture was against the restoration of the Award.

Venture's Arguments: The contentions put forth by Venture before the SC

were as follows:
 The Award is rendered illegal by suppression of the fraud played by Mr.
Raju, which if known would have led Venture to terminate the
agreement dated 20 October 1999 between Venture and Satyam
(Contract) first and subsequently claim damages;
 Mr Raju's confessional statement was a "notorious fact" and known to
the world, hence, judicial notice of it could be taken by the courts
without any further evidentiary proof; and
 The Award is vitiated because of fraud, misrepresentation and
suppression of facts pertaining to Mr Raju's acts in the affairs of
Satyam, all of which had a direct bearing on the case and in view of
which, enforcing the Award would be in conflict with the public policy of
India.
Satyam's Arguments: The contentions put forth by Satyam before the SC were
as follows:
 Mr Raju's alleged crimes had not yet been proved and in view of the
ongoing proceedings in relation to the same, it would not be appropriate
to deem the same as proved;
 There is no causative link between the allegedly suppressed facts and
the facts of the current case and accordingly, the award cannot be said
to be vitiated on the grounds of fraud; and
 Mr Raju's acts were in any case only pertaining to the affairs of Satyam
and had no significance when examining the legality of the arbitral
proceedings and the Award under Section 34 of the Act.

HELD:
As the Bench hearing the matter had differing views, the matter was referred
to a larger Bench. A brief discussion on each of their rulings is set out below:
Justice Sapre's view: Justice Sapre listed the following three questions for
consideration:
 Whether the acts of Mr. Raju in the affairs of Satyam, as admitted by
him in his confessional statement, amounted to misrepresentation/
suppression of material facts and, if so, whether they could be made the
basis of seeking quashing of the Award on the ground that it is against
the public policy of India under Section 34(2)(b)(ii) read with Explanation
(1)(i)(ii) and (iii) of the Act?
 Whether Mr. Raju's acts had any causative link with the facts pertaining
to the arbitration at hand?
 If the above questions are answered in the affirmative, whether it would
constitute a ground for setting aside the Award?
Justice Sapre set aside the Award on the following grounds:
 Citing the definition of "fraud" as enumerated in Kerr on Fraud and
Mistake, 7th Edn., suppression of Mr. Raju's acts amounted to a fraud
played in the arbitration. Relying on SC's Judgement in Onkar Nath &
Ors. v Delhi Administration1, the judicial notice of the confessional
statement of Mr. Raju could be taken without any more formal proof
since neither the letter nor the signature on it had been disputed in any
proceeding.
  In addition, since both Satyam and Venture were 50% shareholders in
the JVC, any unlawful act by Mr. Raju vis-à-vis Satyam's affairs would
also have a direct impact on the JVC. By this, there was indeed a
causative link between Mr. Raju's acts and the present matter. Further,
the suppression of facts by Mr. Raju and ergo, Satyam, deprived
Venture of their right to terminate the Contract earlier, as well as plead
the same grounds before the arbitration.
 The above points vitiated the entire arbitral proceedings, rendering the
Award illegal and against the public policy of India.
 Justice Sapre also accepted the Trial Court's finding that Satyam had
violated the provisions of FEMA, using the finding to bolster the
argument that the Award was against the public policy of India.
 On the question of whether Venture's challenge to the Award was
barred by issue estoppel, Justice Sapre relied on Masud Khan v State
of Uttar Pradesh to hold that the principle of "issue estoppel" only
applied in the context of criminal proceedings. Since arbitral
proceedings are in the nature of civil proceedings, it was held that the
HC had erred in applying the same to dismiss Venture's Application
under Section 34 of the Act.
Justice Chelameshwar's view:
In his order, Justice Chelameshwar listed the following two questions for
consideration:
 Whether the Award was against the public policy of India on the ground
of violation of the FEMA, etc?
 Whether the Award was vitiated by fraud / suppression of material facts
by Satyam?
Justice Chelameshwar upheld the Award on the following grounds:
 Justice Chelameshwar noted that Venture had pleaded that the Award,
insofar as it directed Venture to transfer shares to Satyam at book value
(rather than fair value) was in violation of the Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000. He noted that this contention was
merely accepted at face value by the Trial Court, without mention of the
relevant regulation or the scheme of FEMA or any other reasoning.
Further, the Trial Court had erroneously set aside the Award because
there was lack of discussions on the fair value of the shares, how that
fair value was to be determined or any similar relevant question, as well
as lack of reasoning relating to the public policy ground.
  Even if Mr. Raju's acts were relevant to the arbitration proceedings,
whether the same were "material facts", the non-disclosure of which
could be said to have "affected the Award by fraud", was required to
have been dealt with by the Trial Court. The lack of any discussion
regarding this aspect in the Trial Court's order rendered the same
erroneous.
 As far as the appeal filed by Satyam was concerned, since the same
was re-agitating the question of the applicability of Part- I of the Act to
an international commercial arbitration, it was an indirect challenge to
the decision of the constitutional bench of the SC in Bharat Aluminium
Company v Kaiser Aluminium Technical Services Inc3, which could not
be allowed.
Comment
Despite being inconclusive, the Judgement is a welcome addition to the Indian
jurisprudence on fraud and its role in judicial proceedings. We await the larger
bench's Judgement in this matter as it would shed further light on SC's view
on fraud vitiating an arbitration award.

A similar view was also taken in the judgment of Sutlej Construction v. The
Union Territory of Chandigarh [10]

The Appellant was awarded a contract by the Respondent of earth excavation

work and loading into trucks and unloading for purposes of widening of the
approach road Sukhna Choe on Chandigarh Kalka Road, Chandigarh vide
memo No. 201 dated 5.1.1996. The earth was required to be lifted from the
first source near the regulator and carried through trucks from Golf side
initially. Suffice to say that the Respondent alleged that the Appellant did not
fulfil its obligations while the Appellant, on the other hand, alleges that what
was required to be done by the Respondent to facilitate execution of the
contract was not so done. This resulted in the Respondent terminating the
contract on 12.11.1996. The parties put forth their respective claims before the
arbitrator. The Appellant laid the claims while the Respondent filed the
counterclaims. The arbitrator made and published an Award dated
18.12.2013, partly allowing the claim of the Appellant while rejecting the
counterclaims of the Respondent. The Respondent aggrieved by the Award
filed objections Under Section 34 of the Arbitration & Conciliation Act, 1996
(hereinafter referred to as the 'said Act'), which were, however, rejected by the
learned Additional District Judge, Chandigarh vide order dated 23.7.2013. The
Respondent thereafter preferred an appeal before the Punjab & Haryana High
Court and the said appeal succeeded whereby the Award was set aside
opining that the contract was rightly terminated, and the Department rightly
imposed the penalty.

It has been opined by Supreme Court that when it comes to setting aside of
an award under the public policy ground, it would mean that the award should
shock the conscience of the court and would not include what the court thinks
is unjust on the facts of the case seeking to substitute its view for that of the
arbitrator to do what it considers to be "justice." (Associate Builders v. Delhi
Development Authority MANU/SC/1076/2014 : (2015) 3 SCC 49).

It was also opined by Supreme Court that the approach adopted by the
learned Additional District Judge, Chandigarh was, thus, correct in not getting
into the act of re-appreciating the evidence as the first appellate court from a
trial court decree. An arbitrator is a chosen Judge by the parties and it is on
limited parameters can the award be interfered with. (Sudarsan Trading Co. v.
The Government of Kerala MANU/SC/0361/1989 : (1989)1 SCR 665; Harish
Chander & Co. v. State of U.P. MANU/SC/0985/2016 : AIR 2016 SC 4257 and
Swan Gold Mining v. Hindustan Copper Limited MANU/SC/0849/2014 :
2014(4)Arb LR 1(SC)).

It also opined that the learned single Judge ought to have restrained himself
from getting into the meanderings of evidence appreciation and acting like a
second appellate court. In fact, even in second appeals, only questions of law
are to be determined while the first appellate court is the final court on facts. In
the present case the learned single Judge has, thus, acted in the first appeal
against objections dismissed as if it was the first appellate court against a
decree passed by the trial court.

These judgments show that the recent trend of interpretation of “public policy”
has been one where the Courts have refused to examine the arbitral awards
on merits, thereby upholding the legislative mandate of “minimal intervention
of the Courts in the arbitral process” as reflected by the changes brought by
the Arbitration and Conciliation (Amendment) Act, 2015.

Conclusions
The interpretation of ‘public policy’ has shuttled across various interpretations
and in absence of proper laid down definition, the subordinate courts have
given arbitrary and whimsical decisions in past as to its definitive meaning.
There have been reported instances where mere violation of an Indian Law
has been labelled to be against Public Policy. The ‘patent illegality’ test
opened a Pandora’s Box for litigants as in multiple adjudications, after
thorough examination and proper application of rule of law by the arbitral
tribunals, the courts again started sitting on the merits of the case which
delayed justice and vitiated the whole purpose of arbitration.

While there is a need for a developed and broad version of the concept of
public policy in the realm of contractual relationships, the same may not be
extended to the laws governing arbitrations. The process of arbitration is a
method of alternate dispute resolution that has become increasingly popular in
the settlement of commercial disputes on account of speed and efficiency.
The process of arbitration centres on the guarantee of minimal interference by
the judiciary. Thus, to further the object of arbitration and to increase its utility
in expediting the dispute settlement in the country, it is essential that not only
is the concept of public policy interpreted in a restrictive sense, but that it has
clearly and distinctly defined parameters, whose ambiguities do not lend them
to conflicting interpretations in dispute resolutions. The recent amendments to
the Arbitration and Conciliation Act 1996, are clearly positive and pragmatic in
furtherance of this pro-arbitration stance and it is hoped that they will advance
the dispute resolution in speedier and efficient manner in the years to come.

[3] [1994 SCC Supl. (1) 644]

[2] (2003) 5 SCC 705

[3] (2011) 1 ARBLR 244 (Delhi)

[4](2011) 10 SCC 300

[5] Civil Appeal No. 5085 of 2013

[6] (2014) 9 SCC 263

[7] 2014 (4) ARBLR 307(SC)

[8] XXV YBCA 987 (2000) 989

[9] 473 U.S. 614; 105 S.Ct.3346; 87 L.Ed.2d. 444 (1985); 24 ILM 1064 (1985)

[10] Parsons & Whittemore Overseas Co, Inc v Societe Generale de l’Industrie
de Papier, and Bank of America, 508 F.2d` + 969 (2d. Cir. 1974)

[11] 2017 SCC Online SC 1272

[12] [2017] 14 SCALE 240 (SC)