PUBLIC POLICY UNDER ARBITRATION LAW

ABSTRACT

This article examines the meaning of the term “public policy” in India under Arbitration Law, 1996. The article provides the meaning of the term “arbitral award” and “public policy” which is one of the grounds for termination of arbitral awards under the Arbitration and Conciliation Act,1996. The purpose of setting aside the arbitral awards, highlighting the importance of public policy in India in advancing justice for all. The article analysis the meaning of the term public policy, in the context of setting aside arbitral awards. Landmark decisions of the Supreme Court, in this regard are analyzed. The article discusses the provision of UNCITRAL Model Law from which the Arbitration and Conciliation Act,1996 was adopted. The primary aim of arbitration is to bring about cost-effective and expeditious resolution of disputes and further preventing multiplicity of litigation by giving finality to an arbitral award. Public Policy of India has an essential role in the process of enforcement of an arbitral award. It suggests some matters which concerns the public good or the public interest. Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 states that an arbitral award may be set aside by the Court if “the arbitral award is against the public policy of India”. An award is against the public policy of India only if the award was induced or affected by fraud or corruption or in violation of Section 75 (confidentiality) or Section 81 (admissibility of evidence of conciliation proceedings in other proceedings), is in violation of the fundamental policy of Indian law, is against the most basic notions of morality and justice. The article provides the reason as to why the clause of the public policy of India under Arbitration Law is fundamental. An arbitral award is like a court judgment.

KEYWORDS

Public Policy, Arbitration, arbitral award, morality, justice, corruption, violation, fraud

INTRODUCTION

Public policy is the system of laws, regulations, and conduct governments apply to achieve social and economic goals. It is a statement of the government’s intent and commitment to address a particular issue or problem. Public policy shapes the decision of government officials and affects society, the economy, and politics. It covers numerous issues like economic, social welfare, education, healthcare, and environmental policies. Public policy plays an important role in shaping societies.[1] The contemporary study of public policy began in the late 19th century when American scholars like Woodrow Wilson and John Burgess explored the relationship between government and society but its rules can be found in ancient civilizations. The rules of public policy can be found in ancient civilizations like Greece and Rome, where rulers made decrees and laws to regulate society. Therefore, it can be said that public policy has its roots in the rules of ancient civilizations. However, in 20^th century public policy became a well-known field of study, focusing on solving social, economic, and political problems. The scope of public policy in India includes economic development, promoting social justice, ensuring environmental sustainability, maintaining national security, and engaging in international relations. By addressing these areas, public policy in India encourages development, prosperity, and well-being of all citizens. Public policy plays an important role in shaping societies and affecting the lives of individuals. It influences healthcare, education, environment, and social welfare. An effective public policy secures equitable allocation of resources, promotes social justice, and addresses societal challenges. The importance of public policy is that it creates more inclusive and prosperous society.[2] The Arbitration and Conciliation Act,1996 provides the provision for termination or setting aside of arbitral award granted by the arbitral tribunal if it is against public policy of India.[3]

SCOPE OF PUBLIC POLICY UNDER ARBITRATION LAW

The primary aim of arbitration is to bring about cost-effective and expeditious resolution of disputes and further preventing multiplicity of litigation by giving finality to an arbitral award. Public Policy of India has an essential role in the process of enforcement of an arbitral award particularly the foreign awards because it involves parties, lawyers and arbitrators form diverse legal backgrounds and cultural traditions. Usually, the arbitral tribunal consists of arbitrators from multiple jurisdictions. It is thus desirable that the International Companies and firms working in India should be fully aware of the law on public policy of India and its impact on arbitration awards.Public policy imposes certain restrictions upon the persons to contract. As a rule, although all the other requirements for the formation of an agreement are complied with, an agreement that is illegal will not be enforceable. It is related to fundamental concepts of morality and fair dealing.[4] The Arbitration and conciliation Act, 1996 do not provides the definition of the term “Public Policy” or “opposed to public policy.” “Public Policy” is not the policy of a particular government. It suggests some matters which concerns the public good or the public interest. Therefore, any acts that have a malicious or hostile propensity to injurious to the interest of the state or the public is stated to be against “Public Policy.” In the case of Renu Sagar Power Co. Ltd v. General Electric Co., the Supreme Court held that the expression ‘Public Policy’ has a wider meaning in the context of a domestic award as distinguished from a foreign award.”[5] The concept of the ‘Public Policy’ signifies what is good for the public and in public interest or what would be injurious or harmful for the society. Anything that hurts collective harmony is against the ‘Public Policy.’ Hence the actions which are in violation of law shall be considered against the ‘Public Policy.’ The UNCITRAL Model Law, from which the Arbitration and Conciliation Act, 1996 was adopted, provides that an arbitral award may be set aside if the court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law of this State, or the award is against the public policy of the State. UNCITRAL has taken care to ensure that the fundamental policies, ethos, and the laws of the state are respected while drafting the Model Law.[6] India has also adopted this aspect of the UNCITRAL Model Law and has thereby assured the parties to the dispute, the principles of equality and justice and promised that the Constitution of India shall prevail and shall not be denied to them by making and enforcement of any unfair arbitral award in India.

ARBITRAL AWARD

The arbitral award refers to a decision made in an arbitration proceeding by an arbitration tribunal. An arbitral award is like a court judgment. An arbitral award may be non-monetary in nature where the claims of the entire appellant fail and there is no need for any party to pay any money[7]. Arbitral award may be given for payment of a sum of money, judgment of any matter to be decided in the arbitration proceedings, injunctive relief, fulfilment of a contract and rectification or cancelling an act or other document. The arbitral award shall be defined as any arbitral tribunal’s judgment on the disagreement or dispute and shall include a temporary, interlocutory, or partial arbitral award.[8] The arbitral tribunal may grant an interim arbitral award in any matter in which it will make a final arbitral award during the arbitral proceedings. An arbitral award can be classified into:

Domestic Award: Domestic award are those awards which are the judgement or decisions of domestic arbitration. It is limited to the Indian territory, the parties should have a nexus or birth of Indian origin, the territory essentially comes into play for domestic arbitration purposes. The award given by an arbitral tribunal in India or an award given by a foreign state for a dispute in which both parties are of Indian origin, also falls within the scope of domestic arbitration.[9] Domestic awards are provided under Part I of the Arbitration and Conciliation Act, 1996. A domestic award is granted according to Section 2 to 43 of the Act.[10]

Foreign Award: Foreign Award is the decision of Foreign Arbitration. If the parties choose a foreign arbitration institution or agree to an ad hoc arbitration overseas, the award granted after such proceedings shall be a as foreign award.[11] Section 44 of the Act provides with the definition of Foreign Award.[12]

ARBITRATION LAW ON “PUBLIC POLICY”

The Arbitration and Conciliation Act, 1996 restrict an Arbitral Tribunal or sole Arbitrator to make any award which is against the Public Policy of India. The framework of public policy is provided as a ground for setting aside an award through the court under section 34(2)(b)(ii) of the Arbitration and Conciliation Act,1996. Section 34 of the Arbitration Law of 1996 provides for the termination of arbitral award. It provides that an application for setting aside an arbitral award can be made if the arbitral award made by Arbitral Tribunal or Arbitrator is against the public policy of India. Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 states that an arbitral award may be set aside by the Court if “the arbitral award is against the public policy of India”[13]. In Madan Lal v. Sunder Lal, 1967 the Court held that this section empowers the courts to review the whole arbitration process followed in a case and to examine constitutionality of the arbitration process and the parties are not permitted to lessen the dignity of it.[14] By 2015 amendment the explanation to Section 34(2)(b) has been substituted to clarify that an award is against the public policy of India only if the award:

was induced or affected by fraud or corruption or in violation of Section 75 (confidentiality) or Section 81 (admissibility of evidence of conciliation proceedings in other proceedings).
is in violation of the fundamental policy of Indian law.
is against the most basic notions of morality and justice.

Fraud- Section 17 of the Indian Contract Act, 1872 provides with the definition of fraud. Fraud is an act of deliberate deception with the intention of securing something by taking unfair advantage of another by cheating. It is a deception to gain by another’s loss.[15] Explanation 1 to Section 34 states that an award influenced and induced by ‘fraud or corruption’ is in violation of the public policy of India. The Supreme Court of India in the case of S.P. Chengalvaraya Naidu v. Jagannath had held that “A litigant, is bound to produce all documents executed by him, connected to the litigation. If he refuses to give a vital document to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party.”[16] An award inspired by ‘fraud or corruption’ is in violation of the public policy of India.[17] In Venture Global Engg v. Satyam Computer Services Ltd, 2010 the Supreme Court held that hiding of relevant and material facts that should have been disclosed before the arbitrator is an act of fraud. When an award is 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 are disclosed after the passing of the award and have a link with the facts inducing the award, such facts are relevant to set aside the proceeding and such award may be set aside as affected or induced by fraud.[18]

Corruption- It means bribery. It need not necessary be in monetary terms. An improper relationship between an arbitrator and a party or a party’s legal advisor may lead to a corrupt decision or award.

Accepting Hospitality- If an arbitrator accepts hospitality from one of the parties and it was with the intention to induce the arbitrator to act unfairly or had the effect of inducing the arbitrator to act unfairly, it may be said that the award was convinced. But mere dining with one of the parties or his witness or witnesses in the absence of the other may not make him guilty.

Illegal Gratification- The arbitrator should avoid action which shows that he had received a pecuniary inducement which might have effect on his decision of the matter. An arbitrator should be incorrupt and impartial. If the arbitrator take bribe, the award is liable to be set aside.[19]

The term public policy was considered in the landmark case of Renu Sagar Power Co. Ltd. Vs. General Electric Co. 1994. The Apex Court held that the award passed by the arbitrator will be against the public policy if the award was in contravention of “Fundamental policy of Indian Law, Interest of India and Justice and Morality.”[20] In the case of ONGC Ltd. Vs. Saw Pipes Ltd. 2003 the court added a new ground of “Patent illegality” in addition to the grounds mentioned in Renu Sagar case. The court stated that “the concept of public policy indicates matters which concerns public good and public interest which varied from time to time.” An award that violates the statutory provisions of law or the terms of the contract are in violation of the public policy of India. The court held such an award as patently illegal and said that such illegality amounts to a violation of the public policy of India.[21] The ground “fundamental policy of Indian law” was given another examination in ONGC Vs. Western Geco, 2015 wherein the court held this ground includes three distinct parts i.e. “Duty of the tribunal to adopt a judicial approach, stick to the principle of natural justice and the decision of the tribunal should not be so irrational that no reasonable person would have arrived at the same.” The court held that the award ensuing in “miscarriage of justice” can be altered or completely set aside.[22] In Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. 2017, the court held that “the award of an arbitral tribunal can be set aside only on the grounds under section 34 of the Act and no other ground”.[23] After the amendment of 2015 and these judgments, clarity has developed on the scope of public policy.

CONCLUSION

It can be concluded that Public policy plays a crucial role in shaping societies and is a very important in working and progress of a nation. It affects the society and the nation. The rules of public policy can be found in ancient civilizations but study of public policy began in the late 19th century. By 20th century public policy became a well-known field of study, and it focused on solving social, economic, and political problems. Public Policy in India includes economic development, promoting social justice, ensuring environmental sustainability, maintaining national security, and engaging in international relations. It encourages development, prosperity, and well-being of all citizens of India.[24] There have also been attempts to restore justice as required under the UNCITRAL Model Law. Arbitration and Conciliation Act, 1996 which was adopted from UNCITRAL Model Law, provides for the termination of arbitral award. It states that an application for setting aside an arbitral award can be made if the arbitral award made by Arbitral Tribunal or Arbitrator is against the public policy of India. Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 states that an arbitral award may be set aside by the Court if “the arbitral award is against the public policy of India”.[25] Explanation to Section 34(2)(b) has been substituted to clarify that an award is against the public policy of India only if the award is induced or affected by fraud or corruption or in violation of Section 75 (confidentiality) or Section 81 (admissibility of evidence of conciliation proceedings in other proceedings), is in violation of the fundamental policy of Indian law, is against the most basic notions of morality and justice.[26] Hence, it prevents the miscarriage of justice in Indian legal system. The term ‘public policy’ has varied interpretations around the globe. Supreme court of India has interpreted it keeping in mind laws, morals, and justice. Landmark decisions of the Supreme Court in cases of Renu Sagar Power Co. Ltd v. General Electric Co., 1984, ONGC Ltd. v Saw Pipes Ltd. 2003, ONGC Ltd. v Western Geco International Ltd. 2014, Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors., 2018 have a great impact in interpretation of the phrase “Public Policy.”

Efforts have also been made to interpret explanation to section 34 of Arbitration and Conciliation Act,1996 in the cases of S.P. Chengalvaraya Naidu v. Jagannath, 1994 and Venture Global Engg v. Satyam Computer Services Ltd, 2010 which provides the reasons as to why the award is against the public policy of India. Hence, it is concluded that the award by arbitral tribunal is against the public policy of India and can be set aside if the award was induced or affected by fraud or corruption or in violation of Section 75 (confidentiality) or Section 81 (admissibility of evidence of conciliation proceedings in other proceedings), is in violation of the fundamental policy of Indian law, is against the most basic notions of morality and justice.[27]

REFERENCES

O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)
O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)
Arbitration and Conciliation Act,1996 § 34(2)(b)(ii), No. 26, Acts of Parliament, 1996 (India)
Legalservicesindia.com, https://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law (last visited on Feb 17,2024)
Renu Sagar Power Co. Ltd v. General Electric Co., 1984 SCC (4) 679
ipleaders.com, https://blog.ipleaders.in/enforcement-arbitral-awards/#_ftnref24 (last visited on Feb 17,2024)
Arbitral Award and Legal Definition, https://definitions.uslegal.com/a/arbitral-award/ (last visited on Feb 17,2024)
ipleaders.com, https://blog.ipleaders.in/enforcement-arbitral-awards/#_ftnref24 (last visited on Feb 17,2024)
ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN INDIA, Shodhganga (2016) available at https://shodhganga.inflibnet.ac.in/bitstream/10603/110130/16/16_chapter%206.pdfn (last visited on Feb 17,2024)
Arbitration and Conciliation Act,1996, No. 26, Acts of Parliament, 1996 (India)
ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN INDIA, Shodhganga (2016) available at https://shodhganga.inflibnet.ac.in/bitstream/10603/110130/16/16_chapter%206.pdf (last visited on Feb 17,2024
Arbitration and Conciliation Act,1996 § 44, No. 26, Acts of Parliament, 1996 (India)
Arbitration and Conciliation Act,1996 § 34(2)(b)(ii), No. 26, Acts of Parliament, 1996 (India)
Madan Lal v. Sunder Lal, AIR 1967 SC 1233
The Indian Contract Act,1872 § 17, No. 9, Acts of Parliament, 1996 (India)
S.P. Chengalvaraya Naidu v. Jagannath, 1994 AIR 853
Arbitration and Conciliation Act,1996 § Explanation to section 34, No. 26, Acts of Parliament, 1996 (India)
Venture Global Engg v. Satyam Computer Services Ltd, AIR 2010 SC 3371
Legalservicesindia.com, https://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law (last visited on Feb 17,2024)
Renu Sagar Power Co. Ltd v. General Electric Co., 1984 SCC (4) 679
ONGC Ltd. v Saw Pipes Ltd. 2003 (5) SCC 705.
ONGC Ltd. v Western Geco International Ltd. 2014 (9) SCC 263.
Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors., (2018) 1 SCC 656.
O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)

[1] O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)

[2] O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)

[3] Arbitration and Conciliation Act,1996 § 34(2)(b)(ii), No. 26, Acts of Parliament, 1996 (India)

[4] Legalservicesindia.com, https://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law(last visited on Feb 17,2024)

[5] Renu Sagar Power Co. Ltd v. General Electric Co., 1984 SCC (4) 679

[6] ipleaders.com, https://blog.ipleaders.in/enforcement-arbitral-awards/#_ftnref24 (last visited on Feb 17,2024)

[7] Arbitral Award and Legal Definition, https://definitions.uslegal.com/a/arbitral-award/ last visited on Feb 17,2024

[8] ipleaders.com, https://blog.ipleaders.in/enforcement-arbitral-awards/#_ftnref24 (last visited on Feb 17,2024)

[9] ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN INDIA, Shodhganga (2016) available at https://shodhganga.inflibnet.ac.in/bitstream/10603/110130/16/16_chapter%206.pdf last visited on Feb 17,2024

[10] Arbitration and Conciliation Act,1996, No. 26, Acts of Parliament, 1996 (India)

[11] ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN INDIA, Shodhganga (2016) available at https://shodhganga.inflibnet.ac.in/bitstream/10603/110130/16/16_chapter%206.pdf last visited on Feb 17,2024

[12] Arbitration and Conciliation Act,1996 § 44, No. 26, Acts of Parliament, 1996 (India)

[13] Arbitration and Conciliation Act,1996 § 34(2)(b)(ii), No. 26, Acts of Parliament, 1996 (India)

[14] Madan Lal v. Sunder Lal, AIR 1967 SC 1233

[15] The Indian Contract Act,1872 § 17, No. 9, Acts of Parliament, 1996 (India)

[16] S.P. Chengalvaraya Naidu v. Jagannath, 1994 AIR 853

[17] Arbitration and Conciliation Act,1996 § Explanation to section 34, No. 26, Acts of Parliament, 1996 (India)

[18] Venture Global Engg v. Satyam Computer Services Ltd, AIR 2010 SC 3371

[19] Legalservicesindia.com, https://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law(last visited on Feb 17,2024)

[20] Renu Sagar Power Co. Ltd v. General Electric Co., 1984 SCC (4) 679

[21] ONGC Ltd. v Saw Pipes Ltd. 2003 (5) SCC 705.

[22] ONGC Ltd. v Western Geco International Ltd. 2014 (9) SCC 263.

[23] Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors., (2018) 1 SCC 656.

[24] O.P. Jindal Global University, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited on Feb 17,2024)

[25] Arbitration and Conciliation Act,1996 § 34(2)(b)(ii), No. 26, Acts of Parliament, 1996 (India)

[26] Arbitration and Conciliation Act,1996 § Explanation to section 34, No. 26, Acts of Parliament, 1996 (India)

[27] Ibid

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.