Payal Chawla[1]
Despite recent authoritative decisions including Associate Builders v. DDA[2] and Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India[3], the meaning, parameters and limits of the public policy doctrine remain shrouded in ambiguity. In fact, the anfractuous peregrination of the public policy doctrine continues.
As you read further, you will notice that the ghost of the Wednesbury doctrine has returned. While it has left the realm of “public policy”, it returned under the guise of “reasonableness and irrationality” under the “patent illegality” doctrine. In 2021 the Supreme Court permitted two Indian parties to choose a foreign seat to arbitrate their disputes. The question that arises for consideration is – whether the interplay of the current parameters of the “patent illegality” doctrine with the ratio of PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Private Limited[4], will adversely impact domestic arbitration, or at the very least with regard to large disputes?
PART A – THE MEANING OF PUBLIC POLICY & PATENT ILLEGALITY
“Public policy” is available as a ground for challenge for awards delivered under s. 34 of the Arbitration and Conciliation Act, 1996 (“ACA”) [for both domestic awards and international commercial arbitration (“ICA”) awards], and also for the enforcement of a foreign award under s. 48 of the ACA. “Patent illegality”, on the other hand, is available as a ground for challenge only for domestic arbitrations.
Meaning of public policy – first attempt
Renusagar Power Co. Ltd v. General Electric Co.[5], is the first noted attempt at defining the meaning of “public policy”. This landmark judgement was passed in 1993 by a three-judge bench of the Supreme Court in the context of the Foreign Awards (Recognition and Enforcement) Act, 1961[6]. The court held that public policy would mean “public policy of India”, and it would comprise three key subsets: (i) fundamental policy of Indian law, (ii) interests of India and (iii) justice & morality. In essence, if an arbitral award violated any of the three sub-group or principles, the courts would be well within their power to strike down the award as being contrary to “public policy of India”.
Introduction of Patent Illegality
Ten years later, the Supreme Court in the matter of Oil & Natural Gas Corporation Ltd. v. Saw Pipes[7] expanded the parameters of “public policy” by adding a fourth subset i.e. the test of “patent illegality” Saw Pipes[8], which was albeit delivered in the context of a domestic award, had the “unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards”[9]. This was primarily due to the language of ss. 34 and 48 being in pari materia prior to the promulgation of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 amendments”). The Saw Pipes[10]judgement was controversial as it significantly enhanced the powers of the courts in setting aside / modifying arbitral awards, both domestic and foreign.
Shri Lal Mahal Ltd. v. Progetto Grano Spa[11] carved out an exception for foreign awards and clarified that the patent illegality test would be limited to domestic awards. Foreign awards would continue to be governed by the public policy standard propounded in Renusagar[12].
246th Law Commission Report
The 246th Law Commission Report was submitted in August 2014. The LCR recommended a restrictive interpretation of “public policy” i.e. (i) only to: the making of the award being induced or affected by fraud or corruption or being in violation of s. 75 or s. 81 of the ACA; or (ii) being in contravention with the fundamental policy of Indian law, or (iii) the award being in conflict with the most basic notions of morality and justice. The 246th LCR recommended the removal of “interests of India” as a subset of “public policy”.
The LCR also recommended a different standard of test for foreign awards/ ICA awards on the one hand and domestic awards on the other. According to the 246th LCR, Shri Lal Mahal[13] was the correct exposition of the law qua foreign awards. It recommended the removal of the “patent illegality” test from the definition of “public policy” in its entirety, and for the creation of a separate “patent illegality” test to be applicable only in case of domestic awards.
ONGC v. Western Geco
Within a month of the publication of the 246th LCR, a three-judge bench of the Supreme Court passed a judgment in the matter of ONGC Ltd. v. Western Geco International Ltd.[14], completely ignoring the recommendations of the LCR. The Supreme Court expanded the meaning of the expression “fundamental policy of Indian Law”, which is one of the subsets of “public policy”. Therefore, in effect, the restrictive reading of “public policy” recommended by the LCR, had been expanded through one of the subsets of “public policy” i.e. “fundamental policy of Indian law”[15].
“Without meaning to exhaustively enumerate the purport of the expression ‘fundamental policy of Indian law’”[16], 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[17]. The three principles being: (i) the duty to adopt a judicial approach[18], (ii) natural justice including audi alteram partem[19], and (iii) the Wednesbury[20] principle of reasonableness[21].
Associate Builders: An attempt to define the subsets
The Western Geco[22] decision was cited with approval in the judgment of Associate Builders[23] in November 2014. The Supreme Court in Associate Builders[24] 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”[25]. The Court did not dilate on this aspect and felt the expression may need to “evolve on a case by case basis”[26]. 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”[27]. Presumably, the Court may have felt the need to do so, since the 246th Report was still a mere recommendation, at the time.
With regards to “justice”, the Court defined it to mean an award which “shocks the conscience of the court”[28]. On the aspect of “morality”, the Court observed that morality has been confined to sexual morality, and if it is to go beyond sexual morality, the award must cover such agreements as are not illegal and which could not be enforced given the prevailing mores of the day. The Court cautioned that interference on this ground would also be only if something shocks the court’s conscience[29].
On “patent illegality”, the Court restricted its definition to domestic arbitration and stated that such illegality must go to the root of the matter and cannot be of a trivial nature. It also held that the intervention of an arbitral tribunal was limited to the terms of the contract, and a tribunal could not wander outside the terms of the contract. Interpretation of a contract would be within the domain of an arbitral tribunal and if two interpretations were possible, the tribunal would be free to decide which interpretation to rely upon[30]. The Court, however, cautioned that if the arbitrator construed the contract in a manner no fair-minded or reasonable person would, the Award would be liable to be set aside.
The Supplementary LCR
The Law Commission of India did not welcome the expansive interpretation of the “public policy doctrine” by the Western Geco and Associate Builders judgements. The Law Commission appeared to be particularly vexed by the inclusion of the Wednesbury principle in the definition of “fundamental policy of Indian law”. This necessitated the Law Commission to give a Supplementary Report to the 246th LCR on 06.02.2015.
The Law Commission was inter alia of the view that 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”[31]. It was in this context that the Law Commission recommended the inclusion of Explanation 2[32] to s. 34(2)(b)(ii) to the ACA.
2015 Amendments
The Arbitration & Conciliation Act, 1996 stood amended with effect from October 23, 2015. The recommendations of the 246th LCR and the Supplementary Report thereto, in relation to “public policy” and “patent illegality” were included verbatim in the 2015 amendments.
Of particular importance is the inclusion of Explanation 2, to both ss. 34 and 48, which reads – “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”.[33]
Although the Law Commission had recommended the inclusion of Explanation 2 only to s. 34(2)(b)(ii), in the 2015 amendments Explanation 2 was also added to s. 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 ss. 34 & 48 of the ACA.
The decisions post 2015 Amendments
In HRD Corporation (Marcus Oil & Chemical Division) v. GAIL Limited (formerly Gas Authority of India Limited)[34], Nariman, J. speaking for the Court, read down Associate Builders[35], in so far as it was at variance with the amended ACA. The Supreme Court recognised that the amended ss. 28 and 34 had narrowed the grounds of challenge available under the Act, that Saw Pipes and Western Geco were no longer good law, that ss. 34 and 48 had been reverted back to being in line with the proposition laid down in Renusagar[36], that “public policy” had only two subsets i.e. “fundamental policy of Indian law” and “justice or morality”, and that “the interest of India” “no longer obtains” as part of “public policy[37].
However, despite the importance of the HRD Corporation judgement, the observations made by the Court in regard to “public policy” largely went unnoticed.
In 2019, Nariman J., authored the comprehensive judgement of Ssangyong[38], and once again painstakingly detailed the meaning, to the extent possible, of the two subsets of “public policy”, and also of “patent illegality”.
Current Meaning of “Public Policy” and “Patent Illegality”
From a conjoint reading of Associate Builders[39], HRD Corporation[40] and Ssangyong[41] the meaning of “public policy” and “patent illegality” are as follows.
The meaning of public policy, its subsets and parameters
According to Ssangyong[42], “public policy” will have two components i.e. “Fundamental policy of Indian law” and “justice and morality”. “Fundamental policy of Indian law” bears the same “constricted” meaning as prescribed in paragraphs 18[43] and 27[44] of Associate Builders[45]. As regards paragraph 18 of Associate Builders, the same, in essence, states that enforcement of a foreign award can be refused if it is against the public policy of India, which has two components i.e. (i) fundamental policy of Indian Law, (ii) justice or morality. It was clarified that “interest of India” no longer obtains and therefore paragraph 18 must be read accordingly.
Justice and morality
“Justice” and “morality” continue as subsets of “public policy”. It does not obtain as a part of “patent illegality”.[46] Conflicts with justice or morality are to be understood as a conflict with the “most basic notions of morality or justice” (in line with paragraphs 36 to 39[47] of Associate Builders), and such that “shocks the conscience of the court” and “can be attracted only in very exceptional circumstances”[48].
A three-judge bench in the matter of Government Of India v. Vedanta Limited (Formerly Cairn India Limited)[49] has approved considerations of reciprocity embodied in the New York Convention in regard to the invocation of the public policy defence. According to the Court the reliance on the public policy doctrine should be relied on with caution, construed narrowly and enforcement of foreign arbitral awards should be denied only where enforcement would violate the forum State’s most basic notions of morality and justice.
In the matter of Parsons & Whittemore Overseas Co. Inc. v. Societe Generale De L’industrie du Papier[50] the Court limited the rejection of enforcement only if the award violates a State’s most basic notions of morality and justice. According to the Court there should be great hesitation in refusing enforcement unless it is obtained through “corruption or fraud, or undue means”. Parsons was cited with approval in Renusagar[51]and more recently by Vedanta[52], the latter terming it a “seminal judgement”.
Fundamental Policy of Indian Law
Paragraph 27 of Associate Builders (supra) seeks to clarify whether all infractions against substantive law of India would be a ground for setting aside an arbitral award as a violation of the “fundamental policy of Indian law”. The Court observed that “Violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law.”[53].
As the law stands today, not every violation of substantive law would qualify as a violation of the fundamental policy of Indian law and hence as a ground to set aside an arbitral award. There is a difference between contravention of a statute not linked to public policy or public interest” and “mere erroneous application of the law”.[54] Violation of a statute (which is not linked to public policy or public interest) is not a violation of public policy, and also cannot “be brought in by the back door when it comes to setting aside an award on the ground of patent illegality”.[55] Mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. In this context paragraph 42.1[56] of Associate Builders is no longer good law[57].
If a “statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation”[58] and the award is in contravention of such a statute that would be a ground for setting aside the award.[59] A statute which deals with the economy of India, such as the Foreign Exchange Regulation Act, 1973 of the Indian Stamp Act, 1899 would fall within the mischief of “fundamental policy of Indian law”.[60] Distinguishing the Foreign Exchange Regulation Act, 1973 from the Foreign Exchange Management Act, 1999, a three-judge bench of the Supreme Court in the matter of Vijay Karia And Others v. Prysmian Cavi E Sistemi Srl [61], held that violations under the latter being a curable defect would not fall within the mischief of the public policy doctrine. “(D)isregarding orders passed by the superior courts in India” would amount to a “contravention of the fundamental policy of Indian law” [62], “but the recovery of compound interest on interest, being contrary to statute only, would not contravene any fundamental policy of Indian law.[63]
The expanded version of “fundamental policy of Indian law” is no longer good law
The expanded version of “fundamental policy of Indian law” given by Western Geco[64] would no longer obtain, and accordingly, paragraphs 28 and 29 of Associate Builders (supra) would be redundant.
A combined reading of paragraphs 28 and 29 of Associate Builders[65] would reveal that the following no longer[66] form part of “fundamental policy of Indian law”:-
Basic administration of justice and enforcement of law in India.
Determination by a court or other authority that affects the rights of a citizen or leads to any civil consequences.
That the court or authority concerned is bound to adopt a “judicial approach”[67] in the matter. i.e. they cannot act in an arbitrary, capricious or whimsical manner, and must act bona fide, in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration.
Principles of natural justice and audi alteram partem rule i.e. the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other.
Non-application of mind is a defect that is fatal to any adjudication.
Recording reasons in support of the decision which the court or authority is taking.
The adjudicatory authority must apply its mind.
A decision which is perverse or so irrational that no reasonable person would have arrived at – the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of the Wednesbury[68] principle of reasonableness.
Expansion of s.34(2)(a)(iii) of the ACA
While the aforementioned are not available as grounds of challenge under the head of “public policy”, they (or at least some of them) are now available as ground(s) to challenge a domestic and ICA award under ss. 34(2)(a)(iii), 18, 24 and 25 of the ACA and a domestic award under “patent illegality”.
For instance, the court cannot intervene in the “merits of the award” on the ground that the “arbitrator has not adopted a judicial approach”[69], since this is no longer a ground under “public policy”. However, notice that Ssangyong[70]does not say that a “judicial approach” is not to be used at all. It only says that a court cannot look at the merits of the award on the ground that a judicial approach was not adopted. Therefore, the duty upon the arbitral tribunal to act bona fide, in a fair, reasonable and objective manner, and that its decision is not actuated by any extraneous considerations, continues to remain, except that the mandate of ss. 12 & 13 of the ACA would need to be followed.
An arbitral award may be set aside by the Court only if the party making the application establishes on the basis of the record of the arbitral tribunal that such party “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”[71], then “Sections 18, 24 (3) and 26 are important pointers to what is contained in the ground of challenge mentioned in section 34(2)(a)(iii)”[72]. These pointers are as follows:
Each party should have the full opportunity to present its case, and all statements, documents and other information supplied by one party to the arbitral tribunal should be communicated to the other party;
Any expert report or document on which an arbitral tribunal relies upon in making its decision, should be communicated to the other parties.
When an expert’s report is relied upon by the arbitral tribunal, the said report, along with all documents/goods, or other property in the possession of the expert, and relied upon by the expert in order to prepare his/her report, must first be made available to any party who requests for the foregoing material.
After the report is furnished if either party requests the party shall be given an opportunity to put questions to the expert and to also present their own expert witnesses in order to testify on the points at issue, such opportunity should be provided.
Any material taken behind the back of either party, on which such party has not had the opportunity to comment would be a ground of challenge under s. 34(2)(a)(iii).
More recently, the Court has stated that depriving a party of the right to produce evidence and cross-examine the witness of the other party, would result in violation of the principles of natural justice and ss.18, 24 and 25 of the ACA[73]. Such an award would be set aside under s. 34(2)(a)(iii) of the ACA.
Natural Justice, audi alteram partem and public policy
As regards natural justice, paragraph 30[74] of Associate Builders would continue to be binding[75]. Paragraph 30 of Associate Builder says – “The Audi Alteram Partem principle which undoubtedly is a fundamental juristic principle in Indian law[76] is also contained in Sections 18 and 34 (2) (a) (iii) of the Arbitration and Conciliation Act”. In essence, natural justice and audi alteram partem are covered by public policy (being a fundamental juristic principle of Indian law), ss. 18 and 34(2)(a)(iii). So, while natural justice and audi alteram partem have been removed from the subset of “public policy” i.e. “fundamental policy of Indian Law”[77], it has been brought back into the overarching category of “public policy” by way of paragraph 30 of Associate Builders (supra).
The arbitrator’s domain
According to Ssangyong (supra), the essence of paragraphs 42.3 to 45[78] of Associate Builders are encapsulated in s. 28(3) of the ACA. The construction of a contract would primarily be within the domain of the arbitrator to decide. However, if the arbitrator construes a contract in a manner that no fair-minded or reasonable person would, or in other words the arbitrator takes a view that is not a possible one, or one that goes beyond the contract or deals with matters not allotted to him/her, it would be possible to challenge the award. Such a challenge would be available on the ground of “patent illegality” under s. 34 (2A)[79] of the ACA. The above proposition was stated in paragraphs 39[80] to 41[81] of Ssangyong, wherein it was inter alia held that the construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes a contract in a manner which no fair-minded or reasonable person would take i.e. if the view taken by the arbitrator is not even a possible view to take[82],[83]. This view has once again been reiterated in Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd. (Neepco)[84].
If an arbitrator has wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error, which could be corrected on the ground of “patent illegality”. It would also not be possible to bring this within the mischief of s. 28(3), and would be beyond the scope of s. 34(2)(a)(iv)[85] of the ACA. S. 34(2)(a)(iv) of the ACA must be narrowly construed and apply only to matters which are beyond the scope of the arbitration agreement or beyond the terms of reference of the arbitral tribunal[86]. The arbitral tribunal is the final judge of the quality, as well as the quantity of evidence before it. However, a challenge to the quality and/or quantity of evidence would be a statutory one as stated above, and would not be permissible either under the “public policy” or “patent illegality” doctrines.
The current meaning of Patent Illegality
It is reiterated that “patent illegality” is a separate ground and not part of “public policy”. It is available only for setting aside a domestic award under s. 34 of the ACA and its parameters include the following:
Patent illegality appearing on the face of the award, such that it goes to the root of the matter[87].
Paragraphs 31[88] and 32[89] of Associate Builders[90] will continue to be binding.
An award can be struck down on the grounds of being “perverse”, or “irrational”, and if the award is of such nature that “no reasonable person would have arrived at the same”. Regarding the “perversity principle”, the Court in Ssangyong[91] upheld paragraphs 29[92], 31-34[93] and para 42[94] of Associate Builders[95]. So, therefore, while the ground of perversity and irrationality is no longer available as a ground for challenge under “public policy of India”, it is available as a ground under “patent illegality”. A finding based on no evidence at all, or an award which ignores vital evidence in arriving at its decision would be considered perverse. Also, a decision based on documents taken behind the back of one of the parties by the arbitrator would also qualify as a decision based on no evidence and would be considered perverse[96]. In Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.[97], the Court held, perversity should be such that “goes to the root of the matter without there being a possibility of alternative interpretation”[98].
The award should be based on evidence. It should not ignore vital evidence, nor take into account something irrelevant.
Mere erroneous application of the law is not a ground under “patent illegality”, nor is re-appreciation of evidence permissible.
Paragraph 42.2[99] of Associate Builders (supra) would continue to be binding and failure by the arbitrator to give reasons for the award, or contravention of s. 31(3)[100] of the ACA would amount to patent illegality[101].
The ghost of Wednesbury returns
It is not res integra that Wednesbury no longer forms part of the “public policy” doctrine[102]. But notice, as is evident from the above exposition, the principles of Wednesbury (i.e. perversity and irrationality) are firmly ensconced in “patent illegality”. So, therefore, Wednesbury, while it has been done away with as a ground for setting aside ICA awards and enforcement of foreign awards, it is a ground to test a domestic arbitral award.
The Supplementary LCR made the legislative intent of overruling the principles enunciated by the Western Geco (supra) judgement amply clear, and 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 2015 amendment, which was the minimisation of judicial intervention[103]. 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”[104]. It was in this context, specifically, that Explanation 2[105] was added to the ACA vide the 2015 Supplementary amendments.
The incorporation of Wednesbury principles into the definition of “public policy”, as rightly pointed out by the Law Commission, is contrary to legislative intent, the object of the ACA and international practice[106], and “will discourage the possibility of international arbitration coming to, and domestic arbitration staying in India”.[107]/[108] .
While it can be speculated that Explanation 2 was always intended to apply only to “public policy”, and the omission of “patent illegality” by the Law Commission was deliberate. By sequitur, therefore, the courts could if they so desired apply the principles of Wednesbury to “patent illegality”. On the other hand, it would be equally credible to surmise that if the Law Commission intended for “patent illegality” to be guided by the principles of Wednesbury, it would have said so explicitly. It is important to mention that the context of Explanation 2 was the judgement of Western Geco (supra), which expanded the definition of “public policy”, and not “patent illegality”. Therefore, contextually “patent illegality” was not a topic within the consideration of the Law Commission at the time.
Further, Wednesbury principles are a concept of administrative law which has no place in arbitral disputes. The Singapore Supreme Court in the matter of Sui Southern Gas Co Ltd. v. Habibullah Coastal Power Co (Pte) Ltd. [109] has observed – “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[110]. This is because there is no appropriate analogy between administrative and arbitral decisions. Review for Wednesbury unreasonableness or irrationality[111] 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”.
Ironically, Ssangyong[112] relies on Sui Southern Gas Co Ltd.[113] with approval, and yet the court deemed it fit to incorporate these principles into grounds for setting aside domestic arbitration.
Therefore, whatever the Law Commission may have intended, the fact is that Wednesbury principles (or in other words perversity or irrationality) have now been incorporated into “patent illegality”. Given that it is now possible for two Indian parties to choose a foreign seat to arbitrate their disputes[114], the question that arises for consideration is – whether the inclusion of Wednesbury principles of perversity and irrationality into “patent illegality” will act as a catalyst for more Indian parties to choose a foreign seat?
PART B – DOMESTIC OR FOREIGN AWARD? – THE INDIAN PARTIES CONUNDRUM
PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Private Limited[115] is one of the most progressive judgements on arbitration. In PASL Wind it was held that two Indian parties can choose a foreign seat to arbitrate their disputes.
Domestic award versus foreign award
PASL Wind held that the award between two Indian parties, where a foreign seat has been designated, will be a foreign award, and will be subject to the mischief of Part II of the ACA.
It might be relevant to point out that the 246th LCR describes domestic arbitration as an arbitration “where both parties are Indian Nationals”[116]. The ACA however does not explicitly state that arbitration between two Indian parties is a domestic arbitration, nor is domestic arbitration defined. S. 2(1)(f), however, defines “international commercial arbitration”[117].
A conjoint reading of the 246th LCR, the ACA and PASL Wind reveal that when Indian parties choose an Indian seat the award will be a purely domestic award (as opposed to an ICA or international Commercial Domestic[118] Award[119]), and if Indian parties choose a foreign seat, it will be a foreign award, and Part II of the ACA will be applicable.
Substantive Indian law
TDM Infrastructure (P) Ltd. v. UE Development (India) (P) Ltd.[120] permitted two Indian parties to choose a foreign-seat to arbitrate their disputes, provided they don’t derogate from Indian substantive law. In the event of a derogation, the same would be treated as a violation of “public policy of India”.
What the Court does in PASL Wind is rather impressive – it upholds the TDM Infrastructure proposition (without so saying it), and at the same time, limits the violation of “public policy” to the standard of violation of “fundamental policy of Indian law” in terms set by Ssangyong[121]. So while opting out of substantive Indian law would not be a violation, however, if on the facts of a given case an Indian national circumvented a law which falls within the mischief of “fundamental policy of Indian law”[122], such an award will be vulnerable to non-enforcement under s. 48(2)(b) of the ACA.
As already stated above[123] a mere contravention of substantive law of India is not a ground to set aside an arbitral award, however, contravention of an economic law or a statute linked to public policy or public interest would be.
The point being – that two Indian parties that choose a seat outside India do not gain any special advantage on account of violation of substantive law of India. They would be put to the same standard for violation of “fundamental policy of Indian law” under ss. 34 or 48 of the ACA. As PASL Wind rightly states “in agreeing to a neutral forum outside India”, the parties may have subjected themselves to “two bites at the cherry, namely, the recourse to a court or tribunal in a country outside India for setting aside the arbitral award passed in that country on the grounds available in that country (which may be wider than the grounds available under section 34 of the Arbitration Act)”[124], in addition to an enforcement proceeding under s. 48 of the ACA.
Disincentive to arbitrate in India
While the Court in PASL Wind is correct in stating that a foreign award between two Indian parties is vulnerable to two bites at the cherry in India – one in the seat court and one at the enforcement stage. However, equally, it cannot be ignored that such an award is less vulnerable to wider scrutiny in India than a pure domestic award. A pure domestic award is susceptible to greater judicial scrutiny since the ground of “patent illegality” applies only to the latter. Further, the ground of patent illegality itself has been enlarged to include the test of “rationality” and “perversity”, or in other words Wednesbury. And I might add, a test even wider than first envisaged for patent illegality in Saw Pipes[125].
Furthermore, in certain instances when two Indian parties choose a foreign seat, say, Switzerland, the arbitration would be considered an international arbitration and the PILA[126] would apply[127]. Under Swiss law, there is a different standard of review when setting aside an award rendered with regard to a Swiss domestic award and Swiss international arbitral award. While most grounds are identical and the threshold to set aside an award is high, however, the scope of review on the merits is wider for a domestic award[128]. In effect, therefore, two Indian parties would be entitled to a (marginally) milder scrutiny and in countries such as England and Belgium, to a no different scrutiny.
It cannot, therefore, be ruled out that sophisticated or more resourceful contracting parties may opt for jurisdictions where the “patent illegality” test may not avail. Two Indian parties opting for a foreign seat in certain instances may give them the advantage of avoiding greater judicial scrutiny in India (or no different scrutiny) in a challenge to an award, and lighter scrutiny[129] also in seeking enforcement under Indian law. Resultantly, India could lose its larger domestic arbitrations to foreign countries. And this would be antithetical to the very purpose of the 2015 amendments to the ACA, which was to promote domestic and international commercial arbitration and make India into the next arbitration hub.
On the other hand, it is a progressive move, based on the principles of party autonomy, and in line with international practices. Countries such as England[130] and Switzerland[131] statutorily recognise the right of parties to choose their seat. Similarly, Singapore does not place any restriction on choice of seat.
Finding the balance
Rather than hindering party autonomy, the aim should be to strengthen our internal arbitral framework such that an Indian seated arbitration is a preference for Indian (and foreign) litigants. Several measures will be required to make India an arbitral destination. One such measure may be to consider removing the “patent illegality” test altogether and bring domestic arbitration at par with international commercial arbitration and foreign seated arbitration in testing the validity of the award under ss. 34, s.36 and s.48 of the ACA.
It is true that the Law Commission had recommended that “the legitimacy of judicial intervention in the case of a purely domestic award is far more than in cases where a court is examining the correctness of a foreign award or a domestic award in an international commercial arbitration.”[132]. Albeit, the Law Commission, did not elucidate on a reasoning, it did make a mention “the circumstances prevalent in our country”[133], presumably alluding to the quality of arbitrators.
But that was 2014[134], and we are today in 2022. Indian arbitration has traversed some distance since the 2015 amendments. There is a qualified and growing number of arbitration practitioners. Most arbitrators are retired judges. Conferences and training for arbitrators and arbitration practitioners are aplenty.
To my mind, there is no justification for different (and more stringent) grounds of scrutiny in a purely domestic award. It is also counter-intuitive to the goal sought to be achieved by the 2015 amendments to the ACA, which was to “stem the gradual, though steady”[135] outflow of international commercial arbitration from India. Consider what can a court additionally do under “patent illegality”, that it cannot do under the “public policy” doctrine” read with the statutory provisions of the ACA including ss. 18, 24, 25, 28 and 31(3) if an award requires the interference of the court? Consider the message it sends to the international community. Consider if we don’t trust our own arbitral universe, why should anyone else?
As long back as 2015, the Law Commission had recognised, that Indian parties were “preferring to institute arbitration proceedings abroad”[136]. This problem is likely to worsen with the decision of PASL Wind, unless the “patent illegality” test is done away with, or at the very least the ghost of Wednesbury is finally laid to rest.
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[1] Advocate at Jus Contractus, Part A of this article was peer reviewed by Dr. Amit George and Part B by Ms Renu Gupta. The author recognizes their generous and valuable inputs, and also those provided by Mr Jonathan Nash, KC-3VB, Françoise Lefèvre, Lefèvre Arbitration Belgium, and Dr Phillip Habegger, Habegger Arbitration, Switzerland.
[2] (2015) 3 SCC 49 (“Associate”).
[3] (2019) 15 SCC 131 (“Ssangyong”).
[4] (2021) 7 SCC 1 (‘PASL Wind”).
[5] 1994 Supp (1) SCC 644 (“Renusagar”).
[6] Since repealed.
[7] 2003 (5) SCC 705 (“Saw Pipes”).
[8] Ibid.
[9] Law Commission of India Report No. 246 titled ‘Amendments to the Arbitration and Conciliation Act 1996, dated August, 2014, page 21-22.
[10] (n-7).
[11] (2014) 2 SCC 433 (“Shri Lal Mahal”’).
[12] (n-5).
[13] (n-11).
[14] (2014) 9 SCC 263 (‘Western Geco”)
[15] My emphasis.
[16] (n-14), para 35.
[17] ibid.
[18] Ibid.
[19] (n-14), para 38.
[20] Meaning of Wednesbury – “The court is entitled to investigate the action of the local authority with a view to seeing 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. Once that question is answered in favour of the local authority, it may still be possible to say that, although the local authorities have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it.” – Associated Provincial Picture Houses Ltd v. Wednesbury Corporation, (1948) 1 Kb 223.
[21](n-14), para 39.
[22] (n-14)
[23] (n-2), para 28.
[24] (n-2)
[25] ibid, para 35.
[26] ibid.
[27] (n-9), para 37, page 22.
[28] (n-2), para 36.
[29] (n-2), paras 37-39.
[30] (n-2), paras 40-45.
[31] Supplementary Report to the 246th Law Commission Report dated 06.02.2015, page 19, para 10.6. [Explanation 2 – For avoidance of doubt the test as to whether there is a contravention with fundamental policy of Indian law shall not entail a review on the merits of the dispute.]
[32] Ibid.
[33] Explanation 2 to ss. 34 & 48 of ACA.
[34] (2018) 12 SCC 471 (‘HRD Corp.’).
[35] (n-2).
[36] (n-5).
[37] (n-34), para 18.
[38] (n-3).
[39] (n-2).
[40] (n-35).
[41] (n-3).
[42] (n-3), para 34 & 36.
[43] “18. In Renusagar Power Co. Ltd. v. General Electronic Co 1994 Supp (1) SCC 644, the Supreme Court construed Section 7(1)(b) (ii) of the Foreign Award (Recognition and Enforcement) Act, 1961; ‘7. Conditions for enforcement of foreign awards.-(1) A foreign award may not be enforced under this Act-
(b) if the Court dealing with the case is satisfied that-
(ii) the enforcement of the award will be contrary to the public policy.’” et seq.
[44] “27. Coming to each of the heads contained in the Saw Pipes judgment, we will first deal with the head “fundamental policy of Indian Law”. It has already been seen from the Renusagar judgment that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law.”.
[45] (n-2), para 34.
[46] My emphasis.
[47] “36. The third ground of public policy is, if an award is against justice or morality. These are two different concepts in law. An award can be said to be against justice only when it shocks the conscience of the court.et seq, 37. The other ground is of “morality”. Just as the expression “public policy” also occurs in Section 23 of the Contract Act, 1872 so does the expression “morality””.” et seq.; “38. In Gherulal Parakh v. Mahadeodas Maiya [1959 Supp (2) SCR 406 : AIR 1959 SC 781] , this Court explained the concept of “morality” thus: (SCR pp. 445-46 : AIR pp. 797-98)” et seq.; “39. This Court has confined morality to sexual morality so far as Section 23 of the Contract Act, 1872 is concerned, which in the context of an arbitral award would mean the enforcement of an award say for specific performance of a contract involving prostitution. “Morality” would, if it is to go beyond sexual morality, necessarily cover such agreements as are not illegal but would not be enforced given the prevailing mores of the day. However, interference on this ground would also be only if something shocks the court’s conscience.”.
[48] Gemini Bay Transcription Pvt. Ltd. v. Integrated Sales Service Ltd., (2022) 1 SCC 753, para 76.
[49] 2020 SCC OnLine SC 749.
[50] 508 F 2d 969 (2nd Cir 1974).
[51] (n-5).
[52] (n-49).
[53] (n-2), para 27.
[54] (n-3), Para 37.
[55] Ibid.
[56] Para 42.1 “(a) A contravention of the substantive law of India would result in the death knell of an arbitral award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is really a contravention of Section 28(1)(a) of the Act, which reads as under: ‘28.Rules applicable to substance of dispute.—(1) Where the place of arbitration is situated in India—
(a) in an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India’”.
[57] (n-3), Para 39.
[58] (n-2), para 18.
[59] (n-3), Para 20.
[60] Shriram EPC Limited v. Rioglass Solar SA, (2018) 18 SCC 313, para 34.
[61] 2020 SCC OnLine SC 177
[62] (n-2), para 20.
[63] (n-2), para 18.
[64] (n-14).
[65] (n-2).
[66] My emphasis.
[67] “It is clear that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective”. (n-2), para 29.
[68]Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223: (1947) 2 All ER 680 (CA).
[69] (n-3) Para 34.
[70] (n-3).
[71] s.34(2)(a)(iii) of the ACA.
[72] (n-3), Para 51.
[73] Narinder Singh v. Union of India, 2021SCC OnLine SC 1082, para 7.
[74] “30. The Audi Alteram Partem principle which undoubtedly is a fundamental juristic principle in Indian law is also contained in Sections 18 and 34 (2) (a) (iii) of the Arbitration and Conciliation Act. These Sections read as follows: ‘18. Equal treatment of parties.- The parties shall be treated with equality and each party shall be given a full opportunity to present his case.
34. Application for setting aside arbitral award.- (2) An arbitral award may be set aside by the Court only if- (a) the party making the application furnishes proof that- (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.’”.
[75] (n-3), para 34.
[76] My emphasis.
[77] Para 28 of Associate Builders (n-2) read with para 34 & 36 of Ssangyong, (n-3).
[78] “42.3 (c) Equally, the third sub-head of patent illegality is really a contravention of Section 28 (3) of the Arbitration Act, which reads as under: ‘28. Rules applicable to substance of dispute.- (3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.’” et seq.
[79] (n-3), para 41.
[80] “39. To elucidate, para 42.1 of Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 , namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Para 42.2 of Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 , however, would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.”. et.seq.
[81] The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 , namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrators view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A). (emphasis supplied)”.
[82] (n-2), para 42.3.
[83] MY emphasis.
[84] (2020) 7 SCC 167, para 22.
[85] (n-3), para69.
[86] Ibid.
[87] (n-3), para 37.
[88] “31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:
a finding is based on no evidence, or
an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.”
[89] “A good working test of perversity is contained in two judgments. In H.B. Gandhi, Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312 at p. 317, it was held: ‘7. ……………….It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.’. In Kuldeep Singh v. Commr. Of Police, (1999) 2 SCC 10 at para 10, it was held: ‘10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with.’”.
[90] (n-2).
[91] (n-3).
[92] “29. It is clear that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective”.
[93] (n-3), “31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where- a finding is based on no evidence, or an arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or ignores vital evidence in arriving at its decision, such decision would necessarily be perverse. A good working test of perversity is contained in two judgments.” et seq.
[94] “42. In the 1996 Act, this principle is substituted by the “patent illegality” principle which, in turn, contains three subheads:..” et seq.
[95] (n-2). See also Ssangyong (n-3), paras 34, 41; Anglo American Metallurgical Coal Pty Ltd V. MMTC Ltd.., (2021) 3 SCC 308, para 46.
[96] (n-3), para 41.
[97] (2019) 20 SCC 1.
[98] Ibid., para 24.
[99] “42.2 (b) A contravention of the Arbitration Act itself would be regarded as a patent illegality — for example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act, such award will be liable to be set aside”.
[100] Section 31(3) – “The arbitral award shall state the reasons upon which it is based, unless—
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under section 30”.
[101] (n-3), para 39.
[102] Also see PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin, 2021 SCC OnLine SC 508, para 44 – “A decision which is perverse, though would not be a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. However, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality.”.
[103] (n-31), page 18-19, para 10.5.
[104] Ibid.
[105] “Explanation 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.”
[106] (n-31), page 18, para 10.4.
[107] (n-31), page 4, para 6.
[108] My emphasis.
[109] [2010] SGHC 62.
[110] My emphasis.
[111] My emphasis.
[112] (n-3).
[113] (n-2), page 18, para 10.4.
[114] (n-4).
[115] Ibid.
[116] (n-9), para 11 – “The 1996 Act covers both international and domestic arbitration, i.e., where at least one party is not an Indian National and where both parties are Indian nationals respectively.”.
[117] “International commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country;”
[118] My emphasis.
[119] When one party is foreign.
[120] (2008) 14 SCC 271.
[121] (n-3).
[122] My emphasis.
[123] Under the heading “Fundamental policy of Indian Law”.
[124] (n-4), para 87.
[125] (n-7).
[126] Federal Act on Private International Law (PILA) of 18 December 1987.
[127] Although the parties if they so desire, may, either in the arbitration agreement or by way of a subsequent agreement, exclude the application of Chapter 12 PILA and agree on the application of Part 3 of the Swiss Civil Procedure Code (which applies to domestic arbitrations) pursuant to art. 176(2) PILA (known as ‘opting-out’):
[128] Under Art. 393 of the Swiss Civil Procedure Code.
[129] As against scrutiny of a purely domestic award under s.34.
[130] S. 3(a) of the English Arbitration Act, 1996.
[131] Article 176(3) of the Swiss Federal Private International Law Statute of 1987.
[132] (n-9), page 21, para 34.
[133] (n-9), page 21, para 35.
[134] i.e. 05.08.2014 date of the 246th LCR.
[135] (n-31), page 3, para 5.
[136] (n-31), page 4, para 5.Decoding the meaning of public policy & patent illegality, their interplay with PASL Wind and its impact on the future of Domestic Arbitration
