This article is written by Akshata Timmapur, an associate at The Law Point, Mumbai. In this article, the author has explained Public Policy and its journey with the help of certain case laws.
The New York Convention, 1958, to which India is a signatory, by way of Article V (2)(b) states that the enforcement of an arbitral award can be rejected inter alia on the ground of being in conflict with the public policy of the country where enforcement is sought. Interestingly, the term ‘public policy’ has not been defined under the New York Convention, which means that it will (and has) invariably be determined by each country’s own standard of public policy. In the past, India has struggled to reconcile its definition and standard of public policy with the prevailing international standards. Globally, countries have maintained that their international public policies are narrower than their domestic public policy. In India’s bid to emerge as an arbitration hub by attributing finality to arbitration awards and having minimal judicial interference, there has been an inclination to adopt a narrower definition of public policy for refusing enforcement of foreign awards, in international commercial arbitrations. However, the road to this realisation has been long and ridden with hurdles.
Public Policy – Distinction in the Context of Domestic and Foreign Arbitrations
The term public policy appears twice in the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). One is in the context of a domestic arbitration- under Section 34 where an arbitration award can be set aside if it contravenes the public policy. The other is in the context of a foreign arbitration- under Section 48 where the enforcement of a foreign arbitral award can be refused if it is in contravention of the public policy of the state.
With respect to the interpretation of public policy as regards foreign arbitrations, the matter first came up for consideration in Renusagar Power Co. Ltd. v. General Electric Co. (“Renusagar”). The case was related to the definition of public policy as prescribed under the 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 Supreme Court deliberated whether the narrower concept of public policy as applicable in the field of public international law should be applied or the wider concept of public policy as applicable in the field of municipal law. The Hon’ble Supreme Court finally held that the term public policy was to be interpreted in the narrow sense and stated that contravention of an Indian law would alone not attract the bar of public policy and something more than contravention of law is required. Applying this it was held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.
Almost ten years later, in ONGC v. Saw Pipes, while dealing with an application under Section 34 of Arbitration Act, the scope of public policy was expanded. In addition to the criteria laid out in the Renusagar case (supra), the court also included patent illegality as a sub-set of public policy for setting aside awards. It was held that if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal.
However, it was later clarified in Shri Lal Mahal v. Progetto Grano Spa that the patent illegality ground was only applicable to domestic awards and so the Renusagar position continued to apply to foreign awards. Thereafter the judgement in ONGC v. Western GECO (“Western Geco), complicated things further while interpreting “fundamental policy of India”. Western Geco, which was also cited with approval in the 2015 Associate Builders v. Delhi Development Authority (“Associate Builders”) case, attributed three juristic principles to the phrase “fundamental policy of Indian law” as used in the Renusagar Judgement. First was that courts have to adopt a judicial approach in determination of a dispute, secondly, determination of rights and obligations must be in terms of principles of natural justice and thirdly, that any determination must be on the basis of Wednesbury principles of reasonableness. This judgement permitted judicial intervention, even on merits in arbitral disputes.
The aftermath of the Western Geco and Associate Builder’s case was an anathema to the basic principles of arbitration so much so that the Law Commission, in its 246th Report, not only criticized the inclusion of Wednesbury reasonableness but also went on to recommend the inclusion of Explanation II to Section 34(2)(b)(ii). Explanation II categorically states “for the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute”. When the amendment was finally notified in January 01 2016, with retrospective effect from October 25, 2015, Explanation II was included in both Section 34 and Section 48.
Development Post The 2015 Amendments -narrow Definition
The 2015 amendments introduced notable changes in Section 34 and Section 48. The scope of the term public policy was made identical for both Sections 34 and 48. Conflict with public policy was amended to include only (i) contravention of the fundamental policy of India, (ii) inducement by fraud or corruption (iii) or being against the principles of justice and morality. Interestingly, in Section 34, patent illegality was also inserted as a separate ground for setting aside an award, severed from the public policy ground. Section 48, on the other hand, does not contain patent illegality as a ground for refusal of enforcement. In any case, courts are categorically forbidden from going into the merits of the case while refusing or setting aside an award.
The first case that dealt with the post amendment sections was Ssanyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India. The inclusion of judicial approach as a sub-set of public policy as seen in Western GECO and Associate Builders was done away with for being contrary to Explanation II of Section 34(2)(b)(ii) and 48(2)(b). The meaning of a fundamental policy of India was relegated back to the Renusagar judgement. It was further held that public policy argument based upon most basic notions of justice or morality, can only be attracted in very exceptional circumstances when the conscience of the Court is shocked by infraction of fundamental notions or principles of justice.
In February of 2020, the Supreme Court in Vijay Karia vs Prysmian Cavi E Sistemi Srl (“Vijay Karia”) went even further in delineating the contours of public policy. Vijay Karia judgment adopts a pro-enforcement outlook while holding that the mere contravention of the provisions of FEMA would not amount to contravention of the public policy of India. It went along the same lines of the Renusagar Judgment to hold that a breach of a legal principle or legislation would be in conflict with the fundamental policy of India only if it is “so basic to the Indian Law that it is not susceptible to be compromised.” It further observed “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts.” Thus, this case introduces a novel concept of time honour hallowed principle, although the same has not been satisfactorily defined.
The NAFED Conundrum – A Detour From The Established Principles
Interestingly, just two months after the Vijay Karia judgment, the Supreme Court in National Agricultural Co-Operative Marketing Federation of India v. Alimenta S.A.(“NAFED” held that a foreign arbitral award passed to be unenforceable under Section 48 of the Arbitration Act for being against the public policy of India. While the Vijay Karia judgment was not cited in this case, the plethora of cases that came before it was. The Supreme Court held that non-supply of goods due to not receiving the applicable government license did not constitute a breach of contract. This was so because obtaining the license from the government was a contingency upon which the contract was based, and upon such contingency failing, the contract would be rendered void. This is a reference to Section 32 of the Indian Contract Act, 1852. (“ICA”). The Supreme Court observed that if the goods were supplied, it would amount to a contravention of the law (Export Control Order), and therefore, be opposed to the public policy of India.
The arbitral tribunal’s findings that non-supply for not having received approvals does not render the contract frustrated did not hold ground before the Supreme Court. An argument could be made that Section 32 of the ICA which stipulates that if a contract cannot be performed due to the happening or not of a contingent event, it can be made void, holds true throughout common law jurisdictions. This principle has been an integral part of the contract law and jurisprudence of India. Therefore, arguably Section 32 of the ICA could fall within the contours of time honoured hallowed principle as under the Vijay Karia judgment. Whereas, the provisions of FEMA (as in the Vijay Karia case), being a foreign policy legislation prone to updation, might not pass the test of time honoured hallowed principle.
On the other hand, an argument can be made out that in NAFED, the Supreme Court has overstepped its bounds and delved into the merits of the case, in violation of Explanation II of Section 48(2)(b). The court in essence took upon itself to decide on the terms of contracts between the parties whereas the only question before it was whether an award for damages could be enforced. Furthermore, as seen in Renusagar, mere contravention of law does not amount to contravention of public policy. The Supreme Court did not distinguish the facts pertinent to the instant case from the Renusagar judgment to suggest that something more than mere contravention of law had occurred. The Supreme Court also failed to demonstrate how, if at all, the award “shocked” the conscience of the court by the infractions of the most basic of fundamental notions or principles of justice.
Thus, it appears that while NAFED does make a reference to the judgments that prescribe a narrower definition of public policy, in actuality, it fails to uphold those principles.
Once famously described as an “unruly horse”, the concept of public policy is well on its way to be tamed. India is aiming to establish itself as an arbitration hub, and its effort to align with international standards of enforcement is evident. While the pre-amendment regime may have seen many ups and (mostly) downs in the enforcement of foreign awards, the scope of rejection of the same has been narrowed tremendously post 2015. From Renusagar to Vijay Karia, India has come a long way and in the said process has developed jurisprudence on public policy which is relevant for arbitrations globally. It remains to be seen how the two most recent and seemingly opposing judgments of the Hon’ble Supreme Court in Vijay Karia and NAFED v. Alimenta are reconciled moving forward.
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