PUBLIC POLICY SETTING ASIDE ARBITRAL AWARD

Vivek Kerketta

Introduction

Public policy is an attempt by the government to address a public issue. The government, whether it is city, state, or federal, develops public policy in terms of laws, regulations, decisions, and actions. There are three parts to public policy-making: problems, players, and the policy.

The problem is the issue that needs to be addressed. The player is the individual or group that is influential in forming a plan to address the problem in question. Policy is the finalized course of action decided upon by the government.

It is this lack of definition and certainty of the concept which has led to judicial statements against the extension of public policy. The doctrine of public policy is somewhat open-textured and flexible, and this flexibility has been the cause of judicial censure of the doctrine. By far, the most famous expression of disapproval against public policy is its description as a ‘very unruly horse’ which ‘you never know where it will carry you’.

Other expressions of disdain include descriptions such as “a treacherous ground for legal decision” and “a very unstable and dangerous foundation on which to build until made safe by decision”. However, in the second half of the 20th century, the positive function of the court in matters of public policy increasingly gained recognition. In fact, Lord Denning stated, “With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. It can leap the fences put up by fictions and come down on the side of justice.”

The public policy in relation to international commercial arbitration is that The UNCITRAL Model Law Commission stated in its report that the term “public policy” comprises “fundamental principles of justice”. It was understood that the term public policy which was used in the 1958 New York Convention and many other treaties, covered fundamental principles of law and justice in substantive as well as procedural respects. Thus, instances such as corruption, bribery, or fraud and similar serious cases would constitute a ground for setting aside an award.

 Public Policy for India

Public Policy

“It is never argued at all, but when other points fail” said by Burrough. J

The 1996 Act S. 34(2) (b) (ii) provides that if the award is in conflict with public policy of India it can be set aside. However the term “public policy” has not been defined anywhere in the act. Simplistically speaking, the expression “public policy” connotes some matter which concerns the public good and public interest. An attempt to define public policy was made by Winfield when he identified it as “a principle of judicial legislation or interpretation founded on the current needs of the community”. However, current needs being a changing concept, it is impossible to pigeon hole the same.

There are two conflicting positions with respect to ‘public policy’ which is especially witnessed in English decisions, usually referred to as the ‘narrow view’ and the ‘broad view’. According to the ‘narrow view’, courts cannot create new heads of public policy while the ‘broad view’ permits judicial law making. Indian courts over the years, till the infamous ONGC verdict has been inclined towards a narrow interpretation of the term public policy.

Public Policy means the principles and standards regarded by the legislature or by the court as being of fundamental concern to the State the whole of the society. The Supreme Court attempted by the following explanation of the concept:

The phrase “public policy of India” occurring in section 24(2) (b) is not defined in the Arbitration Act. The concept ‘public policy’ is considered to be vague, susceptible to narrow or wider meaning in the context in which it is used. Hence, it should be given meaning in the context and also considering the purpose of the section.

According to section 23 Indian Contract Act state that- What considerations and objects are lawful and what not – “The consideration or object of an agreement is lawful, unless -It is forbidden by law or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; of involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.”- In Gurmukh Singh v. Amar Singh , demonstrated that the agreement between appellant and the respondent was only to participate an action of evacuee property. There was no intention either to bring down the price or to defraud the government to sell the same at lower price. Therefore the object of the agreement was not opposed to public policy, a priori, it was not valid under section 23 of the Indian Contract Act.

The act does not define the expression ‘public policy’ opposed to public policy of a particular government. It connotes same matter which concerns public good and interest. The phrase ‘public policy of India used in section 34 in context is required to be given a wider meaning. The concept of public policy connotes some matter which concerns public good and public interest. What is for public good or interest or what would be injurious or harmful to public good or interest has varied from time to time. An award which is, on the face of it, patently in violation of statutory provision cannot be said to be public interest.

Setting Aside of Arbitral Award and Relation with Public policy

In the Arbitration and Conciliation Act, 1996, provides as:-

a. Section 34 (2) (b) (ii) states that arbitral award may be set aside or remitted to the arbitral tribunal for reconsideration by the country if it finds that Arbitral Award is in Conflict with public policy of India. It further explains that an award is conflict with public policy with Public Policy of India if the making of award was induced or affected by fraud, corruption or was violation of section 75 or 81

b. Section 48 (2) (b) enforcement of foreign arbitral award as defined article 44 of (New York Convention Award)may be refused if court finds enforcement would be contrary to the Public Policy of India. The provision also explains that an award is in conflict with Public Policy of India if it was induced or affected by fraud or corruption.

c. Section 57 (1) (e) also states that order that foreign award as defined article 53 (Geneva Convention Award) may be enforceable, it shall be necessary that the enforcement of is not contrary to Public Policy or Law of India.

The enforcement of an award as to be refused as being contrary to public policy if it is contrary to the fundamental policy of Indian law, country’s interest and its sense of justice and morality.

 Ground for aside Arbitral Award:

Fraud- The term ‘fraud’ has been defined in section 17 of the Indian Contract Act 1872, which reads as:

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, which intent to deceive another party thereto or his agent, or to induce to enter into the contract-

- The suggestion, as to a fact, of that which is not true by one who does not believe it to be true.

- The active concealment of a fact by one having knowledge or belief of the fact.

- A promise made without any intention of performing it.

- Any other act fitted to deceive.

Explanation- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is in itself, equivalent to speech.

Fraud is a term that should be reserved for something dishonest and morally wrong and such wrong, and much mischief is done as well as much pain inflicted by its use where ‘illegally’ and ‘illegal’ are the real appropriate expression. Chief Justice Edward Coke said, ‘fraud avoids all judicial acts ecclesiastical or temporal. Fraud however is inconsistent with claim of right made in good faith to do the act complained of.

The decision of Supreme Court in SP Chengalvaraya Naidu v. Jagannth, provides an example where it set aside a decree obtained by a party concealing a vitally relevant document from trail court. Here, a plaintiff had obtained the preliminary decree for partition of property, without disclosing to the trail court the release deed with respect to the property executed by him in favour of his employer. The court held that non-disclosure of the release deed before the court was tantamount to plain fraud on the court vitiating the decree.

Corruption-

The Explanation to section 34(2) (b) (ii), clarifies that an award induced or affected by corruption in addition to fraud will be liable to be set aside as being in conflict with the public policy of India. The expression ‘corruption’ has been defined either in the Indian Contract Act, 1872. Corruption of an arbitrator means ‘moral obliquity’ it is a false and misleading metaphor to speak of an arbitrator honest mistake, whether it is of excess or defect, as ‘constructive corruption.’ There is a general principle of law that a domestic award or a foreign award which is induced or affected by corruption, is invalid as well as unenforceable and it cannot sanctioned by the courts.

It is not easy to define corruption, it is not necessary that the arbiter should have been bribed, nor is it necessary that there should be some other form of venality or gross immorality or flagitious conduct.

In Air Corporation Employees Union v. DV Vyas the high court pointed out that the hospitality of the Corporation accepted by the Chairman could not be considered to be formal or niggardly not merit attention. Chandrachud, J said that ‘courts have always zealously upheld the principles that it is not merely sufficient that justice is done but that justice must seem to be done. Though the word ‘corruption’ was not used, the award was quashed for the mere fact that this type of hospitality was accepted.

Confidentially-

Under section 75 of the Arbitration and Conciliation Act, 1996, this provides that ‘now standing anything contained in any other law for the time being in force on India, the conciliator and the parties shall keep confidential all matters relating to the conciliation proceedings.

The provision of this section extended to the application of public policy of India in section 34(2) (ii), the explanations to which for the Avoidance of any doubt, declares that without prejudice to the generally of the expression ‘public policy of India’, if an award inter alia, is in ‘violation of section 75 of the 34(2) (ii), the words ‘conciliator’ and ‘conciliation’ used in section 75 shall have to be substituted for the words ‘arbitrator’ and ‘arbitration.’

Domestic arbitration’ of international commercial arbitration’ is not a public affair; it is essentially a process of private nature. In the language of Stephen Bond, J said- ‘the users of international commercial arbitration, i.e. the companies governments and individuals who are parties in such case, places the highest value upon confidentially as a fundamental characteristic of international commercial arbitration. The features of international commercial arbitration which attracted parties to it, as opposed to litigitation, confidentially of the proceedings and the resulting award would not enter into the public domain were almost invariably mentioned’.

Inadmissibility of evidence in other proceedings-

The explanation to section 34(2) (b) (ii), by reference the provision of section 81 in it. The provision mandates; ‘the parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is subject of the conciliation proceedings-

- Views expressed or suggestion made by the other party in respect of a possible settlement of the dispute.

- Admission made by the other party in the course of the conciliation proceedings.

- Proposals made by the conciliator.

- The fact that the other party had had indicated his willingness to accept a proposal for settlement made by the conciliator

Thus, without prejudice to the generally of the expression ‘public policy of India’ as used in section 34(2) (ii), an award is in conflict with the public policy of India’, if it is violation of the provision of section 81 of the Act.

Misconduct- Section 30 of the Arbitration Act, 1940 provided that an arbitral award was liable to set aside where ‘an arbitrator or umpire has misconduct himself or the proceedings’. Though the term ‘misconduct’ was not defined in that Act, nevertheless misconduct, as crystallized by the judicial decision, covered a wide range of errors on the parts of the arbitrator.

“An award can be set aside for misconduct if the arbitrator has received bribes, or if he is secretly interested in the subject matter of the dispute. Misconduct may exist where no improper motives are imputed to the arbitrator. It is misconduct, for example, to make an award on a illegal contract.”

Misconduct was before the Supreme Court in V.G.Gorege v. Indian Rare Earths Ltd, a case of misconduct exists where the amount awarded by the arbitrator is contrary to his findings.

“The arbitrator may be a most recpectable person, but even so, his conduct cannot be reconciled to general principles. A judge must not take upon himself to say whether evidence improperly admitted had or had not any effect upon his mind. The award may have done perfect justice, but upon general principles it cannot be supported.

Legislatative Perspective

The Principle of public policy has been stated by Lord Mansfield in Holman v.Johson in following language:

The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon immoral or illegal act. If from the plaintiff own stating or otherwise, the cause of action appear to arise ex trupi causa, or the transgression of positive law of country, there the court says he has no right to be assited.

Public policy targets protection and promotion of public welfare. It is the principle of, under which freedom for contract or private dealings is restricted by the law for the good of community.

The general concept of public policy comprehends a wide range of topics categorized under certain heads. Agreement may offend against public policy by tending to prejudice of state in time of war (trading with enemies, etc), by tending to the perversion or abuse of municipal justice or in private life by attempting to impose inconvenient and unreasonable restriction on free choice individual marriage or their liberty to exercise any lawful trade or calling.

In the Indian constitution also in preamble it is well said “WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens: JUSTICE, social, economic and political; LIBERTY of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity; and to promote among them all FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation.”

The Sovereign, Socialist, Secular, Democratic, Republic all this status comes only when good policy is formed and its enacted by the Government. The American President George Washington said- By the people, for the people, of the people, the public policy should be made in such a way that it benefits or works for the people only. It must be made for interest of the society.

Under Indian Constitution the Fundamental Right in Right to Freedom article 19 (4) restrict the right of the individual if the any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the sovereignty and integrity of India or public order or morality, reasonable restrictions on the exercise of the right conferred by the said clause.

Thus fundamental right can also be restricting if the public policy is against the interest of the society or individual because it disturb and violates the sovereignty and integrity of a country. So the policy must be made by seeing or needs the rights and duties of the individual and society.

The section 23 says that the consideration or object of an agreement is lawful, unless- It is forbidden by law or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent, of involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.

Therefore, the contract i.e. (agreement) between the parties should be made in such way that it does not oppose the public policy which hampers the interest of the society and individual.

 

 Judicial Intervention

The Indian legislature and judiciary have a fundamental choice to make- to respect party autonomy and finality of arbitral awards as envisaged by the 1996 Act or impose judicial supervision on arbitration and revert to the days of the 1940 Act. This choice will shape the course of Indian arbitration for the next decade and beyond.

In recent years, all over the world, a shift has been encouraged from litigation to alternative methods of dispute resolution such as arbitration, mediation, and conciliation etc., in an attempt to overcome the problem of inordinate delay in disposal of cases that litigation entails. In India especially, the attempt of the parliament which aims to bringing about cost-effective and expeditious resolution of disputes and further preventing multiplicity of litigation by giving finality to an arbitral award.

Prior to the enactment of the 1996 Act there was widespread discontent over the excessive judicial intervention allowed by its predecessor, the 1940 Act. The 1940 Act permitted courts to set aside an arbitral award where “the award had been improperly procured or otherwise invalid.”

The 1996 act attempted to rectify this problem by limiting the basis on which awards could be challenged to a few narrow grounds (which mirrored those found in the UNCITRAL model law and New York Convention on the Recognition and enforcement of Foreign Arbitral Awards).

The recent decision of the Apex Court in ONGC vs. Saw Pipes where a broad interpretation was given to the expression ‘public policy’, has given an unexpectedly different dimension and direction to S. 34. The objective behind this research is to examine the merits of having a broader notion of public policy in connection with setting aside arbitral award and also to look into the possible problems that could crop up due to this, especially the effect on finality of arbitral awards.

In case where the validity of the award is challenged, there is no necessary of giving a narrower meaning to the term “public policy of India”. Om the contrary, wider meaning is required to be given so that a “patently illegal award” may set aside.

Principles lay down under Section 34 states that an award may be set aside if it is contrary to:-

• Fundamental policy of Indian law,

• The interest of India,

• Justice or morality,

• If it is patently illegal.

In Renusagar Power Plant Co. Ltd. v. General Electric Co. the court in view of the absence of a workable definition of “international public policy” found it difficult to construe the expression “public policy”. In the Renusagar case, while giving narrow meaning to the expression ‘public policy of India’ the Apex Court observed that “It is obvious that since the Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction.”

The court further declared “patent illegality” to mean that the award is contrary to the substantive provisions of law or the provisions of the 1996 Arbitration Act or against the terms of the contract. Thus “error of law” was now included as a ground to set aside the award, thereby making the provision of S. 34 an appellate provision rather than one to be used as an application to set aside the award. In order to justify adding “error of law” as a ground to set aside the award, in light of a contrary precedent in place, the court distinguished between the two cases on the ground that while Renusagar was dealing with a foreign arbitral award, the award in the instant case is a domestic one and thus “error of law” could be used as a ground to set it aside. In light of this reasoning, it can be safely assumed that the court did not intend S. 34 to apply to foreign arbitral awards and the separate provision provided in the Act i.e. S. 48 was to apply in these circumstances

The Supreme Court distinguished Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd. from that of Renusagar Power Co. Ltd v. General Electric Co. on the ground that the Renusagar judgment was in context of a foreign award, while the ratio of SAW Pipes would be confined to domestic awards only.

The most recent decision of the Supreme Court on the subject of setting aside an award on the ground of public policy under Section 34 is Venture Global Engineering Vs. Satyam Computer Services Ltd. Based on the earlier judgment in Bhatia International v. Bulk Trading S.A. and Anr., the Supreme Court in this case held that it is open to the parties to exclude the application of the provisions of part I by express and implied agreement, failing which the whole of part I would apply.

The Supreme Court in its judgment of ONGC v. Saw Pipes Ltd has ruled that an arbitral award can be challenged under Section 34 of the 1996 Act on the ground that it violates the public policy of India, inter alia, because it is contrary to the fundamental policy of Indian Law, justice and morality or is ‘patently illegal’.

The arguments against setting aside awards based on an expansive reading of “public policy” turn on questions of the importance of party-autonomy and minimal judicial interference. It is on this basis that the decision in ONGC v. Saw Pipes has been heavily criticized. However, a refusal to set aside an illegal award under the guise of party autonomy effectively mean that parties are allowed to do indirectly what they cannot do directly.

This was in contrast to the Apex court’s observations in Narayan Prasad Lohia v. Nikunj Kumar Lohia wherein it was held that if an award was in accordance with the agreement of the parties, it may not be set aside by the court. But, as per the ONGC case, the award must be in accordance with the agreement of the parties and the agreement of the parties must lie within the parameters prescribed by the non-derogable provisions of Part I. If the award does not meet the said criteria, it may be set aside, via Section 34(2)(a)(v) read with Section 28(1)(a) of the Act.

Renusagar was a case of private international law involving enforcement of a New York Convention foreign arbitral award governed by the Foreign Awards (Recognition and Enforcement) Act, 1961 of India which was based on the principle of speedy enforcement of arbitral awards with minimum court interference..

The court in Venture Global Engineering vs. Satyam Computer Services Ltd. wherein the court held that it is permissible to set aside a foreign award in India by applying the provisions of S. 34 of Part I of the Act i.e. it held that unless otherwise agreed upon by the parties, Part I of the act also applies to foreign awards which could thus be set aside for violating Indian statutory provisions and for being contrary to Indian public policy.

 

 

 Conclusion

The scheme of the Arbitration and Conciliation Act, 1996 is very clear- to minimize court interference in the arbitral process and to ensure speedy enforcement of arbitral awards without the intervention of courts on unlimited grounds and aforementioned judgments have adopted a very strained interpretation of the Act. In such a situation to allow an expansive reading of ‘public policy’ would nullify the entire purpose. Finality being the most attractive and unique feature of arbitration has been struck at its very roots by the expansive interpretation of the term ‘public policy’ by the ONGC court, as a result of which arbitration as it now stands in India is just another step in the appeal process.

Further, the challenging of International awards and their setting aside on the ground of them being against the public policy and by applicability of Part I of the Act posses a potential threat to the basic foundation of International Commercial Arbitration. However, there are two legislative proposals before the Indian Parliament which indicate that the legislature did not intend to include “error of law” as a public policy ground under S.34 (2) (b) (ii) of the Act. Both the April 2001 Bill and December 2003 Bill, have proposed amendments to the 1996 Act as follows:

“34 A (1) In the case of an arbitral award made in an arbitration other than an international arbitration (whether commercial or not), recourse to the following additional grounds can be had in an application for setting aside an award referred to in sub-section (1) of section 34, namely–(a) that there is an error which is apparent on the face of the arbitral award giving rise to a substantial question of law …”

To sum up, it can be said: “Public Policy can be a ‘double-edged sword’ in arbitration- ‘helpful as a tool, dangerous as a weapon’.”

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