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Challenges To Arbitral Awards: Elixir Or Poison?

Published on Mon, May 11,2015 | 20:01, Updated at Mon, May 11 at 20:01Source : 

By: Nandish Vyas, Partner, Veritas Legal

In line with the Government’s promise of making business easier in India, the Union cabinet had cleared an ordinance ushering in major changes in the old arbitration and conciliation law, which would make settlement of contractual disputes between foreign companies and their Indian partners easier. The government had hoped that this would send a strong signal about India's intent to improve ‘ease of doing business’ and create a favorable environment to attract foreign investment. Now, instead of going down the ordinance route, the Government has plans to table amendments in Parliament to make arbitration the preferred option to settle commercial disputes in a bid to cut down on litigation in the country. This article seeks to examine the issues that resulted in increased judicial intervention in arbitration, certain judgments of the Supreme Court of India and the proposed changes in the law.

The Law Commission of India brought out Report No. 246 in August 2014, recommending various amendments to the Arbitration and Conciliation Act, 1996 (the “Act”) including with respect to the meaning of “public policy” under Section 34 of the Act.  

Under section 34, the party losing the arbitration has the ability to challenge an award under Part I of the Act on certain restricted grounds as specified therein, such as a party being unable to present its case, the arbitral award dealing with a dispute not falling within the scope of the arbitration, etc. Section 34(2)(b)(ii) of the Act provides that an arbitral award may be set aside by the Court if the Court finds that the arbitral award is “in conflict with the public policy of India.” In 1994, Renusagar Power Co. Ltd. v. General Electronic Co.[1] the Supreme Court construed the expression “public policy” in the context of a foreign award narrowly, and held that an award contrary to (i) the fundamental policy of Indian law; (ii) the interest of India; or (iii) justice or morality would be set aside on the ground that it would be contrary to the public policy of India. Thereafter, in 2003, the Supreme Court in ONGC v. Saw Pipes[2] widened the scope of what constitutes “public policy” by stating therein that in addition to the narrower meaning given to the term in the Renusagar case, the award could also be set aside if it was “patently illegal”. It also held that an award patently in violation of statutory provisions was liable to be set aside. This judgment opened the floodgates to unnecessary and prolonged litigation. Every award is now challenged on the ground of violation of public policy, almost as an appeal, though the scope under Section 34 was perceived to be a limited one to file objections on the limited grounds specified therein. Therefore, the true object of arbitration, to obtain the fair resolution to disputes by an impartial tribunal without unnecessary delay or expense is defeated.  

The Supreme Court of India appears to have further ignored one of the key objectives of arbitration law, viz. “minimization of judicial intervention”, in its recent judgment in ONGC v. Western Geco International Ltd.[3]. It elaborated on what would constitute “fundamental policy of Indian law” as the same had not been considered in the Saw Pipes case[4]. In this case, it referred to three juristic principles that would form part and parcel of the fundamental policy of Indian law which were, (i) that every court or authority is bound to adopt a “judicial approach” or bona fide approach in the determination of any matter, (ii) the court or authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice; and (iii) perversity or irrationality of decisions was to be tested on the touchstone of the Wednesbury principle of “reasonableness”. Therefore, Section 34 has been expanded to significantly enlarge the Court’s power to interfere with awards, rather than minimize it.

Interestingly, in the case of Shri Lal Mahal v. Progetto Grano Spa[5], in the context of enforcement of foreign arbitral awards under section 48 (Part II of the Act), the Supreme Court has held that the narrow interpretation in the Renusagar case would continue to be applicable for enforcement of foreign arbitral awards.

The Supreme Court has in another recent judgment, examined the aforesaid judgments and made certain clarifications. In Associate Builders v. Delhi Development Authority[6], the Supreme Court refused to interfere with the arbitral award and dealt with each of the headings laid down under “public policy”. With respect to fundamental policy of India, it discussed the Western Geco case and added a caveat that the Court does not act as a court of appeal, and consequently errors of fact cannot be corrected unless the arbitrators approach is either arbitrary or capricious. The Supreme Court then dealt with when an award is against justice or morality and held that an award can only be said to be against justice when it shocks the conscience of the court and with respect to morality, the same having no universal standard, may be restricted to “sexual immorality” only. With respect to “patent illegality”, the Supreme Court held that the same covers (i) fraud or corruption; (ii) contravention of substantive law (if the illegality is not of a trivial nature); (iii) contravention of the Act; and (iv) contravention of Section 28(3) of the Act. By including contravention of Section 28(3), which provides that the arbitral tribunal is to decide “in accordance with the terms of the contract” and is to take into account the usages of the trade applicable to the transaction, the Supreme Court may have potentially widened the scope of “public policy” to issues of interpretation of certain parts of the contract. Therefore, whilst the Supreme Court has demonstrated through this judgment an attempt to discourage misuse of Section 34 and has provided some amount clarity on the scope of Section 34, by the inclusion of contravention of Section 28(3), it remains to be seen whether this decision has potentially provided another window of opportunity for Section 34 to be misused.  

Prompted by the Western Geco case, in February 2015, the Law Commission issued a “Supplementary to Report No. 246 on Amendments to Arbitration and Conciliation Act, 1996” wherein it suggested a further amendment to Section 34 taking into account the Western Geco case, to clarify that the expression “fundamental policy of Indian law” would not be misinterpreted and would not entail a review “on the merits of the dispute”. Although this amendment is much desired and is indeed in line with the principal objectives of arbitration law, perhaps a more specific and non-exhaustive description of the matters comprising the “merits of the dispute” should also be considered, to place clearer limitations on the scope of review by courts and avoid a swing in the judicial trends on this issue.


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