Evolution of the Doctrine of Public Policy in Arbitration

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[1] under COPRA Act[2], commissions under Monopolies and Restrictive Trade Practices Act, 1969[3]  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.[4] The said section is analogous to Article 5 of UNCITRAL Model Law on International Commercial Arbitration, 1985[5]. 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.[6] 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.[7] 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.[8]

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[9] 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.[10] The right conferred by Section 9 is therefore not a contractual right, as only a party to the arbitration agreement possess the same.[11] Only in the rarest of rare cases, the third party would be competent to claim relief under Section 9 and not otherwise.[12] 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[13] (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[14] (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[15](Lal Mahal), where the vague and abstract nature of the expression, ‘public policy’ was challenged in relation to Section 48(2)(b)[16] 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.[17] 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.[18] 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,[19] which was reiterated in the case of State of Jharkhand v. HSS Integrated SDN & Anr.[20]    

SIGNIFICANT AMENDMENTS

2015 Amendment

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[21] and 34(2),[22] 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.[23] 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.[24] This was reiterated as cross-examination of persons swearing such affidavits/ records is not allowed unless absolutely necessary.[25] 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.[26]  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[27] (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.’[28]

On one hand where the Ssangyong endeavours to restrict the scope of ‘public policy’, the 2020 judgment of NAFED v. Alimenta[29] (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[30]. 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.

2019 Amendment

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.[31] 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.[32] 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.[33]

CONCLUSION

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. 

References

[1] Fair Air Engineers Pvt. Ltd. V. N.K. Modi AIR1997SC533

[2] Consumer Protection Act, 1986

[3] Shri Balaji Traders v. MMTC Ltd. [1999] 34 CLA 251

[4] Sundaram Brake Linings Ltd vs Kotak Mahindra Bank Ltd (2010) 4 Comp LJ 345 (Mad)

[5] Article 5:  This Law shall not affect any other law of this State by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those of this Law.

[6] Secur Industries Ltd vs M/S Godrej & Boyce Mfg. Co. Ltd. (2004) 3 SCC 447

[7] P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539

[8] Shin Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234

[9] Sec. 2(h) of the Arbitration and Conciliation Act, 1996 defines ‘Party’

[10] Harita Finance Ltd. vs ATV projects India ltd., 2003(2)ArbLR376

[11] Firm Ashok Traders and Ors. vs. Gurumukh Das Saluja and Ors., AIR 2004 SC 1433

[12] L & T Finance Limited vs. C.T. Ramanathan Infrastructure Pvt. Ltd. A. No. 5314 of 2012

[13] Renusagar Power Co. Limited v. General Electric Company; 1994 Supp (1) SCC 644

[14] Oil & Natural Gas Corporation v. Saw Pipes Ltd, [2003 (5) SCC 705]

[15] Shri Lal Mahal Ltd. v. Progetto Grano Spa, 2013 (4) CTC 636

[16] Section 48 in The Arbitration and Conciliation Act 1996 Conditions for enforcement of foreign awards,

 (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.

[17] McDermott International Inc. v. Burn Standard Co. Ltd 2006(5)ALT1(SC)

[18] Indian Oil Corporation Ltd. V. Langkawi Shipping Ltd, 2005 (2) Bom CR 458

[19] National Highway Authority of India v. Progressive MVR, (2018) 14 SCC 688

[20] (2019) 9 SCC 798

[21] Explanation to sec. 2A -An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiate by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence. 

[22] 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. 

[23] Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors [2017] 13 SCALE 91 (SC)

[24] Sandeep Kumar v. Dr. Ashok Hans, (2004) 3 Arb LR 306

[25] Emkay Global Financial Service Limited v. Giridhar Sondhi, Civil Appeal No. 8367 of 2018

[26] BCCI v. Kochi Cricket Pvt. Ltd., (2018) 6 SCC 287

[27] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), Civil Appeal No. 4779 of 2019, Supreme Court

[28] Ibid

[29] National Agricultural Co-operative Marketing Federation of India (NAFED) v. Alimenta S.A Civil Appeal No. 667 of 2012, delivered on April 22, 2020

[30] Vijay Karia & Ors. Vs. Prysmian Cavi E Sistemi SRL & Ors. Civil Appeal No. 1544 of 2020

[31] M/s.Canara Nidhi Limited v/s. M. Shashikala & Ors. 2019 SCC OnLine SC 1244

[32] Sangyong Engineering & Construction Co. Ltd. v/s. National Highways Authority of India, 2019 SCC OnLine SC 677

[33] M/s Emkay Global Financial Services Ltd. V. Girdhar Sondhi (2018) 9 SCC 49

 

 

Image Credits: Daniel b photos on Pixabay

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. 

POST A COMMENT

Revised MSME Definition: Impact Analysis

On 12th May 2020, the Prime Minister of India announced an economic package worth Twenty Lakh Crores for various sectors and segments to achieve the goal of self-reliant India. This economic stimulant package was intended to uplift the fallen economy due to COVID 19 outbreak and combat the adverse impact of lockdown.

The proposed economic stimulus package included significant measures for facilitating the promotion, development and enhancement of the competitiveness of Micro, Small and Medium Enterprises (MSME). The Ministry further noticed that the low threshold in MSME definition had created fear among MSMEs of graduating out of the benefits and hence killed the urge to grow. The Finance Minister, therefore, announced the following amendments to the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). The changes were approved by the Cabinet and the amendment was notified in the official Gazette on 01 June 2020. The amended classification of MSME shall come into effect from 01st July 2020. Here is a limited impact analysis of the above-mentioned amendment for your easy reference:

Key Changes

  1. Investment threshold criteria have been revised upwards.
  2. Additional criteria for turnover have been introduced.
  3. The distinction between the manufacturing and service sector has been eliminated

 

  1. Investment based threshold criteria

As per the MSMED Act, the following eligibility norms are based on investment by an enterprise[i] in a plant, machinery, or equipment only:

 

Classification

Micro

Small

Medium

Existing

Revised

Existing

 Revised

Existing

Revised

Manufacturing Enterprises

Investment < INR 25 lakhs

Investment < INR 1 Crore

Investment < INR 5 Crore

Investment <  INR 10 Crore

Investment < INR 10 Crore

Investment < INR 20 Crore

Service Enterprises

Investment < INR 10 lakhs

Investment < INR 2 Crore

Investment < INR 5 Crore

               

 

 

  1. Turnover based threshold criteria added to Investment norms:

 

The amendment has added the following turnover based criteria to above mentioned upward revised Investment norms:

 

Classification

Micro

Small

Medium 

Manufacturing and Services

Investment does not exceed INR 1 Crore

&

Turnover INR does not exceed 5 Crore

Investment does not exceed INR 10 Crore

&

Turnover INR does not exceed 50 Crore

Investment does not exceed INR 50 Crore

&

Turnover INR does not exceed 250 Crore

 

*The Turnover of Enterprise shall be determined by data provided/declared in Goods and Service Tax (GST) returns.

 

  1. Distinction between manufacturing and service sector eliminated:

 

The MSMED Act, 2006, provided for a separate threshold limit for the manufacturing and service Sector. As per the amended provisions, the difference between service and manufacturing sector has been removed.

 

Major Impact of The Amendment:

 

  1. Due to the revision of the threshold limit, many Enterprises will be registered under MSMED Act, 2006 to avail various incentives declared by the Government of India.
  2. With the amended definition, MSMEs will be able to access many industries such as electronics, apparel, chemical and pharmaceuticals, etc.
  3. The move is likely to improve the quality of product and export share of the country.
  4. Consequent to this amendment, many industries would now fall in the ambit of the MSME segment and settlement of invoices within 45 days may create a financial burden for non-MSME entities.
  5. Special economic packages/incentives to MSME entities may create employment opportunities and improve the productivity of indigenous manufacturing units.
  6. The removal of a separate threshold of investment and turnover criteria is expected to provide more encouragement to the service sector enterprises.
  7. The shift will facilitate the competitiveness of indigenous Enterprises against unhealthy competitions created by Foreign entities/investors.
  8. Redefine payment cycle by restricting delayed settlement to Micro and Small Enterprises by big Enterprises.
  9. Facilitate the intrinsic growth of manufacturing and export-oriented Enterprises.
  10. Due to the revision of the threshold limit under the MSMED Act, 2006, Companies will have to seek details of MSME registrations from vendors and suppliers of goods or services. The outstanding amount of more than 45 days as per provisions of Section 15 of MSMED Act, 2006 shall be reported by Companies in Form MSME-1 with the Ministry of Corporate Affairs.

 

Other Registration Requirements:

 

There is no separate MSME registration required for each branch/manufacturing unit of an enterprise. Enterprises are required to provide addresses and details of branches and manufacturing units at the time of registration and the same would be displayed in the Certificate issued under MSMED Act, 2006. Further, enterprises engaged in wholesale trading activities are not eligible to register as MSME Enterprises. MSME is to support start-ups with subsidies and benefits, whereas trading companies are just like middlemen, a link between manufacturer and customer.

 

Moreover, enterprises are required to fulfil only investment and turnover criteria to register under the MSMED Act, 2006. Hence, a subsidiary of another Indian Company or Subsidiary of Foreign Body Corporate can be registered as MSME Enterprise under MSMED Act, 2006. The Government would most likely notify more restrictions on applicability criteria for registration under the MSMED Act, 2006. The Statutory time limit for the realisation of Export payments is provided under the Foreign Exchange Management Act, 1999. Further, the liability to make payment to Micro and Small Enterprises under the provisions of Section 15 of the MSMED Act, 2006, is applicable only for outstanding payments against the domestic supply of goods or services.   

 

Conclusion:

 

The objective of the amendment is mentioned in the Statement of Objects and Reasons of the MSME (Amendment) Bill as “over a period of time, it has been felt necessary to change the criteria for the classification in order to align it with the need of current times and changing business ecosystem.”

 

Therefore, the amendment had been brought in with the belief that the criterion of investment in plant and machinery or equipment often incentivises the tendency in the promoters to keep the investment size small in order to retain the benefits associated with micro or small enterprises category. Further, the physical verification of the value of assets had been a difficult task. On the contrary, if the annual turnover is taken as a criterion for classification, the information available with goods and services tax networks and other sources can be used for the determination of the category of the enterprises.

 

Thus, to conclude the annual turnover based classification

  • will bring in a transparent and objective classification system 
  • will enable industrial growth and increased employment in the country and
  • will promote the ease of doing business 

 

References

[i] Meaning and Definitions:

 

Enterprise: As per the provisions of Section 2(e) of MSMED Act, 2006, “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;

 

  1. Calculation of Investment of Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

Micro

Small

Medium 

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)       the cost of pollution control,

ii)     research and development,

iii)    industrial safety devices

iv)    such other items as may be specified, by notification, shall be excluded

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)         the cost of pollution control,

ii)       research and development,

iii)      industrial safety devices

iv)      and such other items as may be specified by notification shall be excluded

 

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)         the cost of pollution control,

ii)       research and development,

iii)      industrial safety devices

iv)      land and building

and such other items as may be specified in vide notification No.S.O.1722(E) dated October 5, 2006 issued by Ministry of Small-scale Industries

 

 

Investment by Enterprises engaged in providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006

 

 

Image Credits: Photo by Bill Oxford on Unsplash

while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

POST A COMMENT