THE INTERPLAY BETWEEN ARBITRATION AND PUBLIC POLICY: A COMPARATIVE PERSPECTIVE

ABSTRACT

This article indicates that arbitrators should modify their approach to public policy norms in arbitration in addition to the conventional disputes techniques of establishing the appropriate law. The application of public policy norms, particularly those that are dominant or directly relevant to conflicts, need not be rejected by arbitrators. They may choose to provide each party autonomy in all other areas of the case or apply the relevant standard to specific topics in the disagreement. This can be accomplished ex officio or by means of mediation within the arbitration procedure, led by the most experienced arbitrator in the case, with the parties actively involved.

KEYWORDS

Public policy, arbitration, international, award, dispute, arbitrator, tribunal, court.

INTRODUCTION

Arbitration has become a popular alternative dispute resolution method worldwide since it provides parties with a confidential and effective way to settle disagreements. But the point where public policy and arbitration verdicts converge becomes critical, particularly in places like India where there may be obstacles to the enforcement of arbitral awards due to larger public interests. In order to provide light on situations in which the public interest may collide with the enforcement of arbitral decisions, this essay examines the delicate balance that exists between public policy and arbitration awards.

Situations presented by public policy norms make it more difficult for arbitrators in international arbitration to decide which law to apply. The indispensable character of these standards and the distinct role of arbitrators as private adjudicators in contrast to judges are the main causes of this complexity.

Domestic or international arbitration gives contracting parties the freedom to freely manage the settlement of their disputes by appointing subject-matter experts to serve as arbitrators, selecting or establishing the institutional or ad hoc process that will be used to resolve the dispute, and deciding which applicable law will serve their interests.

Limitations do in fact exist when parties’ private interests are so closely linked to the public interests of governments. It is the responsibility of the arbitrator chosen by the parties to settle the conflict of interest in front of her. She obtains her power from the parties, but there are also public policy standards that are independent of her authority source—the arbitration agreement—that assert applicability because the public policy supporting them may be in jeopardy. Aside from resolving disputes between the states on public policy norms that may be applicable at different phases of arbitration, the arbitrator should also seek to address conflicts between the states.

ARBITRATION

“Alternative dispute resolution” involves using different approaches to resolve conflicts, such as conciliation, mediation, and arbitration.

One of the alternative dispute resolution methods that allows parties to settle their differences without the involvement of the courts is “arbitration”. The primary goal of arbitration is to settle disputes quickly and affordably, which will minimise the amount of court cases that are filed.

According to 1 Section 2(1)(a) of the Arbitration and Conciliation Act, 1996 “Arbitration means any arbitration whether or not administered by a permanent arbitral institution”. In other words, in India, all forms of arbitration, irrespective of their nature, are recognized and such decisions are taken in the context of the Arbitration and Conciliation Act, 1996. The simple test involves simple rules of evidence and lack of discovery. Judicial proceedings are generally not public records. An arbitration award is binding on both parties, just like a court decision or order.

The main problem with the current legal system is the sheer amount of cases that are waiting, which eventually results in injustice. Thus, by having arbitrators decide issues, arbitration can be very helpful in reducing the backlog of unresolved cases. The Arbitration and Conciliation act, 1996^[1], has undergone significant revisions, directs and governs arbitration law to regulate the law on arbitration in India.

Arbitral awards are enforceable in India in the same way as other court orders. As a result, the arbitral decision has the same legal force and effect as any other court-issued judgement or order.

PUBLIC POLICY

The concept of “public policy” is imprecise and refers to concerns or situations concerning the welfare of the general population. As the name implies, public policy is broad and always based on the interests of the whole populace. Since it is comparable to a “policy of law,” any laws, regulations, policies, or other practices that are contrary to the public interest will be labelled as “against the public policy.”

Furthermore, because the phrase “public policy” is broad, it encompasses any activities that benefit the public as a whole. The flexibility and open-textured nature of the “public policy” doctrine have led to judicial criticism of the theory. There is a general consensus that the courts have the authority to apply current “Public Policy” to novel circumstances, and the distinction between doing so and developing a whole new principle is frequently quite slight. “Public Policy” is subject to change. Rules based on “public policy,” as opposed to those that are part of established customary law, have the flexibility to expand or change as needed based on the situation.

PUBLIC POLICY PRINCIPLES

Since the public interest is served by the inclusion of natural justice principles, the policy’s flexibility is readily apparent. In a variety of situations, the courts apply the public policy concept prudently. The distinction between a rule that is against public policy and one that is in line with it is subtle. The foundation of public policy is flexible and adjusts to the needs of a changing society.

A contract’s validity or voidability is determined by the government and the court after taking into account the public policy constraints in that particular agreement and applying it to the parties involved.

In the end, “Public Policy” covers anything that undermines justice and goes against the fundamentals of natural justice.

RELATION BETWEEN ARBITRATION AND PUBLIC POLICY

For instance, a search conducted globally in the field of international arbitration shows that the word “public policy” has been used in over 160 arbitral awards—at least those that have been made public. There is still a great deal of uncertainty about the ability of arbitrators and mediators to evaluate public policies as they emerge during procedures. Furthermore, it has shown that judges and national courts have a very discretionary amount of power when it comes to reviewing and enforcing public legislation.

Public policy is an old concept that allows public law to intrude into private law and prevent it from having the usual legal consequences. Its scope is not defined, so it is up to the courts to interpret it in a way that makes sense to them. The term “public policy” is used and argued in numerous national and international tribunals on a daily basis, but its definition is constrained.

In the context of arbitration, the public policy theory states that not every dispute involving two or more parties may be arbitrated because of the public aspect of the issue. Essentially, there is an issue with the enforcement of arbitral rulings if the topic has an impact on the general public. It is also thought that legitimate public bodies should settle disputes rather than arbitration tribunals.

IN INDIA

The Arbitration and Conciliation Act, 1996 prohibits an arbitral tribunal or lone arbitrator from rendering a decision that goes against India’s public policy. A summary of the many sections outlined in the 1996 Act:-

Section 34 (2)(b)(ii)^[2] of the aforementioned Act states that an arbitral verdict may be overturned if the court determines that it is against Indian public policy.

Explanation to Section 34 of the 1996 Act: In relation to the generality of Sub clause (ii), an award is in conflict with the Public Policy of India if its making was influenced or affected by fraud or corruption, or if it violated Sections 75 or 81 of the 1996 Act.^[3]

The Supreme Court construed the term “Public Policy” differently and broadly in Shri Lal Mahal Ltd vs. Progeto Grano S.P.A,^[4] declaring that the enforcement of an international arbitral result differs from that of a domestic award. Furthermore, by rejecting the expansive interpretation of public policy, one can now oppose the enforcement of an international award only under the following circumstances:

Justice and morality;
India’s interests;
the fundamental principles of Indian law;
patently illegal

FRAUD: This broad term with multiple definitions is defined as a deception or a purpose to deceive others under section 17 of the Indian Contract Act.^[5] Furthermore, it is dishonesty with the intention of misleading others.

Therefore, the arbitral award will not be enforceable if it was founded on deception and misinterpretation.

CORRUPTION: The term “corruption” refers to any bias or favouritism shown by an arbitrator towards any party, not just financial gain. The award will not become enforceable if the arbitrator gives any party undue favours.

Corruption cannot arise from a mere suspicion since such accusations require more than just a suspicion. In the case of Chouthmal Jivraj Poddar v. Ram Chandra Jivraj Poddar,^[6] the court ruled that simply putting up with the parties, dining, etc., would not be enough to vitiate the proceedings. Rather, the arbitrators’ private conference on the contentious issue with one of the parties would vitiate the proceedings and could serve as justification for setting aside the decision.

Furthermore, the award may be overturned if the arbitrator engaged in illicit gratification or accepted financial inducement. Section 11^[7] of the Arbitration Act stipulates that the arbitrator must be an unbiased and independent party.

In addition, section 12^[8] of the act specifies the basis for challenges in cases where an arbitrator’s independence and impartiality are expressly stated.

2015 Amendment

The 2015 Act Amendment, which took recommendations from the 246th Law Commission Report, significantly altered the definition of “public policy” under the Arbitration Act. Explanation 2 was added as a change to Sections 2A^[9] and 34(2)^[10]. The modification limits the notion of public policy, so restricting the extent of court intervention in arbitral procedures. The Amendment Act limited the grounds for annulment of foreign arbitral rulings to the following:

caused by or impacted by corruption or fraud
Violation of the core principles of Indian law
In conflict with moral and social justice ideals

PUBLIC POLICY AND INTERNATIONAL LAW:

i) Geneva Convention, 1927

The Geneva Convention of 1927 stipulated that in order for a foreign arbitral award to be recognised or enforced, all of the requirements listed in clauses (a) to (e) of Article 1 had to be satisfied. Additionally, according to Article 2^[11], even if all of the requirements listed in that article were met, the court’s satisfaction with the following matters would prevent recognition and enforcement of the award:-

The award has been revoked in the nation where it was made;
The party was not adequately represented due to his legal incapacity.
That decisions on subjects outside the purview of the arbitration submission are contained in the award.

The common law rules that the English court used are essentially the same ones that apply to the recognition and enforcement of foreign awards. However, it was believed that the Geneva Convention had some flaws that made it more difficult for disagreements to be resolved quickly.

By offering a far more straightforward and efficient way to get international awards recognised and enforced, the New York Convention aims to address the aforementioned flaws.

ii) The 1958 New York Convention^{^[12]}

According to Article III^[13] of the New York Convention (1958), every contracting state must accept awards as legally binding and implement them in line with local laws and customs in the jurisdictions where the awards are used. The procedural issue of submitting a foreign award would therefore be governed by the procedural legislation of the country in which the award is relied upon.

According to Article V (2)^[14] of the New York Convention (1958), an arbitral award may also be rejected to be enforced if the country’s legal system determines that this is the case.

The dispute’s subject matter cannot be resolved through arbitration under that nation’s legal framework, or
It would be against that nation’s national policy to recognise or enforce the award.

iii) UNCITRAL Model Law, 1985

Article 36 (b)^[15] of the UNCITRAL model Law (1985) outlines the reasons a court may refuse to recognise or enforce an arbitral decision, regardless of the nation in which it was rendered. These reasons include the following:

The law of this state prohibits arbitration for the resolution of disputes involving this subject area, or
It would go against this state’s public policy to recognise or enforce the award.

CASE LAWS

THE RENUSAGAR CASE^[16]

Section 7 (1)(b)(ii)^[17] of the Foreign Awards (Recognition and Enforcement) Act, 1961 is encapsulated in the seminal decision Renusagar Power Co Ltd v. General Electric Co.

The Supreme Court ruled that this clause had to be read in a way that required the application of public policy principles to the area of private international law.

This was spoken in relation to the New York convention. Additionally, it has been said that section 34(2)(b)(ii)^[18] will set aside the award if it violates Indian public policy. This ruling has legal ramifications since it allows a ward that is patently unconstitutional to be enforced until and unless it is not unlawful and goes against public policy.

THE ONGC CASE^[19]

The Bombay High Court rejected the petition in this landmark decision, among other reasons, stating that the award did not fall under the category of being “in conflict with public policy.” Consequently, the Supreme Court ruled in the appeals process that section 34^[20] will give a broader interpretation of the term “public policy in India.”

The court in this instance, in contrast to the Renusagar decision, declared that any issue pertaining to the public interest and good is considered public policy. In addition, it has been stated that awards may be revoked in the event of patent illegality, in addition to the three heads specified in the Renusagar case.

Shri Lal Mahal Ltd. v. Progetto Grano Spa^[21]

Using the same terminology, it was argued that the term “public policy” is ambiguous and abstract in reference to Section 48(2)(b)^[22] of the Act. Although Sections 34 and 48(2)(b) have the identical terminology, the SC determined that Section 34 had a greater meaning. As a result, the ruling restricted the interpretation of “public policy” in the challenged part to exclude the award’s patent illegality.

CONCLUSION

Arbitration is an affordable and quick way to settle disputes, however Indian arbitration is becoming less trustworthy due to increased court intervention. It is evident that the judiciary has a preference for arbitration, and as a result, it has given arbitral awards and arbitration greater legal weight and enforceability.

The Law Commission of India’s 176th report states that two new grounds have been introduced under section 34(1):

(i) An error that is clearly visible on the face of the award and raises a significant legal question; and,

(ii) The award ought to include the reasons.

One thing is certain on all fronts: the Supreme Court has extraordinary authority to challenge international arbitral awards based on “public policy” standards and to interpret the Act’s applicability clause in a way that challenges the Act’s strict interpretation, making international arbitrations conducted outside of India subject to Indian court review.

When parties to a contract decide to resolve their legal dispute through arbitration, it indicates that they want to avoid going to court. The country’s contradictory court rulings are undermining international commercial arbitration and defeating the goal of arbitration.

REFERENCES

Blog.ipleaders https://blog.ipleaders.in/interface-public-policy-arbitration/ (last visited on 14th Feb 2024)
Linkedin https://www.linkedin.com/pulse/arbitration-public-policy-vllp2017-zzqbf (last visited on 14th Feb 2024)
LegalservicesIndia https://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law.html#:~:text=the%20Apex%20Court%20has%20held,harmful%20from%20time%20to%20time. (Last visited on 14th Feb 2024)
Kluwer Arbitration Blog https://arbitrationblog.kluwerarbitration.com/2022/06/18/public-policy-is-this-catch-all-provision-relevant-to-the-legitimacy-of-international-commercial-arbitration/ (last visited on 14th Feb 2024)
Foxmandal.in https://www.foxmandal.in/evolution-of-the-doctrine-of-public-policy-in-arbitration/ (last visited on 14th Feb 2024)

^[1] Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996 (India).

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

^[3] Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996 (India).

^[4] Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433

^[5] Indian Contract Act, 1872, § 17, No. 09, Acts of Parliament, 1872 (India)

^[6] Chouthmal Jivraj Poddar v. Ram Chandra Jivraj Poddar ,AIR 1955 Nag 126

^[7] Arbitration and Conciliation Act, 1996, § 11, No. 26, Acts of Parliament, 1996 (India).

^[8] Arbitration and Conciliation Act, 1996, § 12, No. 26, Acts of Parliament, 1996 (India).

^[9] Arbitration and Conciliation Act, 1996, § 2A, No. 26, Acts of Parliament, 1996 (India).

^[10] Arbitration and Conciliation Act, 1996, § 34, cl. 2, No. 26, Acts of Parliament, 1996 (India).

^[11] Geneva Convention, Art. 2, 26^th September, 1927

^[12] New York Convention, 10^th June, 1958

^[13] New York Convention, Art. III, 10^th June, 1958

^[14] New York Convention, Art. III, Cl. 2, 10^th June, 1958

^[15] UNCITRAL Model Law, Art. 36, Cl. B, 21^st June,1985

^[16] Renusagar Power Co Ltd v. General Electric Co.,1994 Air 860, 1994 Scc Supl. (1) 644.

^[17] Foreign Awards (Recognition and Enforcement) Act, 1961, § 7, Cl. 1, No. 045, Acts of Parliament, 1961 (India).

^[18] Arbitration and Conciliation Act, 1996, § 34, cl. 2, No. 26, Acts of Parliament, 1996 (India).

^[19] Oil and Natural Gas Corporation Ltd v. Saw Pipes Ltd., (2003) 5 SCC 705

^[20] Arbitration and Conciliation Act, 1996, § 34, No. 26, Acts of Parliament, 1996 (India).

^[21] Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433

^[22] Arbitration and Conciliation Act, 1996, § 48, cl. 2, No. 26, Acts of Parliament, 1996 (India).

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