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This article is written by Achal Jain, pursuing a Certificate Course in International Commercial Arbitration and Mediation from LawSikho.

Introduction 

This century has noticed a shift in the way courts operate while discharging their duties. Earlier, it was a common practice that the courts had an exclusive authority and jurisdiction to adjudicate the matters concerning commercial disputes, but initially they were cynical towards arbitration and had an approach to guard their powers. However, now it is time to pave the way where there is less intervention of courts and where the courts should reconcile themselves to the destiny that private administered justice of issues should stay. 

The urgent need for an alternative mechanism to the traditional court system cannot be exaggerated enough. The need is real, especially for developing countries where it can be witnessed easily that they have an enormous backlog of unresolved disputes and cases before the domestic courts of such countries, and they do not have the mechanism to dispose of them expeditiously. Looking at exigency in the international commercial sector, the commercial disputes possessing international component, arbitration and other ADR mechanism has taken over the functions of a traditional law system practiced till date. 

Arbitration Law vis-a-vis Public Policy

In most of the states, it is asserted that law governing the disputes concerning international commerce should be independent of the national law of the State. One of the core features of arbitration and other ADR mechanisms is to give the party autonomy wherein parties to dispute are free to check and control nearly every aspect of the arbitral proceedings.  

Many practitioners of arbitration and academics have strongly asserted for reduction in intervention of judiciary in the arbitral process. In some countries it has been witnessed that the legislators have shown consideration to these calls and amended their country’s arbitration laws with a view to restrict judicial intervention in commercial disputes and  resolving them by the way of arbitration (for instance the Indian Arbitration (Amendment) Act, 2015, wherein Section 48 of the aforementioned act demystifies the scope of public policy towards the international commercial arbitration. Unexpectedly, there has not been much resistance to this movement. Any attempt that was made to resist such a trend had to face widespread criticism at the global platform. Another consequence that came to light was the public policy exception given under the New York Convention, to sanction refusal of enforcement of arbitral awards which eventually is of no use. 

There are various advantages of arbitration such as expediency, confidentiality, cost efficiency and the option of appointing arbitrators who are expert and specialized in their fields. Importantly, it also provides that the courts should not restrict the parties to choose the appropriate forum and mechanism for settling their disputes, but at the same time putting the public policy exception in between, will render the mechanism completely ineffective which would become counterproductive eventually. 

There are certain circumstances where judicial oversight might play a crucial role. Nonetheless, the National courts are duty bound to find a fine balance between uplifting party autonomy and making sure that the basic principles of the legal system are respected. In such circumstances where enforcement of an arbitral award would be erroneous, patently illegal or unfairly prejudices a party on account of unfair practice of the arbitral tribunal, there may arise a need for the rendered award to be set aside on the grounds of public policy. 

In certain cases, judicial oversight may become a viable option to overcome dangers which are innate to arbitration. There are some cases where stakes are exceedingly high, and arbitrators whose decisions are near to immune from review often act as lawyers in their private capacity following which they may be tempted to serve their personal interest by rendering favor to their potential clients instead of serving the interest of justice and the economically weaker parties, who might not get another chance to participate in arbitration at all. 

The UNCITRAL (United Nations Commission on International Trade Law) Model Law and the New York Convention recognizes the demand for judicial intervention and oversight, which appreciates the public policy exception as a ground for refusing enforcement of awards rendered in international arbitrations. However, the scope of public policy exception has been diminishing in most of the States. Moreover, the graph of usage of this exception has been diminishing so much that it is no longer a tool that may protect the interests of weaker parties. 

Public Policy in Domestic and Foreign Arbitrations

Domestic Policy and International Public Policy

In domestic arbitration, the national courts apply only local public policy as the arbitration is linked to only that particular nation. While considering national public policy in this case. It is different in the context of international public policy because globally there are different national public policies that are admissible in different states. So, in such circumstances, the national courts have to apply the public policy by taking into consideration the international aspect. To conclude, the international public policy comprises particular rules of a nation’s domestic public policy that are also applied internationally.

Substantive Public Policy and Procedural Public Policy

The arbitrator cannot surpass interpreting the public policy. The award can be against the public policy of substantive or procedural causes. Substantive public policy has been made for the subject matter of the award whereas procedural public policy is related to the mode of the process by which the matter was adjudicated. So, the principles of morality and justice can be an issue under the substantive public policy. Other principles which infringe the state substantive public policy are the rules serving the state’s social, political or economic interest.

Effect on Investment and Growth

It has been widely noticed and a well established fact that public policy provision in International Commercial Arbitration affects the investment and growth of the economy of a nation. It is quite evident, when most of the foreign parties lose the case then the other party challenges the award on the grounds of violation of the public policy of the state. Such kind of cases are commonly seen in India- when the domestic party is about to lose a case from a foreign party then it files a case in national courts for challenging the award rendered in the arbitration. This thing does not find a rationale for the foreign companies and they try to avoid performing any future transactions with the same company or any other company in India. Therefore such practices in the long run moderates or limits the foreign companies to trade or regulate transactions with domestic companies in the country.

Public Policy Exception in Indian Context

The term public policy has appeared twice in the Arbitration and Conciliation Act, 1996. Firstly, it is mentioned under Section 34 which elucidates that a foreign award can be set aside if it violates the public policy. Secondly, it is mentioned under Section 48 which provides for guidelines regarding the refusal of enforcement of foreign awards if they are in contravention of the public policy of India.   

Initially, in India, the first matter that came up for the interpretation of public policy as regard to foreign arbitration was in Renusagar Power Co. Ltd. v. General Electric Co. (Renusagar”).  In this case the definition of the term “public policy” was defined as given under Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 which is in pari materia to Section 48 of the Arbitration Act. The Hon’ble Supreme Court of India, in this case held that the term public policy has to be interpreted in the narrow sense such that it is able toreduce the violation of Indian laws that would alone not induce the restriction of public policy and some more potent issues are required. Afterwards, it was also noted that the refusal of enforcement of a foreign award would be done on the ground that it is in contravention to the public policy of the state when it is contrary to (i) fundamental policy of Indian law; or (ii) interests of India; or (iii) justice or morality.

The public policy exception as a necessary tool for ethical commerce

In international arbitration the importance and need of public policy exception should not be underestimated. It is the only way that serves as the last supporter of state oversight against the private control of the arbitral process across the world. There are various states that limit the use of the public policy exception and gives it a narrow understanding, such jurisdictions have been considered as pro-arbitration States, whereas some States that fail to narrow down the scope of public policy exceptions are looked down as States that are arbitration unfriendly and need to change their process so that they can adhere to the commercial reality around them or they exceedingly lack in the execution or proceedings. However, this might lay down some pressure on local courts of the state to reduce judicial oversight over the arbitral process. This approach led to a complete amendment of the arbitration act in India which took place in 1996 for becoming an ‘arbitration friendly’ State, where the legislature clearly defined the meaning of public policy, and took away this right from the courts in the country and vested it in the hands of private players. 

Conclusion

The public policy exception plays an important role, especially in countries that are developing and working their way forward to protect the integrity of their legal system and prevent parties from circumventing judicial scrutiny by applying the curtain of arbitration clauses. There have also been few instances in which there was a chance that contracts executed especially in developing countries were influenced by some level of corruption. In some cases, it was also observed that there is a lack of arbitral institutions in many States that are accountable for their procedures and conduct. Therefore, it is very important for local courts of the State to draw a fine line between addressing agreements that are vitiated by fraud or corruption and concomitantly protecting the interests of foreign investors. The public policy exception can be a valuable tool which should be used proactively but with great caution for dispensing the interests of justice. 

Once the concept of public policy was famously described as an “unruly horse’, now this concept is on its way to be tamed. India is working hard and aiming to establish itself as an arbitration hub, which is quite evident from its efforts to be in line with international standards of enforcement. India in the pre-amendment regime may have faced many ups and down in the process of enforcement of foreign awards, but the scope of rejection of international arbitration awards has been narrowed down post 2015 amendment. India has come a long way and, in this process, it has developed jurisprudence on public policy which is an attractive affair for arbitrations happening globally. 

References

  1. https://www.mondaq.com/india/trials-appeals-compensation/958028/tracing-the-journey-of-the-public-policy-exception-to-enforcement-of-arbitral-award .
  2. http://cilj.co.uk/2017/02/07/a-case-against-taming-the-public-policy-exception-in-the-context-of-21st-century-international-arbitration/
  3. https://www.thelawpoint.com/post/tracing-the-journey-of-the-public-policy-exception-to-enforcement-of-arbitral-award
  4. https://www.ela.law/Templates/media/files/Misc%20Documents/Enforcement-of-Arbitral-awards-Public-Policy.pdf

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