The public law overhang in arbitration: Does the public sector trigger differential judicial oversight?

On paper, India appears arbitration-friendly. The Arbitration and Conciliation Act, 1996, based on the UNCITRAL Model Law, was enacted to make arbitration a final, efficient and autonomous method of commercial dispute resolution, subject to narrowly circumscribed judicial supervision. Over 3 decades, the Supreme Court repeatedly affirmed party autonomy, finality of awards and limited judicial intervention.

Yet, a second, less predictable line of decisions has emerged. These decisions commonly involve large public infrastructure projects, substantial claims against the State or State-owned entities and judicial interventions that would be surprising in purely private commercial disputes.

This article argues that the tension is institutional rather than doctrinal: constitutional courts in India, accustomed to supervising public administration and protecting the public exchequer, sometimes carry public law instincts into commercial adjudication when the State is a party. The result is not an explicit re-writing of arbitration law, but a gradual shift in how courts apply its limits. A special challenge for Indian arbitration jurisprudence is maintaining the conceptual separation between public law adjudication and private commercial adjudication where the State is a litigant.

The statutory design

The 1996 Act rests on the premise that arbitral awards are intended to be final and binding. Section 34 limits grounds for setting aside an award to a few procedural and substantive defects: incapacity, invalid arbitration agreement, denial of opportunity to present one’s case, decisions beyond the scope of reference, defects in tribunal constitution, non-arbitrability and awards contrary to “public policy of India.” The 2015 Amendment narrowed public policy with two important explanations: Explanation 1 confines “public policy” to awards induced by fraud or corruption, awards contrary to the fundamental policy of Indian law, or those that offend the most basic notions of morality or justice. Explanation 2 clarifies that examining “fundamental policy” does not entail a merits review.

Section 34(2A), also inserted in 2015, recognised “patent illegality” as a ground for setting aside domestic awards but expressly disallowed setting aside on mere erroneous application of law or re-appreciation of evidence. Section 37 provides limited appellate oversight of the Section 34 exercise. The appellate court’s role is to test whether the lower court correctly applied its constrained supervisory jurisdiction.

Judicial review vs appellate review

Indian arbitration jurisprudence has tried to delineate the boundary between legitimate supervisory review and impermissible appellate scrutiny. 3 core propositions have emerged: (1) arbitral tribunals are the primary fact-finders and interpreters of contract; (2) court review protects the integrity and fairness of the arbitral process rather than correcting every tribunal error; and (3) finality of awards is a legislative objective courts must honour.

Renusagar Power Co Ltd v. General Electric Co (1994) established an early narrow construction of “public policy,” signalling judicial restraint. ONGC v. Saw Pipes (2003) marked a significant departure by expanding “public policy” to include “patent illegality” that could reach errors in legal propositions or incorrect application of law. ONGC is a public sector behemoth. The Saw Pipes judgment opened the door to broader judicial engagement with awards’ merits even where the 1996 Act sought finality. In ONGC Ltd v. Western Geco International Ltd (2014) the Supreme Court was persuaded by the State enterprise to allow judicial intervention in an award that “no reasonable person would have arrived at.” 

The 2015 Amendment and its aftermath

The 2015 Amendment sought to restore legislative intent by restricting merits review. It made patent illegality a statutorily defined ground limited to domestic awards and excluded mere errors of law or re-appreciation of evidence. Associate Builders v. DDA (2015) and later decisions narrowed the Western Geco “no reasonable person” test and confirmed that the 2015 changes circumscribed earlier expansive readings.

Ssangyong Engineering v. NHAI (2019) clarified that patent illegality must go to the root of the award. Examples include no reasons, impossible contract construction, decisions beyond terms of reference, or perverse findings unsupported by evidence. Subsequent cases such as MMTC v. Vedanta, (2019); UHL Power v. HP (2022); Konkan Railway v. Chenab Bridge Project, (2023) reiterated that Section 37 cannot be used to substitute the appellate court’s view for a plausible tribunal interpretation. Where tribunal reasoning is plausible and the Section 34 court confines itself to statutory limits, the appellate court must not displace the tribunal’s decision.

DMRC v. Delhi Airport Metro Express (DAMEPL) (2024) starkly illustrates institutional tensions. DAMEPL’s concession was terminated and an arbitral tribunal awarded several thousand crores in its favour. The award survived Section 34 review, but was set aside by a division bench under Section 37 for patent illegality relating to the tribunal’s treatment of certification from the Commissioner of Metro Railway Safety (CMRS). The Supreme Court initially restored the award, emphasising that courts cannot re-examine merits under Sections 34 or 37 and reiterating the limits on judicial intervention. A review petition was dismissed.

Unexpectedly, a curative petition was later entertained by a three-judge bench, which recalled the earlier order and restored the division bench’s decision setting aside the award. The curative bench reaffirmed all settled principles limiting judicial interference, but nonetheless proceeded to a detailed merits analysis - examining contract clauses, the meaning of “effective steps” in the concession agreement, the CMRS certification and the factual record - before concluding patent illegality.

This sequence presents a paradox. Curative jurisdiction, conceived in Rupa Ashok Hurra v. Ashok Hurra (2002) as an exceptional procedural remedy to prevent gross miscarriage of justice (for example, judgments delivered without notice or by judges with undisclosed conflicts), was used here to revisit the merits of a commercial arbitration that had already passed through Sections 34 and 37 and Article 136 scrutiny. The curative exercise diluted statutory finality not by altering the doctrine, but by applying constitutional supervisory power where the State faced enormous financial exposure.

Why did this happen? Once the State or a public sector undertaking faces liability running into thousands of crores, concerns for the public exchequer and the wider public consequences naturally surface in constitutional courts. Those concerns can subtly change adjudicative instincts: a bench may feel compelled to prevent what it perceives as an unreasonable imposition on public finances, even if doing so requires a merits re-examination. The result is that an ostensibly private commercial dispute is reviewed through a public law lens when the State is the respondent.

Paradip Port Authority v. Paradeep Phosphates Ltd (2026) demonstrates the institutional pattern in a setting that did not even invoke the 1996 Act. The dispute concerned a long-term berth-use agreement (1985) under which the Port unilaterally increased tariffs in 1993. The parties avoided statutory arbitration and adopted an internal dispute resolution mechanism outside the 1996 Act. An arbitral authority under that mechanism ordered refunds up to March 1999 and left later tariff fixation to the Tariff Authority for Major Ports (TAMP). The appellate authority under the mechanism affirmed the award; TAMP declined to revise later tariffs; the Orissa High Court dismissed challenges. By the time the Supreme Court heard the matter, it had passed through contractual, regulatory and judicial fora.

Although Sections 34 and 37 were inapplicable, the Supreme Court reopened the controversy and set aside the decisions of the contractual authority and the appellate authority. The Court framed its reasoning as jurisdictional: tariff fixation is entrusted by statute to a specialised regulator and private agreements cannot displace the statutory scheme. The matter was remitted to the competent statutory authority after 3 decades.

The Supreme Court exercised robust supervisory scrutiny when substantial public interest and revenue were implicated. This illustrates the phenomenon that when government revenue or public authority interests are at stake, the institutional instinct to ensure correct administration of law and protection of public finances becomes prominent.

The cases discussed show a consistent institutional tendency. Constitutional courts performing dual roles - protecting public administration and adjudicating private commercial disputes - face normative conflicts when the State is a contracting party. Public law instincts that prioritise the public exchequer, administrative correctness and systemic consequences can migrate into commercial adjudication.

This migration manifests in 3 interrelated ways:

(a) Re-opening finality: Awards or contractual determinations that would be final in private disputes are more readily revisited if they impose large liabilities on the State.

(b) Expansive use of constitutional powers: Article 136, Article 142 or curative jurisdiction may be pressed into service to correct perceived injustices affecting public finances, even where the statutory arbitration framework intended finality; and

(c) Jurisdictional reframing: Courts may recast commercial issues as jurisdictional or regulatory questions, thereby justifying fresh scrutiny by reference to statutory mandates.

These tendencies do not necessarily reflect judicial error; they reveal the institutional values of constitutional courts. The problem arises when such instincts consistently override the legislative choice favouring finality and autonomy in arbitration. That risks creating asymmetry: commercial claimants recover against private respondents under a regime of finality, while analogous claims against public entities remain subject to repeated judicial reappraisal.

Restoring doctrinal clarity helps, but is not sufficient. The 2015 Amendment and subsequent case law have trimmed judicial power and reaffirmed finality, yet institutional behaviour in hard cases persists. Several measures may help preserve the arbitration bargain without ignoring legitimate public law interests.  First, courts should apply Section 34, Section 37 and the 2015 explanations rigorously, resisting invitations to treat public financial exposure as a ground for merits review.  Second, recourse to Article 142 curative petitions in commercial arbitration disputes are an affront to finality and undermine public confidence in impartial adjudication. Third, if India is to emerge as an arbitration hub, our constitutional court judges require to be retrained on the advantages of hands-off approach.  Episodic judicial meddling in public sector enterprise cases undermines the growth of a robust arbitration culture.

The central issue is not the scope of judicial power in the abstract; constitutional courts must retain the tools to prevent gross injustice and protect the public interest. The critical question is how those powers are exercised when the State appears before tribunals as a contracting party. If constitutional powers are used more readily where the State faces large liabilities, arbitration’s promise of finality and party autonomy will erode unevenly.

The solution lies in institutional fidelity to the legislative choice embodied in the 1996 Act: treat the State, when it contracts, as a commercial party entitled to the same finality as any private litigant. Institutional arbitration with strong guardrails, in preference to ad hoc arbitration, may encourage constitutional courts to put aside their administrative law tool kit when examining awards. Preserving this parity will require judicial restraint, clearer doctrinal boundaries and procedural safeguards that reconcile legitimate public law concerns with the statutory goal of an autonomous and final arbitral system. Only by maintaining that separation can arbitration in India remain predictable, efficient and attractive to commercial actors - public and private alike. 

Shyam Divan is a Senior Advocate practicing before the Supreme Court of India.

The author thanks Advocate Angela John for her contributions in the preparation of this article.

A version of this article first appeared in "Vikalp" (New Delhi: Law & Justice Publishing Co), a commemorative volume by Maadhyam, and is published here with its permission.