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This article is written by Dnyaneshwari Patil, from RTMNU Babasaheb Ambedkar College of Law, Nagpur. In this article, she discusses the development of arbitration laws in India, the judicial review of the arbitral awards, and the term ‘public policy’ under Section 34 and its evolution. 

Introduction 

When laws were not formed, the judiciary system was not organised, principles were not set then the people resorted to arbitration for settlement of disputes. Arbitration is preferred by the people as it is less expensive than litigation. It provides for speedy trials and settlement of the disputes is more informal and simpler compared to courtroom trials. The arbitration process is successful if there is minimum judicial interference, the key principle of arbitration is less judicial interference. It can only be accomplished if the judiciary has no significant impact on the arbitral awards. How much the court should interfere in the arbitration process is the question to be answered. Too much interference would hinder the proceedings and development of the arbitration. Too little might lead to the infringement of the principle of natural justice. 

Traces of arbitration laws at the international level

According to biblical theory, King Solomon was considered the first arbitrator when he resolved the dispute between two mothers who were claiming to be the true mother of the child. King Solomon proposed to cut the baby in half and hand over the halves to each mother. The true mother protested and was ready to relinquish the child to the other mother rather than seeing her child get killed. The king witnessed the compassion of the mother and declared her to be the true mother. Thus he managed to find out the truth. The father of Alexander the Great, Phillip the second also used arbitration as a means to resolve the territorial disputes aroused from the peace treaty with the southern state of Greece in around 337BC. Around 600 BC, the disputes between Athens and Megara regarding the possession of the island salamis were referred to the five spartans who in turn allotted the island in favor of Athen.

The Sumerian Code of Hammurabi from Babylon also mentioned the duty of the sovereign in resolving disputes through arbitration. Then the arbitration laws during the times of Roman civilization were affected by the Roman laws and also affected those nations with whom they traded. In England, the earliest recorded evidence of arbitration law traced back to 1698. In India, the notion of arbitration could be found in the treatise named “Brihadaranyaka Upanishad”. It elaborated the arbitrary bodies which are known as a system of Panchayat. The disputes were settled by the tribunals, consisting of wise men, chosen by the parties. Thus, the arbitration processes can be traced back to the ancient world. 

Development of arbitration law in India

The first attempt to introduce arbitration law in India by the British East India Company, Act IX 1850 was promulgated. This was followed by multiple acts but were found inexpedient therefore the Arbitration Act, 1940 was introduced, which was based on English Arbitration Act, 1934. The Act of 1940 was comprehensive on the subject but only dealt with domestic awards and left out the enforcement of international awards. Thus, the Arbitration Act 1940, was not effective in achieving its purpose, hence, this ineffectiveness was expressed in the case Guru Nanak Foundation vs Rattan Singh & Sons (1981), where justice D.A. Desai voiced those complex court proceedings impelled jurists to find an alternative resort, which is less expensive, more informal, more effective and less time consuming, to dissolve disputes avoiding the procedural claptrap, and this took them to Arbitration Act 1940. But the way proceedings are conducted under this Act and are challenged before the court without an exception has made the lawyer laugh and the philosopher weep. The proceedings have become highly technical and prolonging at every stage due to legal traps. Thus, the alternative resolution for solving disputes has been clothed, by the decision of the court, with ‘legalese’ of unforeseeable complexity.

Nearly half a century after finally acting on the criticism, India adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, 1985, and enacted the Arbitration and Conciliation Act, 1996.

This Act not only covered domestic awards but also international arbitration. Thus to ensure a comfortable business environment and attracting foreign investment after post-economic liberalization this act was promulgated with the intention that it would curb the delays and court interference in the arbitration proceedings.

The Arbitration and Conciliation Act, 1996

The principle of minimal interference

According to Section 5 of the Act, the court should not intervene unless there is a clear provision mentioned in Part I of the Act 1996. This limits and defines the court’s role in arbitration. It is the duty of the court to review the proceedings if there are any irregularities in the process but resist reviewing the merits of the award. It emphasizes the importance of the autonomy of the party and restricts the role of the judiciary by ensuring that the court’s duty is limited to assisting the arbitral process and should not interfere in it. 

Section 34 of the Act

According to Section 34, the application to set aside the arbitral award. This is based on Article V(2) of the New York Convention. The party assailing the award can set aside the decision if they proved the grounds mentioned under Section 34. Hence, the court could interfere in the arbitration process after passing off the award. All the provisions mentioned under Section 34 are limited, precise, and do not leave any scope of open-ended expression, except the term “ public policy of India” used in Section 34(2)(b). Thus the expression “public policy” has always been the debate and scope of judicial intervention. 

Public policy

There is no specific definition of public policy in the Act 1996 or any other laws. The term is vague and it is difficult to give a definite meaning and therefore it is always open to judicial scrutiny. Justice Burrough in one of his judgments describes public policy as an unruly horse. Until you astride it you will never know where it will carry you. There are some landmark judgments where the Supreme Court tried to define the meaning of public policy:

  • Renusagar Power Co. Ltd vs General Electric Co. (1993), the Supreme Court held that violation of Indian laws is just not adequate to revoke the enforcement of the award. The term public policy should be comprehended in the sense the public policy is applied in private international law. The Supreme Court restricted the meaning of the public policy, and the enforcement of the award would be contrary to public policy if it is contrary to  (i) fundamental policy of Indian law; (ii) the interest of India; or (iii) justice or morality. Thus the award in violation of the statute Foreign Exchange Regulation Act, 1973, which was for the benefit of national economic interest was in violation of the public policy.  
  • Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd (2003), in this the Supreme Court widened the meaning of the public policy. The court held that if the award is in violation of the statutory provision of India then it is against the public interest. An award that is in the error of law would hamper the administration of justice and it is against public policy. Hence the enforceability of the award could be revoked on the ground of “patent illegality”. Thus any error of law will attract the bar of public policy and give the court the chance of reviewing the legal basis and increasing its interference. 
  • Oil & Natural Gas Corpn.Ltd vs Western Geco International Ltd,(2014), in this, following the path of Saw pipes judgment the Court ruled that, if the arbitrator made inference which is prima facie wrong, or left out inference which should have been made then the award is open to challenge before the court. Any perverse or irrational award would be set aside, if the arbitrator’s finding is such that a “no reasonable person would have arrived at it ” then the same would be revoked. 
  • Associate Builders vs Delhi Development Authority (2014), the Supreme court held that “the fundamental public policy of India” would include:

1) not taking orders from the superior court,

2) judicial approach,

3) principle of natural justice.

The SC held that the award would be set aside if it is found to be perverse. Thus the principle of perverse includes, a) if the findings are based on no evidence, b) ignores vital evidence, c) the tribunal takes something irrelevant while arriving at the decision. 

  • Bharat Aluminium and Co. v. Kaiser Aluminium and Co. (2012) in short known as BALCO, in this the Supreme Court held that Part I of the Act would not apply to Part II of the act. Under this part I would not apply to international commercial arbitration, thus the court could not entertain an application under Section 9 for interim relief, in international arbitration which falls under part II. 

The Arbitration and Conciliation, Act 2015 (Amendment )

The 246th Law Commission Report dealt with the expansion of the term public policy by the judiciary. The report suggested amendments in various provisions of the 1996 Act including Section 34. This recommendation was then translated into the 2015 amendment. The commission suggested that the position of the Renusagar judgment should be retained and should be applied in case of all awards passed at international arbitration. It narrowed the ambit of the term public policy by doing away with the “interest of India” as it was capable of vague interpretation especially in case of award arising from international arbitration. The principle of “patent illegality” should be retained but to be construed narrowly than that was done in Saw Pipes case. 

Following the recommendation, the Indian arbitration was amended with the Arbitration and Conciliation Act, 2015 (Amendment). Thus this ordinance reduced the scope of judicial interference by allowing setting aside of international award on the ground of public policy if:

The award is vitiated by fraud or corruption, if it is not in accordance with the fundamental policy of Indian law, if it is against the basic idea of morality and justice. As per Section 34(2A), only Domestic awards can be set aside on the basis of patent illegality. 

On 9 August, 2019, the president gave assent to the new amendment of the Arbitration and Conciliation Act, 2019. It settled the issue of applicability of Arbitration and Conciliation Act, 2015, by introducing Section 87, according to the Shrikrishna committee report, which mentioned that the 2015 Act is applicable to those court proceedings relating to arbitration, which commenced after introducing the 2015 Act and not arbitration proceedings commence initial to the 2015 Act, thus taking away the retrospective applicability of the 2015 Act. However, this Section was struck down in Hindustan Construction Company limited vs Union Of India (2019), in which it was held that the Arbitration and Conciliation Act, 2015 will apply to all the court proceedings, including fresh and pending on, before or after the commencement of the 2015 Act. It was said that the introduction of Section 87 would delay the arbitration proceedings and increase judicial interference thereby defeating the very object of the 2015 amendment. The extent of delay in enforcement of arbitral awards can be witnessed in the case NAFED vs Alimenta, where it took nearly three decades for the Supreme Court to finally come to findings in 2020. 

Conclusion 

India needs to foster trust in the arbitration process. “Let arbitrate and not litigate” needs to be encouraged. It is important to keep a check on the enforcement of the arbitration award in certain cases but it should be limited and the arbitration proceedings should be as independent as possible to encourage an arbitration-friendly country. The court has to decide where to draw a line and a balance has to be maintained so that there is less intervention and at the same time make sure justice has served.   

References 


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