In this blog post, Shruti Sharma, a Legal Associate at BetterPlace Safety Solutions Pvt. Ltd. who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the relation of a public policy with Arbitration.
DEFINITION OF PUBLIC POLICY
The term “public policy” is a vague concept that connotes the matters or issues relating to the public good.
Public policy as its name suggests is a general policy which always has a foundation for the betterment of the general masses.
It is somewhere equal to the “Policy of law” so therefore, any rules, actions, policies, principles against the public interest shall be denoted as “against the public policy”.
Moreover, being a wide term the public policyincludes any actions which are good for the general public.
PRINCIPLES OF PUBLIC POLICY
The flexibility of the public policy is quite obviousas it includes principles of natural justice which is in the interest of the public.
The courts use the principle of public policy wisely in different circumstances. There is a fine line of difference between the rule in consonance with public policy and against the public policy. The principle of public policy is susceptible to changes and adapts according to the dynamic society.
The court and the government considerthe parameters of public policy in a particular contract and then decide whether it is valid or a void to be implemented on the contemplated parties.
Ultimately, whatever leads to destruction of justice, and are against the principles of natural justice comes under the purview of “Public Policy”.
ARBITRATION AND ITS RELATION WITH PUBLIC POLICY
Arbitration is one of the means for alternate dispute resolution where parties can resolve their disputes without the intervention of the courts.
Alternate Dispute resolution is a method where the disputes are resolved by the various techniques like arbitration, mediation and conciliation.
The main purpose of the arbitration is to resolve the dispute expeditiously and cost effectively which shall in turn reduce the number of litigations in the court.
Increase number of cases is the major issue in our present judicial system; the cases are being pending in the court which ultimately leads to an injustice.
So, the arbitration can play an important role and reduce the piles of pending cases by resolving them by an arbitrator. Indian arbitration and conciliation act, 1996 guides and regulates the law of arbitration and major amendments have been made in this regard.
Arbitral award are enforced in the same manner as any other decree of the Indian court. Therefore, the arbitral award is equivalent to any other decree or order passed by the court which has a binding effect on the parties.
There are two kinds of arbitral award i.e. domestic award and International award.
An international award can also be set aside if it is found to be in contravention to public policy. But the term “public policy” has no where being defined as per New York Convention (NYC). Moreover, in the leading case ONGC Ltd vs.Saw Pipes, Supreme Court stated that domestic arbitral award shall not be enforced if it was against the public policy of India. After Saw Pipes case, the court in PhulchandExports Ltd vs. OOO Patriot, the court has reviewed the merits and illegality of the award on the basis of the public policy.
In Shri Lal Mahal Ltd vs. ProgetoGranoSpa, the Supreme Court interpreted differently and widely of the term “Public Policy” and stated that there is a difference in enforcement of an International arbitral award and domestic award. Moreover, refusing the broad definition of public policy; now the enforcement of an international award can only be opposed to public policy under the following conditions:
- The Fundamental Policy of Indian law;
- The interests of India;
- Justice and morality;
- Patently illegal
As per section 48sub clause (2), if any arbitral award is find against or in conflict with the public policy of India then it may be set aside.
An explanation appended to the section states that if the arbitral award was induced by fraud, corruption or in violation of section 75 or section 81 of 1996 Act will be considered as in conflict with public policy.
- FRAUD: It has been defined under Indian Contract Act,1872 under section 17 as a deception or an intention to deceive others, it is a broad term having various meanings. Moreover, it is a cheating with intent to deceive others.
So if the arbitral award has been based on fraud and misinterpretation shall not be executable.
- CORRUPTION: The term corruption is not confined only to the monetary benefits but any kind of biasness and favours by an arbitrator towards any one of the parties. When the arbitrator shows undue favours towards any of the parties will not make the award executable.
Mere suspicion is not a ground for corruption as there should be something more than the mere suspicion for such allegations. In Chouthmal Jivrajjec poddar vs. Ram Chandra Jivrajjec poddar the court stated that just putting up with parties, dining etc shall not be sufficient to vitiate the proceedings but if arbitrators have a private conference with one of the parties on the subject matter of dispute shall vitiate the proceedings and can be a ground to set aside the arbitral award.
Moreover, if an arbitrator is involved in illegal gratification and have received pecuniary inducement then the award shall be liable to be set aside. It has also been provided under section 11 of the arbitration act that the arbitrator shall be an impartial and independent.
In addition to this section 12 of the act also states the ground of challenges where the impartiality and independence of an arbitrator has been mentioned clearly.
THE RENUSAGAR CASE: The Narrower view
The landmark judgment Renusagar Power Co Ltd v. General Electric Co encapsulates section 7 (1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act ,1961.
The Supreme Court stated that this section must be construed in the sense that the principle of public policy must be applied in the field of private international law.
This statement was in context of New York convention. Moreover, it has been provided that the award in contravention with public policy of India shall be set aside under section 34(2) (b) (ii). The legal repercussion of this decision that an ward with patent illegality can be enforced until and unless it is not illegal in contrary to the public policy.
THE ONGC CASE: A BROADER VIEW
In this leading case the Bombay High Court dismissed the petition inter alia on the ground that the award doesn’t come under the purview of “in conflict with public policy”. Therefore, in the appeal proceedings, the Supreme Court held that the term “public policy in India” shall be interpreted in a wider sense under section 34.
In contrast to Renusagar case here the court stated that the term public policy means any matter which is related to the public good and public interests. Moreover, it has also mentioned that apart from three heads provided in Renusagar case, award can be set aside if there is a patent illegality.
Court further said that the award may be set aside if the terms of the award affect the conscience of the court being unreasonable to the society.
INTERNATIONAL LAW AND PUBLIC POLICY
- GENEVA CONVENTION, 1927
In order to enforcement of the foreign arbitral award the following conditions should not be present in it:
- That party was not properly addressed or represented
- That decisions of the arbitration was beyond its scope
- That the award passed has been void in the country
This convention has suffered withdefects because of which the speedy settlement of
dispute by arbitration was hampered.
- NEW YORK CONVENTION, 1958
To remove the defects in the Geneva convention a new York convention was introduced which states that the rules of the territory where award has been passed should be relied upon.
Moreover, irrespective of the country where arbitral award passed; the court shall refuse to provide enforcement of the award under the following conditions:
- Where the subject matter of the dispute is not capable of consider under arbitration under the law of the country
- Where it is in contrary to the public policy of that country.
- UNCITRAL MODEL LAW, 1985
Under UNCITRAL Model Law it has been clearly stated that Public Policy is a vital criteria and has a great impact on the foreign awards.
Arbitration is a means of cheap and fast settlement of dispute but the more court intervention has made Indian arbitration unreliable.
It has been a clearly seen that the judiciary has inclined towards the process of arbitration and in this regard has also provided arbitral awards and arbitration more sanctity and legal binding.
As per 176th report the law commission of India they have added two additional grounds under section 34(1), these two grounds are i) error which is apparent on the face of the award which leads to substantial question of law, and ii) that the award should contain the reasons.
It is true to state that the court would have failed to provide justice to the public and the societal good can be hampered if there have been no modification and development in the public law.