Interpretation of Public Policy
A three-Judge Bench of the Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano SpA,[1] passed a landmark judgment, wherein the Court established a difference between the scope of Section 48 of the Arbitration and Conciliation Act, 1996 (the Act) concerning the enforceability of a foreign award in international commercial arbitration under the New York Convention Awards on the one hand and challenges to set aside an award under Section 34 of the Arbitration and Conciliation Act, 1996 on the other hand when the “seat” of arbitration is in India. The Supreme Court held that the expression “public policy” under Section 48(2)(b) would not include the ground of “patent illegality” and the judicial dictum of Renusagar Power Co. Ltd. v. General Electric Co.,[2] must apply to the expression “public policy” of Section 48(2)(b). In Renusagar,[3] the court narrowed “public policy” doctrine to a fundamental policy of Indian law, justice and morality, interests of India and thereby limiting the scope of judicial intervention in the foreign arbitral award. The Supreme Court added that the applicability of “public policy” of India doctrine for the purposes of Section 48(2)(b) is limited and narrow in cases involving conflict of laws and matters involving a foreign seated arbitration. Again, the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd.,[4] held that “public policy” of India under Section 34 was required to be interpreted in the context of the jurisdiction of the court where the validity of the award is challenged before it becomes final and executable in contrast to the enforcement of an award after it becomes final. Therefore, public policy in Section 34 of the Act requires a wider meaning and so “patent illegality” was added as a new category for setting aside the arbitral award. Hence, the law laid down in Saw Pipes[5] would govern the scope of Section 34(2)(b)(ii) for setting aside an award under Section 34 of the Arbitration and Conciliation Act, 1996.
Precedents on “Public Policy”
The precedent laid down in Shri Lal Mahal case[6] was an important step forward in the right direction towards minimum judicial interference in arbitration process and thereby granting higher sanctity to foreign arbitral awards by laying down limited grounds under “public policy” based on which courts can refuse enforcement of foreign arbitral awards under Section 48 of the Act. Such was the necessity because the Supreme Court in Bhatia International v. Bulk Trading SA,[7] laid down that Indian courts would have jurisdiction in international commercial arbitrations irrespective of the seat of the arbitration. It led to a situation where foreign arbitral awards were challenged on the grounds of “patent illegality” in Indian courts. The scope of the expression “public policy” under Section 48 of the Act was further expanded in Phulchand Exports Ltd. v. O.O.O. Patriot,[8] wherein the Supreme Court held that expression “public policy” under Sections 34 and 48 of the Act are the same and added that a party could resist enforcement of a foreign award on grounds of “patent illegality”. Thus, it widened the scope of “public policy” under Section 48 of the Act and increased the chances of judicial intervention in international commercial arbitration but the decision of Phulchand[9] was ultimately overruled in Shri Lal Mahal[10] by Hon’ble Supreme Court.
Critical Analysis of Public Policy of India Under Section 48(2)(b)
In 2014, the Supreme Court of India clarified that expression “public policy of India” under Section 48(2)(b) is narrow and limited to the extent of[11]:
(i) Fundamental policy of Indian law.
(ii) Interests of India.
(iii) Justice and morality.
However, the Arbitration and Conciliation (Amendment) Act, 2015 with regard to enforcement of foreign awards added Explanation to Section 48(2)(b) and thereby clarifying when an award shall be considered to be in conflict with “public policy of India”. The Explanation states:
(i) That the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81.
(ii) In contravention with the fundamental policy of Indian law.
(iii) In conflict with basic notions of morality or justice.
The above explanation of “public policy of India” in Section 48(2)(b) is not in consonance with the judicial pronouncement laid down in Shri Lal Mahal case[12]. The Supreme Court has categorically limited the context of “public policy” to fundamental policy of Indian law, justice and morality, and in the interests of India. The Court also refused to give a wide import to the meaning of “public policy” under Section 48 of the Act and rejected “patent illegality” as a ground under public policy for non-enforcement of a foreign arbitral award. The Arbitration and Conciliation (Amendment) Act, 2015 by adding the words “fraud or corruption or in violation of Section 75 or Section 81” instead of “interest of India” as a ground under “public policy” has blatantly violated the judicial principles laid down in Shri Lal Mahal Ltd. case[13].
Furthermore, in Associate Builders v. DDA,[14] the Supreme Court while interpreting the term “patently illegal” has held that under the Explanation to Section 34(2)(b), an award is said to be in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption. Therefore, the Arbitration and Conciliation (Amendment) Act, 2015 by including the words “the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81” in Explanation 1 of Section 48(2)(b) has widened the scope of judicial review by impliedly inferring “patent illegality” within the expression “public policy of India” in complete disregard to the law laid down in Shri Lal Mahal case[15].
Moreover, similar explanation of “public policy” in both Sections 34(2)(b)(ii) and 48(2)(b) is in violation of the precedent laid down in ONGC Ltd. v. Saw Pipes Ltd.[16] The Supreme Court in Saw Pipes[17] agreed to the subtle distinction in the concept of “enforcement of foreign award” as per Section 48 of the Act and “jurisdiction of the court in setting aside the award” as per Section 34 of the Act and held that the expression “public policy” in Section 34 requires a wider meaning and so the court added “patent illegality” as a category for setting aside the award. An arbitral award induced by fraud or corruption can be declared as patently illegal as it is so unfair and unreasonable that it shocks the conscience of the court. Therefore, Arbitration and Conciliation (Amendment) Act, 2015 by adding exactly similar explanation to the expression “public policy” in Section 48 of the Act which deals with enforcement of foreign awards and Section 34 which deals with setting aside of arbitral awards when the “seat” of arbitration is in India either domestic or international commercial arbitration, the Arbitration and Conciliation (Amendment) Act, 2015 left no scope for distinction between the two sections and had completely ignored the judicial pronouncements laid down on public policy.
It is pertinent to note that for arbitration regime to succeed in India it is important that limited grounds are laid down for judicial review in the enforcement of foreign arbitral awards in international commercial arbitration. Hence, explanation 1 of Section 48(2)(b) of the Act which states that “the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81” should be replaced by the words in the “interest of India” under explanation of “public policy”.
Conclusion
The decision of Shri Lal Mahal[18] and other cases on “public policy” has limited the scope of judicial interference of Indian courts regarding enforcement of foreign awards under Section 48 of the Arbitration and Conciliation Act, 1996 and has provided a ray of hope to help India establish as an international commercial arbitration destination. However, the Arbitration and Conciliation (Amendment) Act, 2015 which included “fraud or corruption” instead of “interest of India” has expanded the scope of “public policy” under Section 48 of the Act in violation of the judicial decision laid down in Shri Lal Mahal case[19]. Moreover, precedents show that courts have interpreted “fraud or corruption” as “patent illegality” which was rejected as a ground under “public policy” in Section 48 of the Act. Hence, Parliament should bring a further amendment in Section 48 of the Act by substituting the words “interest of India” in place of “the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81” which would limit the scope of judicial review in enforcement of foreign arbitral awards.
†2nd-year law student, National University of Study and Research in Law, Ranchi (NUSRL), e-mail: soumyajitsaha02@gmail.com.
[3] Ibid.
[4] (2003) 5 SCC 705, para 22.
[5] Ibid.
[9] Ibid.
[11] Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433, para 29.
[13] Ibid.
[14] (2015) 3 SCC 49, para 40.
[17] Ibid.
[19] Ibid.
