THE IMPACT OF ARBITRATION ON PUBLIC POLICY

This article is written by Rabab Shawir of 7^th Semester of University of Khartoum, an intern under Legal Vidhiya

Abstract

This article explores the multifaceted impact of arbitration as a dispute resolution method on public policy. It begins by explaining the concept of public policy and provides a basic understanding of what constitutes public policy and its key features and types. It explains how in India both the government and the general public act as creators of public policy. The article then delves into illustrating the impact of arbitration, considering that public policy evolves in response to various perspectives. The article addresses both positive and negative impacts by analyzing different factors of public policy including efficiency, privacy, and access to justice, and  highlighting the effect of mandatory arbitration. The article further examines the influence of arbitration on specific areas of public policy such as international trade and environmental regulation. The importance of balancing between arbitration and public policy considerations is also discussed, providing that alignment of arbitration processes and ruling with public policy must be taken into account. The article concludes by looking at the regulatory framework in India, noting the public policy grounds upon which arbitration awards may be set aside by courts.

Keywords

Arbitration, Dispute Resolution, Arbitration Awards, Public Policy, Government, Public Interest, Social-welfare, Access to Justice, International Trade, Consumer Protection, Employment Law, Indian Law.

Introduction

Arbitration is a private dispute resolution process where parties agree to be bound by the decision of an arbitrator. An arbitration award represents the definitive ruling issued by the arbitrator, marking the conclusion of the arbitration process. Arbitration is separate from litigation; it is often used as an alternative method to access justice due to its distinctive features. The key characteristics associated with arbitration include voluntariness, flexibility, privacy, efficiency, and finality.

Although arbitration is a private means of resolving disputes, it functions within a wider societal and legal context. Arbitration is inherently intertwined with public policy, operating in ways that significantly impact public interest. It creates precedents that shape future legal interpretations and regulatory standards. The enforcement of arbitration awards, which may or may not align with public policy, further underscores its influence. Additionally, arbitration plays a crucial role in determining the availability and accessibility of justice in major matters, thereby affecting the broader legal and societal landscape. Its capacity to resolve disputes efficiently and confidentially while balancing private interests with public considerations highlights its profound intersection with public policy.

This article explores how arbitration impacts public policy, discussing the concept of public policy as the comprehensive framework encompassing the laws, regulations, and initiatives that governments establish to achieve specific social and economic objectives.  The effects of arbitration are not limited to the process nor its parties, these effects are rather far-reaching and influence issues such as efficiency, confidentiality, and access to justice. Arbitration has a significant impact on particular areas such as its influence on international trade and environmental regulation. The article observes the importance of an equilibrium between considerations of both arbitration and public policy, and how such an equilibrium can be attained.

The article also examines the Indian legal framework, discussing key provisions of the Arbitration and Conciliation Act of 1996, and highlighting significant judicial decisions and legislative measures that reflect this dynamic interplay.

Concept and Formation of Public Policy

Governments are responsible for social welfare, economic stability, and public order. Public policy is a comprehensive framework encompassing the laws, regulations, and initiatives that governments establish to achieve specific social and economic objectives. It serves as a declaration of the government’s intent and commitment to addressing particular issues or problems. Public policy guides the decisions of government officials and agencies, influencing society, the economy, and the political landscape[1].

Public policy is a dynamic process that evolves over time in response to changing needs and circumstances. It is shaped by a variety of factors, including political ideologies, economic conditions, social values, legislative actions, judicial decisions, and public opinion, thereby, it is not neutral as some would benefit from such ideologies, decisions, and values, and some would find them contradicting to their interests and needs.

Public policy is purposeful; targeting identified challenges, systematic; involving coordinated efforts and various stakeholders, and strategic; prioritizing long-term goals and thorough evaluating of possible effects and judicious allocation of resources[2]. Public policy encompasses a broad scope of sectors, including education policy, economic policy such as ‘Five Years Plan’ and Make in India, social policy such as NRHM AND SSA, environmental policy such as NCAP and NAPCC, and health care policy such as Ayushman Bharat and NHM[3]. Public policy affects all stakeholders of a particular sector.

In India, the three branches of government serve as the primary creators of public policies. State governments are also essential in planning and executing public policies through a variety of programs and initiatives. Furthermore, the general public plays an active role in influencing the development of public policies in India. Since these policies are aimed at specific groups or the entire population, citizen feedback is essential[4].

How Does Arbitration Affect Public Policy?

Public policy evolves in response to changing societal values and priorities, and developing economic and political strategies in which arbitration may have a significant role. Over time, as the law became more intricate and the range of issues suitable for arbitration broadened, the impact of arbitration on public policy increased. The effect of Arbitration on public policy emanates from the unique characteristics of the Arbitration process, whether voluntary or mandatory, especially the significant effect arising from the enforcement of arbitration awards. There are various factors relating to arbitration through which we can analyze the multifaceted impact of arbitration on public policy:

Efficiency

Efficiency is generally linked to processes that are both prompt and cost-effective. Individuals resort to arbitration agreements because they are more efficient than litigation which is often associated with cumbersome procedures that are costly and exhaustive[5]. Accordingly, the resort to arbitration may have significant effect on the reduction of burden upon the judicial system allowing public resources to be allocated more effectively which align with public policy objectives of maintaining an effective and responsive legal system.

Confidentiality

Arbitration is a private and confidential procedure. Third parties who are not included in the arbitration agreement are unable to attend hearings or participate in any aspect of the arbitration proceedings[6], and arbitration awards are only published in specific cases.

This essential element of arbitration makes it a very secure dispute resolution system for both businesses and individuals who prefer that their information is protected, allowing businesses to resolve disputes without fear of public exposure.

On the other hand, this element of confidentiality raises concerns about transparency and public scrutiny, especially in matters that affect the public interest. This is far crucial in consumer and employment contracts where there is often a clause including mandatory arbitration in case of disputes, as Fairness demands that individuals involved in conflicts should have access to a resolution mechanism that is transparent and subject to public oversight. Although they might choose private means in specific cases, it would be inappropriate for a society to set up dispute resolution systems that are entirely private[7].

Another concern is that the private nature of the arbitration process and the absence of a doctrine of precedents may be considered as impediments to allow the development and coherence of the legal system which is a dynamic element of public policy. In this regard, arbitration process is said to have no educational function. Unlike arbitration, Courts play a unique and constitutional role in upholding and reinforcing the rule of law through their rulings. By publishing their decisions, they contribute to the dissemination of information about legal issues and their resolutions within their respective jurisdictions. This aspect of their function ensures transparency, informs the public about legal matters, and forms public values[8].

Access to Justice

Access to justice is a fundamental factor affecting public policy. To align arbitration with public policy, it must not restrict access to justice in any manner. However, mandatory arbitration has consistently presented challenges in this regard. In mandatory arbitration parties are mandated to settle their dispute through arbitration, which implies that parties are deprived of their right to litigate. Clauses that obligate parties to utilize arbitration process rather than bringing a class-action lawsuit are found in consumer and employment contracts, which also waives the parties right to appeal. Generally, employees and consumers are at a disadvantage in arbitration, winning less frequently and securing smaller awards than they do in court. Employers, on the other hand, often benefit from a repeat-player effect, prevailing more often when they present cases to the same arbitrator multiple times, suggesting their regular engagement in arbitration gives them a significant edge over employees[9]. Professor Jean Sterling articulates in his article ‘Creeping Mandatory Arbitration, Is It Just?’ that Allowing the most influential members of society to design a dispute resolution system tailored to their own interests, rather than those of their adversaries or the general public, poses a significant issue in public policy[10].

Impact on Specific Areas of Public Policy

International Trade

The implementation of international trade rules introduces various legal challenges. Most international contracts stipulate that any arising disputes will be settled through arbitration. Here,  international arbitration serves as an effective method for resolving trade disputes.  Such disputes can profoundly affect international trade and often demand careful, diplomatic resolution to prevent the worsening of trade relations between the involved nations. Legal scholars argue that international arbitration is contributing to the development of legal doctrines that align with business needs of parties[11], consequently impacting public policy on trade relations, investment protection, and international business practices.

Environmental Regulation

Several of international environmental disputes concern legal issues relating to domestic environmental regulatory frameworks which are resolved through international arbitration[12]. In this context, arbitration can influence public policy on environmental protection, particularly in cases involving international investments and disputes over natural resources. A widely cited instance in the environmental realm is the Indus Waters Kishenganga arbitration (Pakistan v India, PCA 2011-01), initiated under the Indus Waters Treaty[13].

Balancing Arbitration and Public Policy Considerations

Achieving an equilibrium between arbitration and public policy is of paramount importance. Arbitration procedures, rulings, and awards must invariably conform to the essential tenets of public policy. Arbitration and public policy converge when arbitral rulings affect matters of significant public interest. For instance, an arbitral decision that contravenes a nation’s fundamental principles may be challenged on the basis of public policy.

When drafting an agreement or issuing an award, several public policy considerations must be taken into account. These include access to justice, ensuring that the arbitration agreement facilitates rather than hinders the parties’ ability to seek justice. Non-discrimination is another concern, as the process of selecting arbitrators can potentially introduce bias; thus, the agreement must be drafted impartially, without any unjustifiable criteria. Compliance with national laws and societal values is also crucial, as awards that are illegal or influenced by bribery can be challenged on public policy grounds. Moreover, when enforcing arbitration awards across different jurisdictions, stakeholders must navigate diverse public policy frameworks[14].

Arbitration and Public Policy in India

In India, a detailed legal framework regulates the relationship between arbitration awards and public policy. The country values arbitration as an effective dispute-resolution method, but this is moderated by the need to respect public policy considerations. Balancing these aspects is vital for preserving the efficiency of arbitration while protecting the broader interests of Indian society. Indian courts tread carefully between respecting arbitration’s independence and upholding public policy, interpreting the latter to ensure justice, fairness, and alignment with constitutional principles[15].

The Arbitration and Conciliation Act 1996 was enacted in tandem with international practices, and it ensures the adherence to India’s public policy. The Act provides that an arbitration award may be set aside by courts if found contrary to public policy. Section 34(2) of the act stipulates that ‘An arbitral award may be set aside by the Court only if: (b) the court finds that (ii) the arbitral award conflicts with the public policy of India’[16].

In J.G. Engineers (P) Ltd v. Union of India 2011, the court held that  a court can set aside an award under Section 34(2)(b)(ii) of the Act, as being in conflict with the public policy of India, if it is (a) contrary to the fundamental policy of Indian law; or (b) contrary to the interests of India; or (c) contrary to justice or morality; or (d) patently illegal[17]. Furthermore, the court explains in Court in ONGC v. Saw Pipes what constitutes public policy. It states that “Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term “public policy” in Renusagar case [1994 Supp (1) SCC 644] it is required to be held that the award could be set aside if it is patently illegal[18].

Conclusion

The legal system with all its components is inherently intersected with the constitution and development of public policy. Arbitration as a vital method of resolving disputes that may arise in various matters affecting society, economy, and different international practices can be a two-edged sword when it comes to public interest. Although acting as an effective tool that offers efficiency, flexibility, and privacy, its process and final rulings may in some cases create a form of injustice eventually negatively impacting essential components of public policy. Access to justice, which is a factor of public policy, may be restricted by the arbitrary exercise of mandatory arbitration.

Arbitration affects certain areas of public policy rather than others. This is particularly apparent in international trade, environmental regulation, consumer protection, and employment law, possibly leading to the modification of public policy related to rights and regulations.

The need to maintain a balance between the goals of arbitration and public policy considerations becomes necessary in order to ensure the efficiency of arbitration while appropriately preserving public policy. In achieving this objective, periodical review and revision of arbitration agreements may be convenient to ensure their alignment with public policy and further provide a well-suited structure for such an objective.

References

1. Arbitration and Conciliation Act, 1996, Acts of Parliament, 1996 (India).
2. J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758.
3. ONGC v. Saw Pipes, 2003 (5) SCC 705.
4. O.P. JINDAL GLOBAL UNIVERSITY, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited July 11, 2024).
5. INDIAN SCHOOL OF PUBLIC POLICY, https://www.ispp.org.in/what-is-public-policy-why-is-studying-public-policy-more-important-now-than-ever/ (last visited July 11, 2024).
6. LEGAL NATURE, https://www.legalnature.com/guides/dispute-resolution-the-benefits-of-an-arbitration-agreement (last visited July 12, 2024).
7. Richard Smellie, Is arbitration confidential? FENWICK ELLIOTT (July 12, 2024, 9:40 PM), https://www.fenwickelliott.com/sites/default/files/richard_smellie_-_is_arbitration_confidential.pdf
8. Jean Sternlight, Creeping Mandatory Arbitration: Is It Just?, researchgate, (July 12, 2024, 06:06 PM), https://www.researchgate.net/profile/Jean-Sternlight/publication/228193745_Creeping_Mandatory_Arbitration_Is_it_Just/links/61af9c546cd00716cc3dff13/Creeping-Mandatory-Arbitration-Is-it-Just.pdf
9. HIGH COURT OF AUSTRALIA, https://www.hcourt.gov.au/assets/publications/speeches/current-justices/frenchcj/frenchcj18Apr2016.pdf (last visited July 12, 2024).
10. Katherine V.W Stone and Alexander J.S. Colvin, The arbitration epidemic, ECONOMY POLICY INSTITUTE (December 7, 2015), https://www.epi.org/publication/the-arbitration-epidemic/
11. NBER, https://www.nber.org/system/files/working_papers/w4136/w4136.pdf (last visited July 13, 2024).
12. PERMENANT COURT OF ARBITRATION, https://pca-cpa.org/en/services/arbitration-services/environmental-dispute-resolution/ (last visited July 13, 2024).
13. NORTON ROSE FULBRIGHT, https://www.nortonrosefulbright.com/en/knowledge/publications/b4cbedfe/climate-change-and-sustainability-disputes-international-arbitration-perspective (last visited July 13, 2024).
14. BRODERIC BOZIMO & COMPANY, https://broderickbozimo.com/bridging-arbitration-and-public-policy/ (last visited July 14, 2024).
15. LINKEDIN, https://www.linkedin.com/pulse/arbitration-public-policy-vllp2017-zzqbf/ (last visited July 14, 2024).

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[1] O.P. JINDAL GLOBAL UNIVERSITY, https://jgu.edu.in/blog/2023/12/30/what-is-public-policy/ (last visited July 11, 2024).

[2] INDIAN SCHOOL OF PUBLIC POLICY, https://www.ispp.org.in/what-is-public-policy-why-is-studying-public-policy-more-important-now-than-ever/ (last visited July 11, 2024).

[3] Id.

[4]  Id.

[5] LEGAL NATURE, https://www.legalnature.com/guides/dispute-resolution-the-benefits-of-an-arbitration-agreement (last visited July 12, 2024).

[6] Richard Smellie, Is arbitration confidential?, FENWICK ELLIOTT (July 12, 2024, 9:40 PM), https://www.fenwickelliott.com/sites/default/files/richard_smellie_-_is_arbitration_confidential.pdf

[7] Jean Sternlight, Creeping Mandatory Arbitration: Is It Just?, researchgate, (July 12, 2024, 06:06 PM), https://www.researchgate.net/profile/Jean-Sternlight/publication/228193745_Creeping_Mandatory_Arbitration_Is_it_Just/links/61af9c546cd00716cc3dff13/Creeping-Mandatory-Arbitration-Is-it-Just.pdf

[8] HIGH COURT OF AUSTRALIA, https://www.hcourt.gov.au/assets/publications/speeches/current-justices/frenchcj/frenchcj18Apr2016.pdf (last visited July 12, 2024).

[9] Katherine V.W Stone and Alexander J.S. Colvin, The arbitration epidemic, ECONOMY POLICY INSTITUTE (December 7, 2015), https://www.epi.org/publication/the-arbitration-epidemic/

[10] supra note 7.

[11] NBER, https://www.nber.org/system/files/working_papers/w4136/w4136.pdf (last visited July 13, 2024).

[12] PERMENANT COURT OF ARBITRATION, https://pca-cpa.org/en/services/arbitration-services/environmental-dispute-resolution/ (last visited July 13, 2024).

[13] NORTON ROSE FULBRIGHT, https://www.nortonrosefulbright.com/en/knowledge/publications/b4cbedfe/climate-change-and-sustainability-disputes-international-arbitration-perspective (last visited July 13, 2024).

[14] BRODERIC BOZIMO & COMPANY, https://broderickbozimo.com/bridging-arbitration-and-public-policy/ (last visited July 14, 2024).

[15] LINKEDIN, https://www.linkedin.com/pulse/arbitration-public-policy-vllp2017-zzqbf/ (last visited July 14, 2024)

[16] Arbitration and Conciliation Act, 1996, § 34, Acts of Parliament, 1996 (India).

[17] J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758.

[18] ONGC v. Saw Pipes, 2003 (5) SCC 705.

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