Payal Chawla
This article was first published in Corporate LiveWire Magazine on 09.01.2017
Under the (Indian) Arbitration & Conciliation Act, 1996, there are essentially three types of arbitrations: purely domestic arbitrations (where both parties are Indian and the arbitration is held in India); International Commercial Arbitration or ICA (where at least one of the parties is a foreign national but the arbitration is conducted in India), and foreign arbitrations (where the arbitration is held outside India, but is required to be enforced in India).
With respect to the first two types of arbitrations, i.e., domestic and ICA, an arbitral award can be challenged in courts on certain grounds prescribed in section 34 of the Arbitration & Conciliation Act, 1996. The enforcement of a foreign award can also be challenged under section 48 thereof. Under the pre-amendment[1] regime, the language of sections 34 and 48 were in pari materia and therefore the grounds of challenge of all three types of arbitrations were the same. One such ground of challenge was “public policy”, whereby an award could inter-alia be challenged/refused enforcement if it was found to be against public policy.
The Renusagar decision:
In 1993, a three-judge bench of the Supreme Court in the landmark judgement of Renusagar Power Co. Ltd v. General Electric Co.,[2] held that public policy would mean “public policy of India” and it would have three key ingredients: fundamental policy of Indian law, interests of India and justice and morality. In essence, if an award violated any of these three principles, the courts would be well within their power to strike down the award as being against the “public policy of India”.
Fourth dimension:
Ten years later, a fourth dimension – the test of patent illegality – was added to the above list by the Supreme Court in the matter of ONGC v. Saw Pipes.[3] Although the decision of Saw Pipes was delivered in the context of a domestic award, it had the unfortunate effect of being extended to apply “equally to both awards arising out of international commercial arbitrations as well as foreign awards”,[4] given that the language of Section 34 and 48 was the same prior to the 2016 amendments. The Saw Pipes judgement was controversial
and resulted in vastly increasing the powers of the courts in setting aside or modifying arbitral awards.
The foreign awards departure:
However, in 2014, the Supreme Court in Shri Lal Mahal v. Progetto Grano Spa,[5] clarified that the patent illegality test could not apply to foreign awards since the Saw Pipes judgement was in the context of domestic awards. Therefore, the Renusagar test became the applicable standard for foreign awards.
Recognising Shri Lal Mahal as the correct interpretation of the law, in August of 2014 the 246th Law Commission went on to recommend the deletion of the patent illegality test from the definition of public policy. However, the Law Commission recommended the retention of patent illegality as a separate ground, dehors public policy, but only in case of domestic awards. The sequitur of this recommendation was that an arbitral award arising from an international commercial arbitration could not be set aside and a foreign award could not be refused enforcement on the ground of patent illegality. Additionally, the Law Commission recommended the removal of “interests of India” as a subset of “public policy” and restricted the definition of public policy only to: the making of the award being induced or affected by fraud or corruption or being in violation of Section 75 or Section 81; or being in contravention with the fundamental policy of Indian Law, or in conflict with the most basic notions of morality and justice.
Another controversy: Western Geco & Fundamental Policy
With these recommendations of the Law Commission, it appeared that all the controversy surrounding public policy had finally been laid to rest. But then, within a month of the publication of the 246th Law Commission Report, a new controversy emerged; this time on the meaning of the words “fundamental policy of Indian Law”.
The Supreme Court in a three-judge bench passed a judgment in the matter of ONGC Ltd. v. Western Geco International Ltd.[6]. “Without meaning to exhaustively enumerate the purport of the expression ‘fundamental policy of Indian law’”, the court observed that the expression had three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law.[7] The three principles being: the duty to adopt a judicial approach, natural justice including audi alteram partem, and the Wednesbury principle of reasonableness.
The Western Geco decision was cited with approval in November, 2014, in the judgment of Associate Builders v. DDA[8]. The Court in Associate Builders also went on to define the expressions interests of India – justice, morality and patent illegality. The Court held that the expression interest of India concerns itself with India as a member of the world community in its relations with foreign powers.[9] The court did not dilate on this aspect and felt the expression may need to evolve on a case by case basis.[10] It remains unclear why the Court elucidated on a definition for interests of India since the Law Commission had already recommended that the said expression should be removed from the definition of public policy as it was subject to “interpretational misuse”.[11] Presumably, the Court may have felt the need to make a mention of the same, since at the time the 246th Report was still a mere recommendation.
With regards to justice, the court defined it to mean an award which “shocks the conscience of the court”.[12] On the aspect of morality, the court observed that morality has been confined to sexual morality. If it is to go beyond sexual morality, the award must cover such agreements as are not illegal but would not be enforced given the prevailing mores of the day. It was cautioned that interference on this ground would also be only if something shocks the court’s conscience.[13] With regard to patent illegality, the court restricted its definition to domestic arbitration and that such illegality must go to the root of the matter and cannot be of a trivial nature. It also held that an arbitral tribunal must decide the dispute in accordance with the terms of the contract, and if the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do, it would be liable to be set aside. The court also held that while an arbitrator cannot wander outside the terms of the contract, if two interpretations are possible and the arbitrator takes one, that would be within the arbitrator’s jurisdiction.[14]
Criticism by Law Commission:
The Law Commission did not take kindly to the expansive definition attributed to public policy by the judgements of Western Geco and Associate Builders. The Law Commission appeared to be particularly vexed by the inclusion of the Wednesbury principle, to the definition of fundamental policy of Indian law, and thus felt the need to publish a supplementary report to the 246th Law Commission Report. The Law Commission felt such an expanded definition would have “four deleterious effects”, including the “reduction in popularity of India as a destination for international and domestic commercial arbitration”,[15] and therefore recommended the inclusion of Explanation II to Section 34(2)(b)(ii) to the Act.
The Arbitration & Conciliation Act of 1996 stood amended on January 1, 2016 with retrospective effect from October 23, 2015. The recommendations of the 246th Law Commission Report and the Supplementary Report thereto, in relation to public policy and patent illegality were included verbatim in the 2016 amendments. Of particular importance is the inclusion of Explanation II, to both Section 34 and 48, which categorically stated that “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”.[16]
It is important to mention that although the Law Commission had recommended the inclusion of Explanation II only to section 34(2)(b)(ii), in the 2016 amendments Explanation II was also added to section 48. The inclusion in both sections was obviated since fundamental policy of Indian law was a component of public policy, which is a ground for challenge both under Section 34 and 48.
Public Policy and the Wednesbury principle
With all the iterations that the definition of public policy has gone through, the question is: what is the meaning of public policy post the 2016 amendments, and is the Wednesbury principle still a part of it? In my respectful submission, Wednesbury isn’t and can no longer be a part of the definition of public policy.
First, the intent of parliament on this aspect is lucid and the inclusion of Explanation II to both Section 34 and 48 was in the specific context of the inclusion of the Wednesbury principle. The Law Commission in this regard stated that the “Supreme Court’s judgment in Western Geco would expand the Court’s power” which would run contrary to the principal object of the 2016 amendments which was minimisation of judicial intervention.[17] The Law Commission minced no words in stating that the applicability of Wednesbury principles to public policy would render the construction of the term “public policy” “nugatory”.[18] It was in this context, specifically, that the inclusion of Explanation II was added to the 2016 amendments.
Secondly, it is a settled principle of law that the Wednesbury principle entails an investigation into the action of an authority and “whether they have taken into account matters which they ought not to take into account, or, conversely, have refused to take into account or neglected to take into account matters which they ought to take into account”[19] and “if in doing so, they came to a conclusion so unreasonable that no reasonable authority could ever have come to it”.[20] In making such a judgement, the court would require an inquisition into the facts or merits of the dispute, which would run contrary to the prohibition imposed by Explanation II. While the language of Explanation II appears, on the face of it, to suggest that in applying the three principles, i.e., the duty to adopt a judicial approach, natural justice and the Wednesbury principle of reasonableness, the Court shall not entail a review on the merits of the dispute,[21] it is, nevertheless, important to consider that there can be no application of the Wednesbury principle without a review of the merits.
Thirdly, the Wednesbury principle is a principle of administrative law where the court sits as a judicial authority over the local authority to see if the local authority has acted in a manner that exceeded its powers, and not as an appellate authority to override a decision of a local authority. In essence, Wednesbury is an element of judicial review which has no place in arbitral disputes. In 2010, The Singapore High Court[22] succinctly explicated, “although the court undoubtedly has, on judicial review, a power to quash an administrative decision when it’s substantive merits are so absurd that no sensible person could have made that decision… no such power is available where the decision in question is made by an arbitral tribunal. This is because there is no appropriate analogy between administrative and arbitral decisions. Review for Wednesbury unreasonableness or irrationality exists because it is presumed that, when Parliament gives an administrative decision maker a discretion, that discretion is not unfettered; rather, Parliament intends that that discretion be exercised reasonably… this presumption of rationality, however, finds no purchase in the context of private arbitrations, where parties have contractually agreed to abide by the decision of the arbitral tribunal. Parties must therefore be held to that agreement, in the absence of any of the specific grounds for challenging an award set out by Parliament in the act. The ability to challenge an award for unreasonableness or irrationality is not a ground set out in the Act”. The Arbitration & Conciliation Act, 1996, has no such specific ground for challenge of an award for unreasonableness or irrationality.
Albeit, the proposition has yet not been decided by the court, the Law Commission has rightly pointed that to continue to read the Wednesbury principle into the definition of public policy would be contrary to legislative intent, the object of the Act and international practice.[23][24]
[1]The Arbitration and Conciliation Act, 1996 was amended vide The Arbitration and Conciliation (Amendment) Act, 2015 with effect from 23.10.2015.
[2]1994 Supp (1) SCC 644
[3]2003 (5) SCC 705
[4]246th Law Commission Report, page 21-22
[5]2014 (2) SCC 433
[6](2014) 9 SCC 263
[7]ONGC v. Western Geco, para 35
[8](2015) 3 SCC 49
[9]Associate Builders v. DDA, para 35
[10]Associate Builders v. DDA, para 35
[11]246th Law Commission Report, para 37, page 22;
[12]Associate Builders v. DDA, para 36
[13]Associate Builders v. DDA, para 37-39;
[14]Associate Builders v. DDA, para 42-45;
[15]Supplementary Report to the 246th Law Commission Report, 06.02.2015, para 10.6, page 19;
[16]Explanation II to Section 34 & Section 48 of the Arbitration and Conciliation Act, 1996;
[17]Supplementary Report to the 246th Law Commission Report, 06.02.2015, para 10.5, page 18-19;
[18]Supplementary Report to the 246th Law Commission Report, 06.02.2015, para 10.5, page 18-19;
[19]Associated Provisional Picture Houses, Limited v. Wednesbury Corporation [1948] 1 KB 223;
[20]Associated Provisional Picture Houses, Limited v. Wednesbury Corporation [1948] 1 KB 223;
[21]Explanation II to Section 34 & Section 48 of the Arbitration and Conciliation Act, 1996;
[22]Sui Southern Gas Co Ltd. v. Habibullah Coastal Power Co (Pte) Ltd. [2010] SGHC 62
[23]Supplementary Report to the 246th Law Commission Report, 06.02.2015, para 10.4, page 18;
[24]Stop press: As this article was ready to go to press, a three-judge bench of the Supreme Court, on December 15, 2016 delivered a landmark judgement in the matter of M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. [Civil Appeal No.’s 2562/2006 & 2564/2006) in relation to two tier arbitrations. In this case the court has made observations in regard to public policy, but the same do not impact the contents of this article, since the observations are obiter dicta and the court has held that it was in the present case only concerned with fundamental policy and a two-tier arbitration would not be against public policy.
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