The pendency of litigation and piling up of cases in courts was the necessity which led to the discovery of alternative dispute resolution mechanisms. These tools of dispute resolution are highly efficient, time-bound and cost-effective. Further, as the dispute resolution is amicable, the delicate and long-standing relationship of parties is preserved. It is for this reason separate tribunals are set up for arbitration, independent mediators can be appointed for mediation and a number of unaided negotiations take place between the parties for settlement of any disputes.
Arbitration is also familiar as a form of private litigation as to some extent the formalized means of dispute resolution; witness examination, expert opinions, and binding nature of the arbitral award will substantiate the fact. However, with enhanced remedial and appellate participation from the judiciary, the idea of ‘alternative’ dispute resolution seems to replicate a façade. The primeval legislation, Arbitration Act of 1940 provided for a triangular remedial setup, namely rectification, remission, and setting aside of the arbitral award. This was narrowed down to remission and setting aside of the award in the subsequent Act, 1996.
A noteworthy argument here is, that the arbitration disputes are often referred to as, ‘matters’ and not ‘suits’, this is a practice to limit the authority of courts over these disputes. The term ‘judicial authority’ is not construed in a narrow sense, rather derives a wider import to itself by the virtue of numerous common law precedents. Inclusion of District Forums, State Commissions and National Commission under COPRA Act, commissions under Monopolies and Restrictive Trade Practices Act, 1969 and Company Law Tribunals have been brought under the ambit of ‘judicial authority’.
The interplay of litigation courts in the proceeding of arbitration can be analyzed in three stages vis-à-vis before proceedings, during proceedings, and after proceedings. When on one hand this intermingling helps establish effective checks and balances when it comes to matters of public policy, on the counter, it defeats one of the primary advantages of arbitration, i.e. the expediency of dispute resolution.
Section 5 of the Arbitration & Conciliation Act, 1996 provides for the limited or minimal intervention of judicial authority in arbitration proceedings. The said section is analogous to Article 5 of UNCITRAL Model Law on International Commercial Arbitration, 1985. The scope of judicial intervention is however non-arbitrary and is limited to the purposes prescribed in the Act, extending only to the administrative and non-judicial roles, within the non-obstante provisions. The stance of the Indian judiciary was firmly established while inclining with the legislative intent behind the section, that the courts’ intervention should be minimal to encourage the resolution of disputes expeditiously and less expensively. Even if the matter requires judicial intervention, the judicial authority is required to decide the issue expeditiously within a prescribed period and not to treat the matter in parimateria regular civil suits.
Section 9 and 17 of the Arbitration & Conciliation Act, 1996 provide for interim measures by the courts and tribunals. An application under Section 9 is that of a mandatory nature and is not a substantive remedy available at the discretion of the parties. The section provides for the judicial recourse for enforcement of rights of a third party in case its rights are being affected as a result of the arbitral award. As the third party is not a party to the arbitration and does not have a locus standi, the said enforcement can happen only on a separate cause of action engaged by the third party and is not covered under the ambit of an arbitration agreement. The right conferred by Section 9 is therefore not a contractual right, as only a party to the arbitration agreement possess the same. Only in the rarest of rare cases, the third party would be competent to claim relief under Section 9 and not otherwise. As locus standi is a significant rationale before granting interim relief under Section 9, the courts must be extra vigilant to not benefit frivolous litigations.
As the remedy of ‘rectification’ has been taken away in the 1996 Act, the Arbitral Tribunal under the 1996 Act cannot review an Award on its own, the aggrieved party who has suffered on account of the Arbitral Award is required to challenge it according to the Law prescribed, and if the aggrieved party fails to apply under Section 34 for setting aside the Award, then a de novo inquiry cannot arise on its own. Section 34 of the Act provides for setting aside the arbitral award, in two cases when either a party is willing to challenge the award on grounds of prejudice or the Court finds that the award was in conflict with the public policy of India. The aggrieved party can make an application under this section within 3 months and additional 30 days from the date of receipt of the award. Section 34(2)(a) of the Arbitration and Conciliation Act, 1996 provides for numerous grounds on account of which the Court can set aside the arbitral award, including incapacity of parties, invalid or illegal arbitration, no proper notice for appointment of an arbitrator, non-agreement of parties on composition of the tribunal. The court is vested with powers to set aside the award in case of a non-arbitrable dispute or if the award conflicts with the public policy of India.
AMBIGUITY IN ‘PUBLIC POLICY’
The ground of public policy for setting aside the arbitral award under Section 34 of the Act is a ‘judge-made’ ground evolving from common law. A series of precedents shaped the doctrine of public policy as it stands today with regard to setting aside the arbitral award.
The foremost case of Renusagar Power Co. Ltd v. General Electric Company (Renusagar), which questioned the validity of Section 7 (1)(b)(ii) of the Foreign Award (Recognition and Enforcement) Act, 1961 which provided for the non-enforceability of a foreign award in case it contravened the public policy. It was held by the Apex court that “public policy” was to be interpreted as to be the public policy of India, whilst the application of foreign law in a purely municipal legal issue. The court relied on Article I(e) of the Geneva Convention Act, 1927, which recognizes objections by the host country regarding the enforceability of the award if the same contravenes the public policy of the host country. Further, Section7(1) of the Protocol & Convention Act, 1937 which requires that the enforcement of the foreign award must not be contrary to the public policy or the law of India. Therefore, it was concluded that to invoke the bar of public policy the award must invoke something more than mere violation of any domestic law. A test was laid down for the satisfaction of the ‘public policy’ doctrine vis-à-vis, the award should not be contrary to i) fundamental policy of Indian law, ii) interests of India, iii) justice or morality.
The second landmark judgment in the evolution of public policy doctrine in the present context was, Oil & Natural Gas Corporation v. Saw Pipes Ltd (Saw Pipes) the issue of the scope of judicial intervention under Section 34 was decided, as to whether a legally flawed arbitral award could be challenged on the pretext of contravention of provisions of the governing Act. The award was held to be ‘patently illegal’, therefore indirectly staining the public policy. The test to qualify repudiation of public policy in Renusagar was hence expanded to include acts contradicting i) fundamental policy of Indian law, (ii) the interests of India, (iii) justice or morality, (iv) if it is patently illegal. Hence, the thought of public policy was granted enormously wide abstract notions as if it was to ‘shock the conscience of the court’.
The final stone was laid by the Supreme Court in the case of Shri Lal Mahal Ltd. v. Progetto Grano Spa(Lal Mahal), where the vague and abstract nature of the expression, ‘public policy’ was challenged in relation to Section 48(2)(b) of the Act with identical terminology. The SC analyzed that Section 34 was of a wider import than Section 48(2)(b) despite having identical terminology. Therefore, the decision limited the inference of ‘public policy’ in the impugned section to not include patent illegality of the award.
The ambiguity and blanket protection of the term ‘public policy’ was criticized in numerous judgments that followed. The defense of public policy cannot be used as a shield protecting judicial intervention in matters of arbitration. Various counter-claims included court must assume only a supervisory role by reviewing arbitral awards to ensure fairness. The object of the 1996 Act itself is to radically curtail the judicial intervention in arbitration awards except in the circumstances as contemplated in the provisions of the Act, by vesting such enormous powers of judicial intervention in Section 34; the judiciary is violating the legislative intent. It must be noted that the arbitrator is no less than a judicial authority and the view taken by the arbitrator in judicial capacity is no less than that taken by the judge, therefore his plausible view must not be interfered with in a judicial proceeding under Section 34 of the Act, which was reiterated in the case of State of Jharkhand v. HSS Integrated SDN & Anr.
The 2015 Amendment in the Act brought about significant changes in the concept of ‘public policy’ under the Arbitration Act, drawing suggestions from the 246th Law Commission Report. An amendment was made to the Sections 2A and 34(2), by adding Explanation 2. The amendment restricts the scope of judicial intervention in arbitral proceedings by limiting the definition of public policy. The Amendment Act restricted the grounds of setting aside international arbitral awards solely on:
- Induced or affected by fraud or corruption
- Contravention in the fundamental policy of Indian Law
- In conflict with notions of morality and public justice
Therefore, the court cannot act as an Appellate Court to examine the legality of the arbitral award, nor can it examine the factual merits of the claim. As factual merits could not be questioned, the record of an arbitrator was to be held to be sufficient to furnish compliance with Section 34. This was reiterated as cross-examination of persons swearing such affidavits/ records is not allowed unless absolutely necessary. Further, the Amendment Act provided that proceedings for setting aside could be initiated only after due notice to the parties. Furthermore, Arbitration and Conciliation (Amendment) Act, 2015 was held to be prospective in nature and operation. Post amendment, the mere initiation of proceedings under Section 34 would not automatically operate as a stay of the arbitral award. The aggrieved party is required to file a separate application seeking stay of the award and the Court may grant a stay of the award by imposing conditions.
The position of the term ‘public policy’ has been further clarified in the recent judgment of Ssangyong v. NHAI (Ssangyong) to not include the ‘fundamental policy’ under Section 34, relying on the 246th Law Commission Report. However, with such a firm stance, the overall efficacy of remedy under Section 34 may be objected. The judgment is noteworthy while analysing the applicability of Section 34 as it unmistakably stated that ‘under no circumstances can the Courts interfere with an arbitral award on the ground that justice was not served in the opinion of the Court as the same would clearly contradict the ethos of Section 34.’
On one hand where the Ssangyong endeavours to restrict the scope of ‘public policy’, the 2020 judgment of NAFED v. Alimenta (NAFED) seems to elaborate it. The judgment included export policy within the ambit public policy, stating the contravention of the former will inevitably contravene the latter. On the face of it, the judgment seems to be against the precedents, however, one argument of the judgment is found on the premise that it is highly fact-based. Even though the judgment has accredited a lot of criticism in the short span after delivery to not have considered the judgment of Vijay Karia. However, it must not be overlooked that the NAFED judgment seeks to define the ‘public policy’ in Section 48 of the Act which has a very distinct pose than the use of term under Section 34.
The threshold under the erstwhile Section 34(2)(a) for the setting aside of arbitral awards by the court was that the applicant has to furnish proof of the circumstances enumerated therein for the Court to set aside the award. The ‘furnishing of proof’ led to the prolongation of setting aside proceedings serving as an obstacle for the enforcement of domestic awards. The amendment in Section 34(2) removes the requirement of furnishing proofs to substantiate the ground(s) for setting aside the award. Instead, by virtue of this amendment, the applicant needs to establish the ground(s) for setting aside of the award based on the record of the arbitral tribunal which may ensure that proceedings under Section 34 are conducted expeditiously. It was held that proceedings under Section 34 of the Act are summary in nature. Furthermore, the court held that under Section 34 (2A) of the Arbitration Act, a decision which is perverse while no longer being a ground for challenge under “public policy of India”, would certainly amount to patent illegality appearing on the face of the award. The court while deciding the application for setting aside an arbitral award decided that the court will not ordinarily require anything beyond the records before the arbitrator. If otherwise pertinent to the issue, the records can be brought before the Court by the way of affidavits by both parties.
Conclusively it can be said that the legislative intention behind alternative dispute resolution was never to encourage interference from the judiciary perhaps that was the reason arbitration awards were classified to be binding on the parties. However, it must not be forgotten that the judiciary is expected to be the safe-keeper of the fundamental rights of the citizens; therefore, if genuine and gross violations in the arbitral award render the parties without a remedy, the courts must not be restricted to intervene in the arbitration proceedings. Standing the evolution in time and necessary amendments, the Arbitration and Conciliation Act, 1996 has proven to be a living document.
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(2) Enforcement of an arbitral award may also be refused if the Court finds that— (b) the enforcement of the award would be contrary to the public policy of India.
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Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence.
 Explanation to sec. 34(2)- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian Law shall not entail a review on the merits of the dispute.
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The legislative intention behind alternative dispute resolution was never to encourage interference from the judiciary perhaps that was the reason arbitration awards were classified to be binding on the parties.