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Arbitration and The Public Policy Exception: Necessary Precaution Or Controversial Impediment?

Updated: Sep 26, 2023

by Mathanki Narayanan*

Sections 34 and 48 of the Arbitration and Conciliation Act, 1996 provide for applications for the setting aside of arbitral awards and conditions for enforcement of foreign awards respectively; one of the grounds (for challenging the award or its enforcement) mentioned in both sections is that of public policy. The views of the Indian judiciary on the public policy exception have typically oscillated from a narrow interpretation to a broad one. Many cases- such as ONGC v. Saw Pipes Ltd. and Bhatia International v. Bulk Trading S.A.- had the effect of ensuring that scope for challenging domestic as well as foreign arbitral awards was broadened to the detriment of the Indian arbitration milieu. Conversely, cases such as Renusagar Power Plant Co. Ltd. v. General Electric Company and the more recent Ssangyong Engineering v. National Highways Authority of India have sought to remedy some of the shortcomings of their predecessors by adopting a pro-enforcement view. Notwithstanding that India has been a party to the New York Convention, it has widely been regarded as an inconvenient jurisdiction with respect to the enforcement of international arbitration awards- partly due to the various problems posed by the public policy exemption. This article attempts to shed light on the various manifestations of these issues, and whether such exceptions are expendable, or if their benefits outweigh the disadvantages.

Evolution of Judicial Interpretations of “Public Policy” in India

In Renusagar Power Plant Co. Ltd. v. General Electric Company, the Supreme Court adopted a narrow interpretation of public policy- particularly with respect to private international law. Recognizing the need for enforceability of foreign arbitral awards in the pre-1996 period, the Court stated that the enforceability of a foreign arbitral award by the ICC could be questioned on only three grounds of public policy: fundamental policy of Indian law, the interests of India as a nation, and justice and morality. Post the enactment of the 1996 Act, the case of ONGC v. Saw Pipes Ltd. witnessed a contrasting approach taken by the Supreme Court with respect to the question of whether it could set aside a domestic arbitral award on grounds of patent illegality. Holding that patent illegality was indeed an additional ground for court intervention, the Supreme Court in this case widened the scope for challenging domestic as well as foreign arbitral awards. The effects of this case, in combination with that of subsequent cases- such as Bhatia International v. Bulk Trading S.A., Venture Global v. Satyam Computers, and Phulchand Exports Limited v. O.O.O. Patriot- was that foreign arbitral awards could be questioned on the broad grounds as enumerated in ONGC. But in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., the Supreme Court recognized the need to remedy previous wrongs and upheld the prospective overruling of Bhatia International- to the extent that international arbitral awards could not be subjected to the public policy exception as delineated in Sec. 34.

However, the Court in ONGC v. WesternGeco International Ltd. betrayed a turn towards reinforcement and expansion of the public policy exception yet again: detracting from Renusagar, the Court erroneously conflated the merits of an award with its enforcement. This thus enabled courts to review the merits of a case, effectively allowing underhanded subversion of arbitral awards. Following this, in Associate Builders v. DDA, the Court sought to mitigate some of the damage inflicted by WesternGeco. With respect to the patent illegality ground, the Court introduced the test of reasonability as a means to determine whether or not the interpretation of a contract would necessitate interference by the judiciary. In an effort to prevent further manipulation of the public policy exceptions, the Court also explicated the limits of the “justice and morality” and the “interests of India” exceptions. Following these two problematic decisions, a supplement to the 246th Law Commission Report expressing the Commission’s disapproval of the aforementioned decisions was published. Subsequently, the 2015 Amendments to the Arbitration and Conciliation Act were effected. With the inclusion of two explanations and Sec. 34 (2A), these amendments were a necessary overhaul of the pre-Amendment regime. In Ssangyong Engineering v. National Highways Authority of India, the Court made extensive references to the 2015 amendments, holding that the broad interpretation of public policy as in WesternGeco would not be in line with the same. This judgment marked a long-awaited return to the narrow construction of public policy embodied in Renusagar. The 2020 case of Vijay Karia v. Prysmian Cavi E Sistemi SRL also reinforced the pro-enforcement leaning of Indian courts, with the SC in this case holding that mere contravention of the law would not by itself be sufficient to warrant non-enforcement of foreign arbitral awards. However, in National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A the SC ruled that foreign arbitral award could not be enforced on two counts: its voidness vis-à-vis Section 32 of the Indian Contract Act, and its dissonance with India’s policy vis-à-vis exports. The enhanced application of domestic laws in this case suggests that, in the future, foreign arbitral awards might be subjected to a greater level of scrutiny by virtue of consonance with domestic laws.

Need for the Public Policy Exception

Public policy is often described as a doctrine of judicial interpretation that is reflective of societal needs and norms. The very nature of such a doctrine, therefore, requires the filling in of various lacunae by the judiciary, who cannot shirk their duties to do so by approving any and every agreement that could possibly circumvent collective societal wellbeing. Considering that arbitration is still at a nascent stage as compared to more established methods of dispute resolution such as litigation, courts must also fulfil their duties to uphold public confidence in ADR processes. As proffered by the Saw Pipes judgment, the role of dispute resolution is ultimately one that must be carried out by the State itself- in this regard, the power of the courts cannot be undermined by shadowing the significance of public policy concerns. The relationship between public policy and arbitration is one that must be paralleled by a similar balance between concerns of attributing finality to ADR processes and justice.

Furthermore, there are certain drawbacks to the arbitration setup itself. For instance, private arbitrators (who are in essence acting in a similar capacity to that of private lawyers) might favour clients who are wealthier than, say, a poor client who does not possess the necessary resources to ensure multiple arbitration sessions. Such a client has no better alternative to turn to, as litigation would also consume a significant amount of money, and even more time. Where one party is able to dominate the other through informational or economic asymmetry, the public policy exception steps in to protect the weaker party. The guiding principles of equity, justice, and good conscience must therefore be implemented by courts in case they are not adhered to in the arbitration process. The public policy exception thus ensures that justice is not circumvented due to a lack of adequate judicial oversight or intervention. As elucidated in the landmark case of Soleimany v. Soleimany, the obligation to protect the integrity of the arbitral process falls upon the courts. Private agreements that are in contravention of this integrity, as well as other general principles and rules of law, cannot be allowed to take precedence over public policy. Particularly with respect to developing countries such as India, wherein private agreements tend to be more susceptible to the influence of corruption/fraud, public policy exceptions play a two-pronged role: bolstering the robustness of arbitration processes, and preventing parties from circumventing judicial oversight by manipulating arbitration clauses.

Another factor that bolsters the need for the public policy exception is the mitigation of harm posed to third parties by agreements between two private individuals. An arbitration that is concluded outside of the purview of the court might not always pay heed to the effects of such an agreement and its enforcement upon third parties who are not privy to this information. For example, in cases pertaining to the establishment of monopolies in contravention of competition policies or factory-related disputes whose enforcement would infringe upon pollution control statutes, courts would be required to step in to perform the task of balancing private interests and public interests. The incorporation of the public policy exception might also help the law fulfil its redistributive duties in a more efficient manner. Take for instance the case of usury laws. Here, the limitation of the private liberties of creditors (who are characterized as being high-risk due to their perceived propensity towards defaulting upon repayment) would have an overall beneficial effect on society. An overreliance upon ex-post redressal mechanism would burden organs of the welfare state that are tasked with redistribution of benefits; therefore, if courts step in to pre-empt any such agreements- which if enforced would be detrimental to public policy- it would not only help the state, but also the individuals directly affected by such an agreement in the long run.


A Contrasting View: Public Policy as a Convenient Loophole

In a milieu wherein litigation is considered not only inconvenient but also avoidable, arbitration allows conflicting viewpoints to be resolved by parties who are willing to step outside conventional methods of arbitration. In this context, the opening up of various backdoors in the form of public policy exceptions allows opposing parties to prolong the resolution process through Court intervention. This is not in consonance with the underpinning of the Arbitration and Conciliation Act which seeks to minimize judicial interference insofar as it is rendered unnecessary by the powers of arbitration tribunals. Additionally, in order to align with the Law Commission’s vision of India’s development as an international hub for arbitration, it becomes increasingly significant to ensure that the enforceability of arbitral awards is not hindered by overexpansiveness in the interpretation of public policy. But the issue of curtailing the problems posed by the exception of public policy is not a novel one- in the 1824 case of Richardson v. Mellish, public policy had been described as an “unruly horse.” Apart from ensuring judicial supervision over arbitration, another less popular argument against the public policy exception stems from the contention that if the enforcement of any arbitral award can be questioned on grounds of public policy, there exists no guarantee that such a court will adopt the appropriate view.

Excessive reliance upon the public policy exception could have the effect of creating (both perceived and actual) inconsistencies in the outcomes of arbitration. If courts are given the power to intervene on grounds of public policy, prospective parties to arbitration would, to a certain extent, be deterred from arbitrating as the entire process itself could be rendered nugatory at the final stage. Additionally, if, as in the aforementioned class of cases involving asymmetrical access to information or economic resources, the stronger party were aware that such judicial interventions are possible, they would altogether see more of a reason to dispense with arbitration clauses in the first place. This might have the broader effect of harming weaker parties, such as employees in cases of employer-employee disputes, by forcing them to go through conventional methods of dispute resolution such as litigation- which are more expensive. Even in the USA, courts have generally taken the view that the New York Convention’s goal of reducing the number and severity of obstacles to the enforceability of international arbitral awards would be diminished by reliance upon the exception.

Conclusion

Although the pre-1996 epoch of Indian arbitration was marked by vicissitudes on both ends of the spectrum, the public policy exception has- as indicated by the evolution of judicial interpretations- begun to constrict. In an era where arbitration is becoming an increasingly popular method of dispute resolution, India, through legislative and judicial actions, must ensure that the efficiency of ADR mechanisms is not curtailed by convenient backdoors such as the public policy exception. From an international frame of reference, for the purposes of international cohesion and uniformity in the development of arbitration, it would be useful if the global ADR community arrived at a consensus as to which circumstances would permit the invocation of the public policy exception. Although most countries favour a narrow interpretation of this exception, it would be unwise to rely solely upon this trend. While there is an undeniable need for the exception, the Indian judiciary must pay careful heed to the definitional scope it attributes to the term “public policy”- which must, for the time being at least, be construed narrowly. In this regard, the courts must be particularly careful in delineating the upper limit of the public policy exception. With the contradicting judgements given in the recent cases of Vijay Karia and NAFED, it remains to be seen how the Indian courts attempt to resolve the issue of interpretation of public policy. Hopefully, the pro-enforcement bias is sustained in an attempt to promote India as a pro-arbitration jurisdiction in the global community.

Mathanki Narayanan is a fourth-year law student at Jindal Global Law School, you can reach out to her here.

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