Changing contours of Public Policy in India: Un-blinkering the unruly horse

Deciphering the ever-changing dimensions of public policy, the author outlines how, in India, it has remained the best defence and the last resort for the losing party.
Changing contours of Public Policy in India: Un-blinkering the unruly horse
Tariq Khan, Public Policy

The words of J Burrough aptly justify the unpredictability of the interpretation of the term ‘public policy’. He says,

Public Policy is an unruly horse where once you stride on it you do not know where it’s going to take you.”

For decades, India has been perceived as a jurisdiction which is not arbitration-friendly and where enforcement of foreign arbitral awards is problematic. As per section 34(2)(b)(ii) of the Arbitration Act, 1996 an arbitral award can be set aside by the court if it is against the “public policy of India”. Further, under section 48(2)(b) enforcement of a foreign award may be refused if it is in conflict with the “Public Policy of India”.

Though more developed, arbitration-friendly jurisdictions have adopted a restrictive approach and interpreted the term ‘public policy’ narrowly, in India, it has remained the best defence and the last resort for the losing party.

The history and evolution of ‘public policy’ in India can be summarized as follows:

October 17, 1993: In Renusagar Power Co. Ltd. v. General Electric Co, the Supreme Court held that enforcement of a foreign award would be refused if it is contrary to i) the fundamental policy of Indian law, ii) the interests of India and iii) justice or morality.

April 17, 2003: In Oil and Natural Gas Co. v. Saw Pipes, the Supreme Court widened the scope of public policy and held that enforcement of a foreign award would be refused if it is contrary to patent illegality, in addition to the grounds enumerated in Renusagar.

The Court also observed,

"… 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…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."

May 12, 2006: In McDermott International Inc v. Burn Standard Co. Ltd, the Court held that the role of the courts is only supervisory in nature, and they can review the arbitral award only to ensure fairness and not otherwise. Further, it was observed that patent illegality must go to the root of the matter, and that the public policy violation should be so unfair and unreasonable as to shock the conscience of the court.

August 11, 2010: In Venture Global Engineering v. Satyam Computer Service Ltd. & Anr, the Supreme Court was to consider whether the concealed facts after the delivery of an arbitral award could be used to challenge the award under Section 34 of the 1996 Act. The Court held that if the facts were material or central or had a causative link to the passing of such award, only in such cases can such an award be questioned on grounds of public policy and set aside as being affected or induced by fraud.

October 12, 2011: In Phulchand Exports Ltd. v. OOO Patriot, the Supreme Court relied on the additional ground of ‘patent illegality’ under ‘public policy’ laid down by it in Saw Pipes and observed that this test should also be followed in foreign awards under Section 48(2)(b) of the Act. 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, which although dealt with a separate statute, had in fact interpreted a provision identical in text and intention to that of Section 48.

July 3, 2013: In Shri Lal Mahal Ltd. v. Progetto Grano Spa, the Supreme Court made an attempt to limit the scope of judicial intervention in the enforcement of foreign awards. It was observed that the guidelines laid down in Renusagar with reference to Section 7(1)(b)(ii) of the Foreign Awards Act for setting aside a foreign award would equally apply to the scope of Section 48(2)(b) and thus, the enforcement of foreign award would entail refusal on the grounds of it being contrary to public policy of India only on the basis of the three categories expounded upon in the Renusagar case.

September 4, 2014: In ONGC Ltd. v. Western Geco International Ltd, the Supreme Court was deciding the question of what would constitute the ‘Fundamental policy of Indian Law’. At the outset, the Court observed that the decision in Saw Pipes does not elaborate upon that aspect. While elaborating the term, the Court laid down the following principles:

  • Judicial Approach: Any Court, tribunal or any other authority must apply its judicial mind and refrain itself from acting in an arbitrary or whimsical manner while making any determination that would affect the rights of citizens or have civil consequences.

  • Principles of Natural Justice: Each court and all quasi-judicial authorities are obligated to follow these principles while determining the rights of parties. Equal opportunity to be heard should be provided to the parties to the dispute.

  • Wednesbury’s principle of reasonableness: Where a decision by a court of law or a tribunal is so irrational that it may be beyond any reasonable person’s comprehension, then the same shall not sustain in a court of law.

November 25, 2014: In Associate Builders v. Delhi Development Authority, the Court held that the judicial approach to any arbitral award requires such an award to be fair, reasonable and objective. The Court clarified the scope of interpretation of the most basic notions of morality and justice. It was observed that an arbitral award would be set aside on the ground that it is contrary to “justice” only if it shocks the conscience of the Court.

2015 Amendment to the Arbitration Act: The 2015 amendment clarified that an award can only be set aside on the ground that it is against the public policy of India if, and only if, – (i) the award is vitiated by fraud or corruption; (ii) it is in contravention to the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. It was clarified that the ground of "patently illegality" to challenge an award cannot be taken in international arbitrations and the same will be available only in domestic arbitrations.

November 1, 2017: In Venture Global Engineering LLC and Ors. v. Tech Mahindra Ltd. and Ors, relying on the Associate Builders case, the Court construed that violating the provisions of the Foreign Exchange Management Act (FEMA) would amount to patent illegality, and thus, violation of public policy. In this case the Supreme 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 can it examine the merits of claim by entering in factual arena like an Appellate Court."

February 18, 2019: In MMTC v. M/s Vedanta Ltd, the Court held that under Section 34 of the 1996 Act, the position of the court is that it does not sit in appeal over the arbitral award and may interfere on merits on the limited grounds provided under Section 34(2)(b)(ii) i.e. when the award doesn’t coincide with India’s public policy. However, the position changed after the 2015 amendment, whereby Explanation-1 was inserted to Section 34(2). Interference under Section 37 could not go beyond the already laid down restrictions under Section 34.

May 8, 2019: In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, the Supreme Court noted that after the 2015 amendments to the Act, the interpretation of the term 'public policy' has been narrowed down. The Court clarified that under no circumstance can any court interfere with an arbitral award on the ground that justice has not been done in the opinion of that court. This would be an entry into the merits of the dispute, which is contrary to the ethos of Section 34 of the 1996 Act.

March 12, 2020: In Steel Authority of India v. Primetals Technologies India Pvt. Ltd, the Delhi High Court held that construction and interpretation of the terms of contract between two parties is to be solely adjudged by the arbitrator and must not be interfered with by the courts under the scope of public policy. The courts, while applying the test of 'public policy' to an award, does not act as a court of appeal.

April 22, 2020: National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S.A. This judgment came when India was on the path of becoming a hub of arbitration. The Supreme Court considered that the defense of ‘public policy’ under Sec.7(1)(b)(ii) of the Foreign Awards Act was construed narrowly. While setting aside the award, the Court again widely interpreted the term 'public policy' by relying on the guidelines laid down in Renusagar.

May 11, 2020: In South East Asia Marine Engineering and Constructions Ltd. v. Oil India Limited, the Supreme Court held that in cases where the interpretation of the clause, as suggested by the arbitral tribunal, is perverse, then the same cannot be sustained.

September 16, 2020: In Government of India v. Vedanta Limited, the Court relied on the interpretation of public policy given in Renusagar case and held that 'public policy' comprised the fundamental policy, interests of India, justice and morality. The Court further held that erroneous interpretation of a contractual provision by the tribunal cannot be a ground to challenge the award on merits.

The Way Forward

The pro-enforcement stance taken by the Supreme Court in the Vedanta judgment will go a long way in making India a preferred arbitration hub and concomitantly encourage a foreign venture climate. The government must adopt an approach which instills confidence in foreign companies to invest in India. Also, in order to actually achieve the dream of India of becoming a global arbitration hub, the courts would have to embrace the pro-arbitration system wherein they follow limited intervention when it comes to enforcement of foreign arbitral awards, as envisioned in the Vedanta judgment.

The author is a Principal Associate at Advani & Co. He would like to thank Animesh Upadhyay and Harshita Kakar for their assistance.

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