Arbitration and Conciliation Act
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This article is written by Millia Dasgupta, from OP Jindal Global University. This article goes into the history of judicial intervention and arbitration, Section 34, and the new 2021 Amendment. 

Introduction 

The whole point of Arbitration is to settle disputes outside the purview of the courts. Arbitration can be defined as “a process of settlement of the dispute, between two or more parties, the intent of which is conveyed, either through a contract or agreement, and the parties agree to resolve their disputes, by the means of mediation or conciliation.” When parties consent to have their disagreement or dispute handled by a third party with authority and that decision is to be made binding on the parties, it is said that arbitration has taken place. An ‘award’ is the decision by an Arbitration Tribunal which is considered to be as important and binding as a decision given by a court of law. 

But despite the entire point of Arbitration is to settle disputes outside the purview of the courts, there are some instances where the court needs to intervene. It is hard to pinpoint the exact areas where the judiciary can intervene due to the fact that arbitration law is continuously evolving. 

Laws in place

Arbitration Act, 1940

The Arbitration Act, 1940 was based on the English and Welsh Act of 1934. It was Section 30 of the Arbitration Act of 1940 that governed setting aside awards and judicial intervention. This Section was highly disputed and was severely criticized. In Guru Nanak Foundation v. Rattan Singh (1981), the court criticized how complex and tedious proceedings were under the act and how there is always a legal trap waiting for the unwary parties. All proceedings would be challenged in court and such a provision made “lawyers laugh and legal philosophers weep”.

Arbitration and Conciliation Act, 1996 – liberalization of the Indian economy

There was a dire need to revamp India’s dispute resolution if India wanted other countries to do business with them when they opened up their economy. Thus, the legislature in order to modernize the legal framework repealed the act of 1940 and replaced it with the Arbitration and Conciliation Act 1996. The act was based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, and one of the main focuses of this Act was to reduce judicial intervention. 

Section 5 defines the extent to which judicial intervention can happen. Judicial intervention can happen before, during, and after arbitration. Sections such as Section 8 (Power to refer parties to arbitration) and Section 27 (Assistance in taking evidence) provide clarity on how judicial intervention can happen. Section 34 of the Act talks about how the courts can intervene when a tribunal has given a decision and how to put aside an award from an Arbitration Tribunal. 

Section 34 of the Arbitration and Conciliation Act, 1996

Pre-2015 Amendment – public policy is an unruly horse

Section 34 of the Act sets the procedure for setting aside an arbitration award. The grounds on which an award could be set aside were stated in Section 34(2)(a) prior to the 2015 amendment. Some of the grounds on which awards could be set aside were parties under some incapacity or the tribunal was not composed according to the parties. Section 34(2)(b) of the 1996 Act prior to the 2015 amendment gave grounds for setting aside awards if the matter could not be settled through means of arbitration or the award conflicted with public policy.

Section 34(2)(a) was precise and there was no scope for courts to widen the interpretation. On the other hand, Section 34(2)(b) included very wide terms such as ‘public policy’ which could be interpreted in many ways. Public policy in simple terms means the overall good and interests of the public good. Thus, from this definition, it is easy for the courts to interpret awards as being in conflict with ‘public good’, thus widening their scope for intervention. 

Public policy was not defined anywhere in the Act or in any other law. Justice Burrough defined public policy as an unruly horse because it was difficult to define. Indian courts have also called it an unruly horse. In cases such as Renusagar and Saw Pipes, Indian courts tried to give public policy some sort of structure. 

Renusagar Power Co. Ltd. v. General Electric Co

In Renusagar (1993), the courts held that awards that violate provisions under the Foreign Exchange Regulation Act 1973 shall be considered against public policy. This is because the Act was enacted in the interest of national security and economic benefit. The court also stated that public policy is limited to the fundamental policy of Indian law, the interest of India, and the principles of justice or morality. 

Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd – widening the scope of public policy

In Saw Pipes (2003), the court held that with regards to Section 34 the judiciary was similar to an appellate court or in other words a court of revision. The court also added another ground to public policy which was patent illegality. Patent illegality can be defined as a decision by the arbitrator that is so perverse and irrational that no reasonable person would reach it.

Such an interpretation opened up the floodgates to litigation as courts had more grounds on which they could intervene in Arbitration Awards. Many courts recognized the faults with saw pipes judgment but still had to abide by it because of the principle of stare decisis. Many critiqued Saw Pipes as a step backwards as it went against the main reason why the 1966 Act was drafted in the first place. 

Oil & Natural Gas Corpn.Ltd v. Western Geco International Ltd- Wider Interpretation 

In ONGC (2014), the court while citing the Saw pipes case stated that there was no decided meaning of “Fundamental policy of Law”. They state that the Fundamental policy of law should include three heads. 

  • Duty to adopt a judicial approach.
  • Adhering to the principles of natural justice.
  • A perverse decision that no reasonable person would have arrived at the same.

Thus the ONGC case not only widened the scope of public policy but gave the judiciary more grounds to intervene. The court also held that if the decision of the arbitration tribunal resulted in a miscarriage of justice, the award could be set aside or even modified. By further widening the scope of judicial intervention, the courts had defeated the purpose of arbitration by reducing its impact. 

Associate Builders v. Delhi Development Authority

In Associate Builders (2014), the court while relying on judgments such as Renusagar, Saw Pipes, and ONGC, the court stated that it was important that courts give due weightage to the arbitration awards before setting them aside. They upheld the criteria that would result in the violation of public policy (as stated in the ONGC case), i.e-

  • Contrary to the fundamental policy of Indian law;
  • Contrary to the interests of India;
  • Contrary to justice and morality; or
  • Patently illegal

With regards to a fundamental policy of Indian law, they stated that this aspect of public policy would be violated if a fundamental policy of India was violated. Such as the Foreign Exchange Legislature or orders from a superior court. 

With regards to the interests of India, the court stated that this ground “concerns itself with India as a member of the world community in its relations with foreign powers“.

With regards to justice and morality, the courts can only set aside an award on this ground if it “shocks the conscience of the court”. They further explained by stating that such an award wouldn’t necessarily be illegal but should “not be enforced given the prevailing environment of the day”. 

With regards to patent illegality, the court stated that the court could put aside an award on the following grounds. 

  • Contravenes substantive law of India. The illegal matter should not be of a trivial nature. 
  • Contravenes the Arbitration Act itself.
  • The tribunal fails to decide the dispute in accordance with the contract. 

While this case inspired courts to pass more pro-arbitration decisions, there was still scope for overreaching judicial intervention. Such as in cases where factual errors in the award would prove that the arbitrator’s award was whimsical and could be thus set aside on the grounds of patently illegal.  

2015 Amendment 

The 2015 amendment made major changes to the scope of judicial intervention, especially Section 34. These changes were based on the suggestions made in the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996. The Law Commission had considered the negative outcomes of the ONGC and Associated Builders case. They stated that the following cases eroded faith in arbitration proceedings, reduced India’s popularity as a destination for commercial arbitration, increased investor concern to the efficiency and speed of arbitration, and increased judicial backlog. In their eyes, there needed to be serious amendments. 

The Amendment added Explanation 2 [Section 34(2)] as well as Section 2(a). Explanation 2 of Section 34 stated that if the courts wish to set an award aside on the grounds of ‘violation of the fundamental policy of Indian Law”, it can not review the merits of the dispute. Bypassing this amendment, the law set down by ONGC v Western GECO was curtailed and courts could no longer interfere with a decision passed by an arbitrator. 

Similarly, Section 2(a) curtails the law set down by ONGC v Saw Pipes with regards to “patently illegal”. The Section lays down that the award may be set aside if the court finds a prima facie patent illegality in the award. The court can not set aside the awards merely because of an erroneous application of law or by reappreciation of evidence. Thus, awards can no longer be set aside on the basis that the arbitrator made errors when dealing with evidence. The amendment made no changes to the interpretation of justice and morality set out in Associate Builders. 

Ssangyong Engineering & Construction Co. Ltd. v. National Highway Authority of India Limited

Ssangyong Engineering (2019) is an important case post the 2015 amendment. The case confirmed that the broad definition of ‘fundamental policy of Indian law’ given in Western GECO does not hold true under Section 34 after the 2015 amendment. They relied on the 246th Report of the Law Commission of India and the supplement. The documents made suggestions on how the previous Act can be amended to ensure that “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed. They defined the grounds of public policy as follows:

  • Contravenes Fundamental Policy of Indian Law –  The award should not be in contravention of factors such as laws protecting the national interest, disregard for orders from superior courts, and disregard for principles of natural justice. 
  • Contravenes Morality and Justice- Upheld the ratio in the case of Associate Builders where the award should shock the conscience of the court in order to contravene morality and justice. But while deciding its validity, the courts should look at the prevailing environment of morality. 
  • Patent illegality- It is the illegality that affects the root of the matter. But it should not include issues such as erroneous application of the law by the arbitration tribunal. However, this ground can be invoked if
    • No reasons are given for the reward.
    • The arbitrator did not give the reward in compliance with the contract. 
    • The arbitrator decides questions beyond a contract or his terms of reference.
    • A perverse award is given based on no evidence, or overlooking vital evidence, or based on documents taken in as evidence without informing the parties. 

2021 Amendment 

The 2021 amendment has added Section 36(3) of the Act which pertains to the enforcement of the arbitral award. It has given courts the power to grant an unconditional stay on awards if the award is induced by fraud or corruption or the making of the award was made through fraud or corruption. 

Criticisms of the Amendment

Critiques state that this has undone the work done by the 2015 amendment. The implementation could lead to excessive judicial interference. This is opposite to what the Indian legislature has envisioned for arbitration in India in the past. This provision can also put more strain on courts and increase pending cases. The amendment can also be used as a tool for harassing the other parties and to delay arbitration proceedings. There was no need for such addition as there were already provisions in the act to deal with awards induced and made through fraud and corruption. 

Fraud and corruption in the agreement 

According to the 2015 amendment, the proper forum to file a complaint of fraud and corruption was the arbitration tribunal. The tribunal was competent to evaluate comprehensive and voluminous evidence and conduct an in-depth analysis of the agreement and the contract. If the parties were not happy with the decision of the tribunal, they could file an application to set aside the award under Section 34. If they were not happy with the decision of the court, they could file an appeal under Section 37(1)(c) of the Act. Thus, there was no need for this amendment.

Fraud and corruption in the making of the award

Section 34(2)(b) was placed to set aside an award by the court if the award was induced by corruption under the condition that if the award was against public policy. If they were unsatisfied with the decision, they could appeal against it under Section 37(1)(c) of the Act. The previous Act laid out grounds under which parties could move under Section 34 but the new amendment does not seem to layout any such grounds. Thus the amendment merely puts an additional layer of judicial supervision without any adequate safeguards. 

Conclusion 

The main aim of arbitration is to make sure there is as little judicial intervention as possible. With evolving jurisprudence, we can see that the courts have many times tried their best to reduce judicial intervention. But it seems with the new amendment, the courts have taken a few steps back. In the following case laws and discussions, the article puts forth sets down in what scenarios the judiciary has the power to intervene and when they do not. 

References 

 

 


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