Author: Utkarsh Srivastava
Advocate-on-Record, Supreme Court of India
Topic : Public Policy of India: When an Arbitral Award can be held to be against the Public Policy of India?
An Arbitral Award can be challenged on the grounds laid down in Section 34(2), (2-A) and (3) of the Arbitration and Conciliation Act 1996 (herein after referred to as “1996 Act”)
Section 34(2)(b)(ii) states that an arbitral award may be set aside by the Court if the Court finds that the Arbitral Award is in conflict with the “Public Policy of India”.
Vide Arbitration and Conciliation (Amendment) Act 2015, the 1996 Act was amended and Explanations (1) and (2) were added to Section 34(2)(b)(ii) of the 1996 Act. The Explanations provide that an arbitral award is in conflict with the Public Policy of India, only if the making of such an award is either,
- Induced by or affect by fraud or corruption, or
- Is in contravention of Fundamental Policy of Indian Law, or
- Conflicts with most basic notions of morality or justice.
It further provided that in order to test as to whether an arbitral award is in contravention of Fundamental Policy of Indian Law, the court shall not entail a review on the merits of the dispute.
Apart from above, vide the Amendment Act 2015, another Sub-section (2-A) was added which provides that 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 the law or by reappreciation of evidence.
The term “Public Policy” is not statutorily defined but is a part of common law. It has been used in Section 23 of the Contract Act 1872, which provides that the consideration or object of an agreement is lawful when it is not opposed to public policy.
Chitty on Contracts (Vol. 1, 35th Edn., Para. 9) defined the scope of Public Policy as,
“Objects which on grounds of public policy invalidate contracts may, for convenience, be generally classified into five groups: first, objects which are illegal by common law or by legislation; secondly, objects injurious to good government either in the field of domestic or foreign affairs; thirdly, objects which interfere with the proper working of the machinery of justice; fourthly, objects injurious to marriage and morality; and, fifthly, objects economically against the public interest, viz contracts in restraint of trade…..”
Hon’ble Supreme Court of India in, Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986) 3 SCC 156, observed that the expressions ‘Public Policy’, ‘Opposed to Public Policy’ or ‘Contrary to Public Policy’ cannot be defined precisely. It was held that what is good for the public or in public interest or injurious or harmful to the public has varied from time to time. It was observed that with time, transactions change, circumstances changes and with every change, the definition of the Public Policy changes. The courts have from time to time changed the definition of ‘Public Policy’ or created a new head. Like, the terms morality, justice and patent illegality were added to the 1996 Act for defining the scope of the expression “Public Policy”.
In Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, while dealing with a Foreign Award in context of Foreign Exchange Regulation Act, it was observed by the Hon’ble Supreme Court of India that the doctrine of Public Policy is open textured and flexible. It was held that contravention of law alone will not attract the bar of Public Policy but something more than contravention of law is required. It was held that enforcement of a Foreign Award could be refused on the ground of being contrary to the Public Policy, if such enforcement is contrary to,
- Fundamental Policy of India Law, or
- The interests of India, or
- Justice or Morality.
These terms have been added by the legislature in Section 34(2)(b)(ii) by amending the 1996 Act vide Amendment Act 2015.
In ONGC v. Saw Pipes Ltd. (2003) 5 SCC 705, it was held that an award which, on the face of it, is patently in violation of statutory provisions cannot be said to be in public interest. It is likely to affect the administration of justice. While holding that an award can be set aside if it is so unfair and unreasonable that its shocks the conscience of court being against the Public Policy, it was also pointed out that the illegality must go to the root of the matter. If illegality is trivial in nature, the same cannot be said to be against the Public Policy.
In Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, Hon’ble Supreme Court for the first time had the occasion to interpret the expression “Fundamental Policy of Indian Law”. It was held that post amendment the expression ‘Public Policy of India’ would mean ‘Fundamental Policy of Indian Law’. In addition to justice and morality, an additional ground was added to the expression ‘Public Policy’, i.e. ‘Patent Illegality’ under Sub-Section (2-A) of Section 34 of the 1996 Act. Principles laid down regarding Public Policy and Patent Illegality in the said case are:
- Patent Illegality should go to the root of the matter which does not include mere erroneous application of law.
- Mere contravention of substantive law of India is no longer a ground available to set aside an award.
- Construction of terms of Contract is primarily for an arbitrator to decide unless the construction is not fair or reasonable to make.
- If the arbitrator deals with matters not allotted to him, he commits an error of jurisdiction and the same is covered under Patent Illegality.
- Finding based on no evidence or by ignoring the evidence would be perverse and also covered under Patent Illegality.
Recently, Hon’ble Supreme Court of India in OPG Power Generation Pvt. Ltd. v. Enexio Power Cooling Solutions India Pvt. Ltd. & Anr. 2024 INSC 711 has thus observed that,
“36. What is clear from above is that for an award to be against public policy of India a mere infraction of the municipal laws of India is not enough. There must be, inter alia, infraction of fundamental policy of Indian law including a law meant to serve public interest or public good.”
…
52. The legal position which emerges from the aforesaid discussion is that after the ‘2015 amendments’ in Section 34 (2)(b)(ii) and Section 48(2)(b) of the 1996 Act, the phrase “in conflict with the public policy of India” must be accorded a restricted meaning in terms of Explanation 1. The expression “in contravention with the fundamental policy of Indian law” by use of the word ‘fundamental’ before the phrase ‘policy of Indian law’ makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country. Without intending to exhaustively enumerate instances of such contravention, by way of illustration, it could be said that (a) violation of the principles of natural justice; (b) disregarding orders of superior courts in India or the binding effect of the judgment of a superior court; and (c) violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law. However, while assessing whether there has been a contravention of the fundamental policy of Indian law, the extent of judicial scrutiny must not exceed the limit as set out in Explanation 2 to Section 34(2)(b)(ii).
…Emphasis Supplied
Hence, it can be concluded that expression public policy has evolved from time to time and as on date, for the purposes of arbitrations, mere contravention of law is not enough to set aside the award under Section 34 (2)(b)(ii) of the 1996 Act. In order to set aside the award, it must fall under either of the following fundamental principles,
- The award is induced by or affect by fraud or corruption, or
- The award is in contravention of Fundamental Policy of Indian Law, or
- The award conflicts with most basic notions of morality or justice, or
- The award is patently illegal.