This article is written by Sanjay M Jawle pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Table of Contents
Introduction
I had come across some severe criticism of the Indian judiciary with regard to its inconsistent judgements in matters related to arbitration. Not convinced about the facts behind such criticism, I decided to carry out a detailed study of some of the more important and landmark judgements in matters related to arbitration and find out the truth for myself. I have hereinafter penned down my findings and analysis of the same. In this article, the author has tried to critically analyse various aspects of public policy as it has emerged from the judgements of the Supreme Court elaborately.
Background of public policy in India
At the outset, before we go into the details of public policy, it is important to understand the reason as to why the clause of the public policy of India exists in the first place.
The UNCITRAL Model Law, from which the Arbitration and Conciliation Act, 1996 was adopted, among other reasons provides that an arbitral award may be set aside if the court finds that: (i) the subject matter of the dispute is not capable of settlement by arbitration under the law of this State; or (ii) the award is in conflict with the public policy of the State.
It is a well-settled principle in law that “laws which are in contravention with the ethos and rules of a state or which are in contravention with the principles of natural justice are seldom respected”. While drafting the Model Law, UNCITRAL has taken care to ensure that the fundamental policies, ethos and the laws of the state are respected.
Keeping this in mind, India has also adopted this aspect of the UNCITRAL Model Law and has thereby assured the two disputing parties, both citizens and non-citizens alike, that the principles of equality and justice enshrined and promised to them in the Constitution of India shall prevail and shall not be denied to them by the making and enforcement of any unfair arbitral award in India.
Provisions of the Arbitration and Conciliation Act, 1996
Provisions of Section 34 (2) (b) (ii), for setting aside of an arbitral award, of the Arbitration and Conciliation Act, 1996 clarifies that an arbitral award may be set aside by the court only if the court finds that the arbitral award is in conflict with the public policy of India.
Explanation 1 (i) given therein clarifies that an award is in conflict with the public policy of India, only if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 91 of the Act. Explanation 1 (ii) states that an award is in conflict with the public policy of India, only if it is in contravention of the fundamental policy of Indian law. Explanation 1 (iii) states that an award is in conflict with the public policy of India, only if it is in conflict with the most basic notions of morality and justice.
Provisions of Section 48 (2)(b), on conditions for enforcement of foreign awards, also contains a similar clarification with regard to the public policy of India, though there exists a small difference between the two.
Facts and previous judgements on various aspects of public policy
In Renusagar Power Co v General Electric Co, in 1984, the Supreme Court ruled that a mere violation of the Indian Law would not be sufficient to attract the bar of public policy. Applying the said criteria, enforcement of a foreign award would be refused on the ground of public policy if such enforcement would be contrary to; fundamental policy of Indian law; or the interests of India; or justice or morality.
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On patent illegality
In ONGC v. SAW Pipes, in 2003, the Supreme Court expanded the interpretation of “Public Policy of India” and said that an award that violated the statutory provisions of law or the terms of the contract were indeed in violation of the public policy of India. It went on to term such an award as patently illegal and said that such illegality amounts to a violation of the public policy of India. Such an interpretation, by facilitating in the setting aside of the award, gave the losing party an opportunity to argue its case all over again and thus delayed justice.
In Phulchand Exports Ltd v. O. O. O. Patriot, in 2011, the Supreme Court, by including the expression “public policy of India” in Section 48 expanded its meaning and said that the scope and the intended meaning of the expression under Section 34 and Section 48 were one and the same. Thus, by virtue of this expanded interpretation of the public policy of India along with the interpretation in the ONGC case that a violation of the statutory process of the Indian law or the terms of the contract amounted to a violation of the public policy of India, every foreign award could be challenged in the National Courts and the ends of justice delayed.
In Lal Mahal v. Progetto Grano Spa, in 2013, the Supreme Court held that the expression “public policy of India” would not include the grounds of “patent illegality”. It further clarified that such ground was limited to Section 34 of the Act. Thus, in the Lal Mahal case, the Supreme Court overturned its earlier decision in the Phulchand case.
However, the 2015 Amendment Act clarified that the grounds of ‘Patent illegality’ would not be applicable to International Commercial Arbitrations; i.e. Enforcement of Foreign Awards under Section 48 of the Act, could not be refused on the grounds of ‘Patent illegality’.
In Ssangyong Engg & Construction Co v. National Highway Authority of India, in 2019, the Supreme Court ruled that a decision that is perverse is no longer a ground for challenge under the ‘public policy of India’. However, a perverse decision amounts to patent illegality appearing on the face of the award. A finding based on documents taken behind the back of a party amounts to a decision on ‘no evidence’ and is such a decision is therefore characterized as perverse and is liable to be set aside on the grounds of ‘patent illegality appearing on the face of the award’.
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On the fundamental policy of Indian law
In ONGC v. Western GECO, in 2014, the Supreme Court further expanded the interpretation of the ‘public policy of India’ and elaborated upon the ‘fundamental policy of Indian law’ as comprising 3 separate pillars.
- Judicial approach: It is the duty of the adjudicating authority or the tribunal to adopt a judicial approach and apply its judicial mind.
- Natural justice: Every judicial authority or tribunal should adhere to the principles of natural justice and give both parties equal opportunity to be heard and represented.
- Reasonableness: The judicial authority must ensure that the decision given must not be so perverse or irrational that no reasonable person could have arrived at the same.
The judgment made it open to the courts to set aside or modify the arbitral award as well if the award is in contravention of the fundamental policy of Indian law. Thus, this judgment left it open to the courts to examine the awards on their merits.
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On fraud
Explanation 1 to Section 34 clarifies that an award induced by ‘fraud or corruption’ is in violation of the public policy of India. Fraud is the deliberate or intentional deception of another to gain an unfair advantage. It not only includes willful misrepresentation but also the concealment of facts for gains.
Fraud is a criminal wrong and punishable with imprisonment or fine or both as per the provisions of the Indian Penal Code. In matters related to arbitration, the national courts have taken a varying stance on matters related to fraud over the decades.
In N Radhakrishnan v. Maestro Engineers, in 2010, the Supreme Court held that the allegations of fraud and serious malpractice can be settled only in a court of law and not through private arbitration tribunals. In view of the facts of the case, such allegations should be tried in a court of law which would be more competent and have the means to decide such applicable matters involving various questions and issues raised in the said petition.
In Maharashtra Stage & Cultural Development Corp v. Multi Screen Media Pvt Ltd, in 2013, the Bombay High Court ruled that mere allegations of fraud would not be sufficient to divest the arbitral tribunal of jurisdiction nor does the judgement of the Supreme Court in the N Radhakrishnan case support such a proposition. If mere allegations of fraud were to oust the jurisdiction of the arbitral tribunal, the efficacy of arbitration as an alternative dispute resolution mechanism would be undermined.
In HSBC P1 Holdings (Mauritius) Ltd v. Avitel Post Studioz Ltd, in 2014, the Bombay High Court ruled that when there are allegations of fraud, fabrication and malpractice, the Courts have the discretionary powers to decide whether to refer the matter to arbitration or whether the same should be decided by the Court. The Arbitration & Conciliation Act does not put any bar against the arbitrator from entering and or deciding the issue of fraud, forgery, malpractice etc.
In A Ayyasamy v. A Paramasivam, in 2016, the Supreme Court ruled that unless the fraud in question is of a serious and complicated nature, the jurisdiction of the arbitrator would not be ousted. Mere allegations of fraud simply would not take away the arbitrability of a dispute where a valid arbitration agreement existed.
In Microvision Technologies v. Micro & Small Enterprises Facilitation Council & Anr, in 2016, the Bombay High Court ruled that where the allegations of fraud are not of a serious nature and which did not make the case of a criminal offence or which are not very complex or complicated, can be decided by an arbitrator.
In Venture Global Engg v. Satyam Computer Services Ltd, in 2010, the Supreme Court held that concealment of relevant and material facts that should have been disclosed before the arbitrator is an act of fraud. “Fraus est celare fraudem”– It is a fraud to conceal a fraud. When an award is induced or affected by fraud or corruption, the same would fall within ‘lack of due process of law’ and can be set aside. If the concealed facts disclosed after the passing of the award can have a causative link with the facts constituting or inducing the award, such facts are relevant in a setting aside proceeding and such award may be set aside as affected or induced by fraud.
Analysis and conclusion
In the last 3 decades, the interpretation of the public policy of India has swung like a pendulum from one end of a clock to another and back again. The decision of the Supreme Court in the Phulchand case was overturned two years later in the Lal Mahal case. The decision of the Supreme Court in the Bhatia International case was overturned ten years later in the Bharat Aluminium (BALCO) case. However, there have also been attempts to restore justice and keep it steady and as required under the UNCITRAL Model Law and which many other developed countries have done.
Does the varying interpretation not mean that injustice was done, not only to the award creditors in these cases but also to several others in the ensuing years until the award was finally overturned and given its present-day correct interpretation? Can something be done to prevent such diametrically opposite interpretations of the law in general as well as for Arbitration in particular? Should the interpretations be built-in as a system, in the Acts’ itself so as to prevent or at least minimize the variation in the judgements caused thereby?
Such a step, I believe, will not only prevent the miscarriage of justice but would even reduce the number of appeals and thereby the case load in the various courts, at least in matters related to the question of law.
References
- Renusagar Power Co v General Electric Co; 1994 Supp (1) SCC 644
- ONGC v. SAW Pipes; 2003 5 SCC 705
- Phulchand Exports Ltd v. O. O. O. Patriot; Civil Appeal No. 3343 of 2005
- Lal Mahal v. Progetto Grano Spa ; Civil Appeal No. 5085 of 2013, SC
- Ssangyong Engg & Construction Co v. National Highway Authority of India; Civil Appeal No. 4779 of 2019, SC
- ONGC v. Western GECO; 2014 9 SCC 263
- N Radhakrishnan v. Maestro Engineers; 2010 1 SCC 72
- Maharashtra Stage & Cultural Development Corp v. Multi Screen Media Pvt Ltd; 2013 11 LJSOFT 101
- HSBC P1 Holdings (Mauritius) Ltd v. Avitel Post Studioz Ltd; 2014 SCC OnLine Bom 929
- A Ayyasamy v. A Paramasivam ; Civil Appeal No 8245 & 8246 of 2016
- Microvision Technologies v. Micro & Small Enterprises Facilitation Council & Anr; 2016 SCC Online Bom10039
- Venture Global Engg v. Satyam Computer Services Ltd, AIR 2010 SC 3371
- Bhatia International v. Bulk Trading; 2002 4 SCC 105
- Bharat Aluminium v. Kaiser Tech Services; 2012 9 SCC 649
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