Foreign Arbitral Awards vs. Public Policy: A Judicial Tug of War in India

Introduction

Public policy may be considered a sort of ‘two-way street’ in international commercial arbitration ‘helpful as a tool, dangerous as a weapon’.

There are various expressed opinions concerning arbitration concurrently with the changing opinions on public policy have had an effect on how judges interpret what is meant by public policy in deciding whether an arbitral award is not to be enforced.”This has come to be known as the public policy exception to the enforcement of arbitral decisions. While both the UNCITRAL model law and the New York Convention recognize that ‘public policy’ is an important factor in maintaining arbitral awards, the function that public policy plays in the maintenance of such awards remains contentious and controversial in arbitration. However, any arbitral award contrary to public policy is liable to be set aside, as provided under Sections 34 and 48 of the Arbitration and Conciliation Act, 1996. The Act, however, does not define what would comprise the contours of public policy. However, the courts have during these years attempted to throw some light upon the interpretation of public policy, holding that the awards of the arbitrators which contravene public policy may be set aside.”

This article seeks to develop a nuanced understanding of the public policy exception and its relevance while enforcing foreign Arbitral Award.

Historical background of enforcement of foreign arbitral award in India

The two “Indian statues of significant importance to the developmental timeline of “enforcement” and “recognition” of foreign arbitral awards, are the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. Whereas the former is an offshoot of the Geneva Protocol, 1923 and the Geneva Convention, 1927, the New York Convention of 1958 culminated in the development of the Foreign Awards (Recognition and Enforcement) Act of 1961. Even after the First World War era, ‘Protocol on Arbitration Clauses’ also developed that dealt at length with the arbitral procedure and execution of arbitral awards.”

In a noble attempt to form part of the larger group of such countries, Indian Government adhered to the Geneva Protocol on Arbitration Clauses, 1923 and the International Convention on the Execution of Foreign “Arbitral Awards, 1927. However, implementary concerns soon pushed for an effective arbitral procedure in place that would ensure speedy and smooth enforcement of an arbitral award, thereby giving birth to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention, 1958). “India became a party to the New York Convention, 1958 on July 13, 1960. The Geneva Protocol as well as the Geneva Convention were included in First and Second Schedules of the Arbitration Act, 1937. Similarly, Schedules of the 1958 New York Convention constituted part of the Foreign Awards Act, 1961.”

The Act of arbitration known as the Arbitration and Conciliation Act, 1996, enacted in consonance with the UNCITRAL Model Law and Rules had repealed the enactments hitherto known as the Foreign Awards (Recognition and Enforcement) Act of 1961 and the Arbitration (Protocol and Convention) Act of 1937. Part II of the Act deals with the enforcement of a foreign award in India.

Doctrine of Public Policy: Theoretical Underpinnings

“A body of law like the common law, which has grown up gradually with the growth of the nation, necessarily acquires some fixed principles, and if it is to maintain these principles it must be able, on the ground of public policy or some other like ground, to suppress practices which, under ever new disguises, seek to weaken or negative them.”

– Sir William Holdsworth

In international legal transactions and relations today, the cross-border mobility of foreign judgments is of the essence. “Naturally then, the international mobility of arbitral awards and a reasonably firm understanding of the circumstances in which courts will or will not recognize and enforce foreign awards, then assume equal interest to parties who have opted arbitration for the resolution of international disputes. The public policy doctrine has evolved on the principle that while the parties have the autonomy of entering into a contract and referring the dispute to arbitration, party autonomy is limited to the fact that the arbitral award is liable to be set aside if found contrary to public interest. Both Section 34 of the 1996 Act, which is based on Article 34 of UNCITRAL Model Law, and Section 48 of the 1996 Act, which is based on Article V of the New York Convention, make reference to the grounds of “public policy” in support of challenging the arbitral award and seeking for refusal of enforcement, respectively.”

Judicial interpretation of public policy varies significantly across common law and civil law countries. “Public policy, in the civil law, is the general principles or abstract ideas embracing the underlying principles of society, never individually defined, but basic to the whole construction of the fabric on which all specific laws are founded. In common law jurisdictions, the general principles of justice, equity, and morality are embodied in public policy. Judicially, it falls between two poles-the broad view, which takes a contextual approach and allows it to be changed and modified on a case-to-case basis, while the narrow view advocates for strict interpretation of the doctrine and countered that it is upon the courts to show restraint in laying down new heads of public policy.”

The Impact of public policy on enforcement of foreign awards

I. PRE-AMENDMENT

India’s journey of welcoming alternative disputed mechanisms propelled after ratifying the New York Convention in 1960. The Indian government discharged the signatory responsibility after introducing the Indian Arbitration Act, 1940 and the Foreign Awards Act 1961 dealing with domestic arbitration and enforcement of foreign awards respectively. However, the enforcement of foreign arbitral awards was intruded upon by judicial interpretation of “public policy” owing to a lack of clarity as to the scope for refusal of enforcement of foreign arbitral awards on the ground of “public policy”. However, a well-known resistance to the enforcement of foreign arbitral awards in India has reined post introduction of the Arbitration and Conciliation (Amendment) Act, 2015.

The judicial construction of “public policy” began with Renusagar Power Company Ltd. v. General Electric Company, in here the Supreme Court constricted the tentacles of public policy to the fundamental policy of India, interests of India, and justice and morality. As a result the judicial wisdom extended the scope of public policy at par with international standards. However, the position shifted drastically after the Supreme Court in ONGC Corporation Limited v. Saw Pipes Limited outstretched the ambit of public policy to “patent illegality” and amplified possibilities for judicial review. In this case, the court outweighed the adjudication of merits of the case instead of objectively applying the exception of public policy.

The dictum of Saw Pipes was reaffirmed in Phulchand Exports Limited v. O.O.O. Patriot in which the Supreme Court blurred the applicability of public policy exception for enforcement of foreign awards. The apex court enforced the award after reopening the merits of the case after scrutinizing “patent illegality” as to whether there lies any contravention to the substantive provision of law. Though again the apex court in Shri Lal Mahal Ltd. v. Progetto Grano Spa reiterated the stance in Renusagar case, thereby segregating the defense of public policy in enforcement of domestic awards and foreign awards.
Yet another case wherein the Supreme Court obscured the differentiation is Associate Builders v. DDA by reading Sections 34 and 48 of the Arbitration Act concertedly, though the court opined that the interpretation of contractual terms by the courts shall be warranted only when absolutely unreasonable. The oscillation halted when 246th Law Commission Report reinforced the international public policy and preceded the much-awaited Arbitration and Conciliation (Amendment) Act, 2015.

II. POST 2015 AMENDMENT

The 246th Law Commission report “recommended significant modifications to Section 34 of the 1996 Act, that were implemented in 2015 by the Arbitration & Conciliation (Amendment) Act, 2015. The amendment brought in Section 2A and added Explanation 2 to Section 34(2), which essentially sought to limit the scope for judicial interference in arbitral rulings on the pretext of “public policy”. Since the 2015 amendment, the courts have refrained from interpreting the term “public policy” broadly or giving it an open-ended flavour. It must also be noted at this juncture that there lies a difference between the award itself and its enforcement, and that the public policy exception only applies to the enforcement phase of the award, thus preventing the Courts from reviewing the merits of the award itself.”

The honorable Supreme Court in Venture Global case held that “the application of Section 34 to a foreign award would not be inconsistent with Section 48 of the 1996 Act, or any other provision of part II and that the judgment-debtor cannot be deprived of his right under Section 34 to evoke the public policy of India, to set aside the award.”

The Delhi High Court in Cruz City Mauritius Holdings v. Unitech Ltd. “established a balancing test to decide on the refusal of the enforcement of a foreign arbitral award. The court observed that although there are very few and restricted grounds for rejecting a foreign arbitral award, it is nonetheless possible if sufficient grounds exist. On similar lines, a three-judge bench of the Supreme Court Govt. of India v. Vedanta Ltd., rejected the Alimenta case’s regressive position to hold that the courts should interfere as little as possible in executing foreign arbitral awards.”

Further, the Apex Court in Vijay Karia v. Prysmian Cavi E Sistemi SRL highlighted that “the violation of the fundamental policy of Indian law must amount to a breach of some legal principle or legislation which is basic to an Indian law that should not be susceptible to being compromised.”

Public Policy – A Foe?

The enforcement of the arbitral award is actually the last stage of the proceeding where parties expect their respective dues and liabilities to be dispensed with. Especially in commercial arbitration cases, “the parties are looking for speedy disposal of the proceedings in accordance with the terms of a contract. In this regard, a judicial decision refusing enforcement of the arbitrator’s award would be antithetical to the interest of the parties. The statute of 1996, by the operation of Section 28, thus gave specific liberty to parties to international commercial arbitration to empower the arbitrator to decide ex aequo et bono if the parties so decide, all issues having regard to the terms governing the contract.

The court thus denying dependence of foreign award would, therefore, run counter to the very goal of pursuing the ADR mechanism in India. Indian legal evolution is oft maligned for its diffidence to construct Western jurisprudence in harmony with Indian law, a testimony of which is an over-expansive scope of construction of public policy doctrine in the enforcement of foreign awards, which yet remains a bone of contention.

Moreover, public policy as a sword aimed at defending the interest of the weaker party and public good is often played in favor of an economically sound party by giving them reason to omit the arbitration clauses, leaving the former with the option of an arduous litigation process.”

Conclusion

It will be safe to hold that the contours of public policy affect parties to foreign awards differently, mostly depending upon the nature of the state. The threshold for rejection of enforcement is certainly high in China, and Russia whereas it reduces significantly in USA, Switzerland, Italy and Australia. Although there is a budding trend amongst the states to adopt international public policy, thereby narrowing down the scope of its violation based on national law.

India is in an uncertain position where judiciary has been oscillating between broadening and narrowing the ambit of public policy. This is a major constraint for India to become a favorable destination for arbitration of disputes. However, it is pertinent to note that legislature’s intendment to facilitate ADR mechanisms in India is quite visible by limiting the scope of inquiry under Section 48(2), yet the terms “if the court finds that” is opening floodgates for judicial intervention. This discretion often turns against the objective of fostering international arbitration. Consequently, this fluid construction needs to cease by bringing about a clear statutory provision curtailing the circumstantial application of public policy exception with a view to further uniform international public policy.

Author: Kritika Gautam and Samriddhi Bammidi, authors pursuing B.A.LL.B. (Hons.) from Maharashtra National Law University Aurangabad

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