ARBITRAL AWARD & PUBLIC POLICY CLINIC I A.D.

Submitted by: L. ASHISH KUMAR 201108 SEMESTER VI

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM MARCH 2014

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ACKNOWLEDGEMENT
I would like to express my special thanks to our Vice Chancellor Prof. R.G.B. Bhagvath Kumar, Registrar Prof. A. Sudhakar and especially gratitude my Teacher R. Vishnu Kumar who gave me the opportunity to do this wonderful project on the topic Arbitral Awards & Public Policy which also helped me in doing a lot of research. I am really thankful to them all. Secondly I would also like to thank my parents and friends who helped me a lot in finishing this project.

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CONTENT
TABLE OF CASES ................................................................................................................... 4 ABBREVIATIONS ................................................................................................................... 5 RESEARCH METHODOLOGY............................................................................................... 5 INTRODUCTION ..................................................................................................................... 6 DOCTRINE OF PUBLIC POLICY........................................................................................... 7 ARBITRATION LAW ON "PUBLIC POLICY" ...................................................................... 8 JUDICIAL DECISIONS ON PUBLIC POLICY .................................................................... 10 INTERNATIONAL LAW GOVERNING PUBLIC POLICY FOR RECOGNITION AND ENFORCEMENT OF AN ARBITRAL AWARD .................................................................. 13 CONCLUSION ........................................................................................................................ 14 BIBLIOGRAPHY .................................................................................................................... 15

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TABLE OF CASES

Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprise. Konkan Railway Construction Corporation Ltd. v. Rani Constructions Pvt. Ltd. Oil and Natural Gas Corporation Ltd. v. Schlumberger Asia Services Ltd Shri Hans Enterprises v. Air Port Authority of India. Central Inland Water Corp. Ltd. v. Brojo Nath Ganguly. Gherulal Parakh v. Mahadeodas Maiyev. Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd. Renusagar Power Plant Co. Ltd v. General Electric Co. Bharat Heavy Electricals Ltd. v. C.N. Garg and Ors.

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ABBREVIATIONS
1. A.I.R. - All India Reporter. 2. S.C. - Supreme Court. 3. S.C.R. Supreme Court Reporter. 4. Sec.-Section. 5. Art. Article. 6. UNCITRAL- United Nation Commission on International Trade Law. 7. Arb. L. R. - Arbitration Law Reporter. 8. W.L.C. Western Law Cases.

RESEARCH METHODOLOGY
The method of research which is followed for the project is a non-empirical study. The research includes gathering the data from the existing information like referring the books related to the topic, articles, journals and the documents relating to the topic available online.

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INTRODUCTION
The Arbitration and Conciliation Act, 1996 is sixteen years old. In these sixteen years, the manner in which courts have interpreted, or supplied to, the text of the statute is astounding. The Act virtually followed the structure of the Model Law on International Commercial Arbitration, 1985 (the Model Law). The advantage of following the configuration of the Model Law was that the Act (and India as a destination for arbitration) could be marketed as being in consonance with international practices on dispute resolution. In this paper the author examines the meaning of the term Public Policy under The Arbitration and Conciliation Act, 1996. Public Policy is a ground for setting aside an arbitral award under Sec. 34 of The Arbitration and Conciliation Act, 1996. This provision mirrors the UNICTRAL Model Law on International Commercial Arbitration. Sec. 48 of the Act also says that the foreign award can be set aside on the ground that it affects the public policy. Definition of Public Policy The Arbitration and conciliation Act, 1996 or the Contract Act, 1872 do not define the expression "Public Policy" or "opposed to public policy." But reference is made under Sec. 34 (2) (b) (ii), Sec. 48(2) (b) (Enforcement of Certain Foreign Award (New York Convention Awards)) and Sec. 57 (1) (e) (Geneva Convention Awards) stating that the awards made be not against the "Public Policy of India". Similarly in part III relating conciliation, Sec.75 (Confidentiality) and Sec. 81 (Admissibility of Evidence in other proceedings) also restrain the Arbitrator /Arbitral Tribunal to make award any which is against the "Public Policy of India." "Public Policy" is not the policy of a particular Govt. It connotes some matter which concerns the public good or the public interest. 'Public Policy' is equivalent to the "Policy of Law." Therefore any acts that have a mischievous tendency so as to be injurious to the interest of the state or the public are stated to be against "Public Policy" or against the 'Policy of Law.1

P. K. Padhi: Legal Aspects of Business, 2013, P.no: 62.

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In Bharat Heavy Electricals Ltd. v. C.N. Garg and Ors.,2 Lord Brougham defines public policy as the principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare. Public policy comprehends only protection and promotion of public welfare.

DOCTRINE OF PUBLIC POLICY

Doctrine of 'Public Policy' is somewhat open textured and flexible, and this flexibility has been the cause of judicial censure of the doctrine. There is a general agreement that the courts may extend existing 'Public Policy' to new situations and the difference between extending on existing principle as opposed to creating a new one will often be wafer thin. 'Public Policy' is not immutable. Rules which rest on the foundation of 'Public Policy,' not being rules which belong to the fixed Customary Law, are capable on proper occasion, of expansion or modification depending upon circumstances. In the broader view, the doctrine of "Public Policy" is equivalent to the "Policy of Law," whatever leads to obstruction of justice or violation of a statute or is against the good morals when made the object of contract would be against 'Public Policy of India" and being void, would not be susceptible to enforcement. Though misconduct of "Arbitral Tribunal" or of the "proceedings before an arbitral tribunal" and "error of law on the face of an arbitral tribunal award" by themselves are not made as grounds for recourse against an arbitral award under Sec. 34 of the 1996 Act. Interpreting the doctrine of "Public Policy of India" in its broader view, courts of law may intervene permitting recourse against an arbitral award based on irregularity of a kind which the court considers has caused or will cause substantial injustice to the applicant. Extreme cases where arbitral tribunal has gone so wrong in its conduct of arbitration that justice calls out for it to be corrected may justifiably fall within the ambit of the doctrine of 'Public Policy of India" to enable courts of law in India to intervene under Sec. 34 of the 1996 Act permitting recourse against arbitral award.

2001(2) Arb. LR 545 (S.C).

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ARBITRATION LAW ON "PUBLIC POLICY"

The Arbitration and Conciliation Act, 1996 restrain an Arbitral Tribunal or sole Arbitrator to make any award which is against the Public Policy of India. Various provisions laid down under 1996 Act are briefed here under:Sec. 34. (2) (b) (ii) Sec. 34 (2) (b) (ii) of the said Act lays down that an Arbitral Award may be set aside if the court finds that the arbitral award is in conflict with the Public Policy of India. Explanation to Sec. 34 of the 1996 Act, without prejudice to the generality of sub-clause (ii), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India if the making of the Award was induced or affected by fraud or corruption or was violation of Sec. 75 or Sec. 81 of 1996 Act. Sec. 48 (2) (b) Conditions for Enforcement of Foreign Awards Sec. 48 (2) (b) of the Arbitration and Conciliation Act, 1996 pertaining to enforcement of New York Convention Awards is in identical terms. The said Sec. provides that enforcement of foreign awards covered by the said provision may be refused if the court finds that the enforcement of such, Award would be contrary to the "Public Policy of India." Explanation to the section says that without prejudice to the generality of clause (b), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India, if the making of award was induced or affected by fraud or Corruption. Sec. 57 (1) (e) Conditions for Enforcement of Foreign Awards Sec. 57 (1) (e) of the Arbitration and Conciliation Act, 1996 prescribing conditions for enforcement of "Geneva Convention Awards" provides that the foreign awards covered under the said provision, shall not be enforced if the enforcement of the Award was in conflict with public policy or the law of India. Explanation to the section says that without prejudice to the generality of clause (e), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India if the making of award was induced or affected by fraud or Corruption. Sec. 75 Confidentiality Sec. 75 in Part (III) of the Arbitration and Conciliation Act, 1996 pertaining to Conciliation provides that the Conciliator and the parties shall keep all matters relating to the conciliation proceedings Confidential. It further provides that confidentiality shall extend also to the settlement agreement except where its disclosure is necessary for the purpose of implementation and enforcement thereof. Thus if an arbitral award is induced in violation of
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the provision contained in Sec. 75, it shall be against the statutory provisions contained in Sec. 75 and as such, in conflict with the "Public Policy of India." Sec. 81- Admissibility of Evidence in Other Proceedings The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the Subject of the Conciliation proceedings: 1. Views expressed or suggestions made by the other party in respect of possible settlement of the dispute. 2. Admissions made by the other party in the course of the Conciliation proceedings. 3. Proposals made by the Conciliator.
4.

The fact that the other party had indicated his willingness to accept a proposal for settlement made by the Conciliator. The statutory Proceedings given under Sec. 81 cannot be permitted to be misused and if an award is made in violation of the statutory provisions as contained in Sec. 81, it would be in conflict with "Public Policy of India" and as such, the court shall be entitled to set it aside.

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JUDICIAL DECISIONS ON PUBLIC POLICY

In the case of Renusagar Power Plant Co. Ltd v. General Electric Co.,3 (Renusagars Case), the Supreme Court while construing the term Public Policy in Section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961 (Foreign Awards Act), applied the principles of private international law and held that an award would be contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality and cannot be set aside on merits. In Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd.,4 the aggrieved party challenged an adverse arbitral award because the arbitral tribunal had incorrectly applied the law of liquidated damages to the case. In holding that the challenged award was legally flawed, the Court held that, in addition to the interpretation of public policy in Renusagars Case, a domestic arbitral award may be set aside if it contravenes the provisions of the [1996 Arbitration and Conciliation] Act or any other substantive law governing the parties or is against the terms of the contract. The holding of the Supreme Court in SAW Pipes added Patent Illegality as a fourth public policy consideration to the three considerations previously enumerated in Renusagars case. In Gherulal Parakh v. Mahadeodas Maiyev,5 the Supreme Court observed that the Public Policy or the policy of the law is an illusive concept. It has been described as untrustworthy guide, variable quantity, uncertain one, unruly horse etc. The primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on public policy. The doctrine of public policy is extended not only to harmful cases but also to harmful tendencies; it is only a branch of common law, and just like any other branch of common law. It is governed by precedents. The principle has been crystallized under different heads although it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public policy, through the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstance of a changing world, it

3 4

A.I.R. 1994 S.C. 860. A.I.R. 2003 S.C. 2629. 5 A.I.R. 1959 S.C. 781.

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is advisable in the interest of stability of society not to make any attempt to discover new heads. In Central Inland Water Corp. Ltd. v. Brojo Nath Ganguly,6 the Supreme Court promoted a wider stance by interpreting the term public policy on the pillars of public conscience, public good and public interest. In Shri Hans Enterprises v. Air Port Authority of India,7 it was held that Award not based on true construction of the terms and conditions of the contract between the parties and correct appreciation of the material in as much as he has ignored the certain important clauses of the agreement while arriving at the said findings is clearly in conflict with the Public Policy of India. In Oil and Natural Gas Corporation Ltd. v. Schlumberger Asia Services Ltd.,8 it was held that where an Arbitrator or an Arbitral Tribunal ignores a well recognized principle of interpretation, such an award would be against public policy. In Konkan Railway Construction Corporation Ltd. v. Rani Constructions Pvt. Ltd.,9 contention of appellants was that order of Chief Justice of Bombay High Court u/s. 11 of Arbitration and Conciliation Act, 1996 on the preliminary issues is a judicial order and is liable to be set aside under Article 136 of the Constitution of India. They also contended that even if it is administrative in nature, it is amenable to Article 136. The Court held as question is one arising almost constantly in a large number of cases in various High Courts, it is desirable that this Court re-examines the matter and papers directed to be placed before Honble CJI for passing appropriate orders. The Court also observed that award can be sought to be set aside under Sec. 34. Section 16 empowers the arbitral tribunal to rule on its own jurisdiction and if a party is aggrieved by an arbitral award made after rejection of his plea of jurisdiction, he can challenge it in accordance with Section 34. Need for Reconsideration Subsequent to the decision in SAW pipe case, the question that needs to be answered is what exactly did the Court mean when it stated that an award would also be contrary to public
6 7

A.I.R. 1986 S.C. 1571. 2003 (2) Arb.L.R. 336. 8 2006 (3) Arb.L.R 610. 9 2000 (3) RAJ. 188 (S.C.)

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policy if it were Patently Illegal. Before that on has to know what illegality means in the arbitration context. Illegality in arbitration context has threefold meaning. Firstly, the illegal nature of the underlying contract, secondly its subject matter and lastly, the circumstances surrounding the entering into the contract or the arbitration agreement. But the Apex Court in SAW Pipe case gave a whole new dimension to the term illegality in arbitration context by equating it to mean error of law. The Supreme Court itself has held in Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprise,10 that the Court cannot interfere with the decision of an arbitrator on the ground that his decision is based on error of law or fact. The Act only provides for specific heads under Sec. 34 on which appeals can be made to thr Court to set aside the award. If the legislators wanted to include error of law as a ground for setting aside the award, they would have provided for it in Sec. 34 itself. There are two legislative proposals before Indian Parliament which clearly show that the legislature did not intend to include error of law as a public policy ground under Sec. 34 (2) (b) (ii). In fact, the Courts interpretation of public policy is so broad that it potentially opens the floodgates to more and more challenges of arbitral awards before the Indian courts. It is submitted that the SAW Pipes case was decided in the context of an Indian award, and therefore should not apply to recognition and enforcement proceedings for foreign awards pursuant to Sec. 48 of the Act.11

10 11

1992 (2) W.L.C. 19. http://manupatra.com/roundup/326/Articles/Arbitration.pdf (accessed on 13-03-2014).

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INTERNATIONAL LAW GOVERNING PUBLIC POLICY FOR RECOGNITION AND ENFORCEMENT OF AN ARBITRAL AWARD
New York Convention, 1958 The New York Convention (1958), Art. III provides that each contracting State Shall recognize awards as binding and enforce them in accordance with the rules & procedure of the territory, where award is relied upon. Accordingly the procedural laws of the Country in which the award is relied upon would govern the procedural aspect of the filing of foreign award. Further New York Convention (1958), Art. V (2) provides that the enforcement of an arbitral award may also be refused, if the laws of the Country where the recognition and enforcement is sought finds that:12 1. The Subject matter of the difference is not Capable of Settlement by arbitration under the law of that Country or 2. The recognition or enforcement of the award would be contrary to the public policy of that country. UNCITRAL Model law (1985) The UNCITRAL model Law (1985), Article 36 (1) (b) provides the grounds for refusing recognition or enforcement of an arbitral award, irrespective of the country in which it was made, it may be refused if the court finds that:13 1. The subject matter of the dispute is not capable of Settlement by arbitration under the law of this state, or 2. The recognition or enforcement of the award would be contrary to the public policy of this state.

12

http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (accessed on 13-032014). 13 http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration.html (accessed on 13-03-2014).

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CONCLUSION
The Arbitration and Conciliation Act, 1996 or the Contract Act, 1872 do not define the expression Public Policy or opposed to Public Policy. Public Policy is not the policy of a particular Government. It connotes some matter which concerns the public good or public interest. Doctrine of 'Public Policy' is somewhat open textured and flexible and this flexibility has been the cause of judicial censure of the doctrine. The concept of Public Policy denotes what is good for the public or in public interest or what would be injurious or harmful from time to time. New concept of Public Policy takes the place of the old. Public Policy of India does not cover public policy of the country, mere contravention of law would not attract bar of public policy, but the award must be contrary to Fundamental policy of Indian Law or The interest of India or Justice or Morality or Patently illegal.

Principles governing what would be 'Public Policy' will have to be construed on each occasion on facts of each case and with the law as applicable at the relevant time.

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BIBLIOGRAPHY
LIST OF STATUTES:

The Arbitration and Conciliation Act, 1996. New York Convention, 1958 UNCITRAL Model law (1985)

BOOKS:

N. K. Acharya: Law Relating to Arbitration and A.D.R., 3rd Edition, 2011, Asia Law House, Hyderabad. Dr. S. C. Tripathi: Arbitration and Conciliation Act, 1996, 5th Edition, 2010, Central Law Publications, Allhabad. P. K. Padhi: Legal Aspects of Business, 2013, PHI Learning Pvt. Ltd., New Delhi.

WEBSITES:

http://www.indiankanoon.org http://manupatra.com/ http://www.uncitral.org/

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