Public Policy in Indian Arbitration

Ben Giaretta and Akshay Kishore report on developments in India concerning challenges to arbitration awards on the grounds of public policy, including a proposal by the Law Commission of India to restrict the scope of such challenges.

Public Policy and The Indian Courts

Under the Indian Arbitration and Conciliation Act, 1996 (the Act) a court may set aside a domestic arbitration award if it conflicts with the public policy of India (section 34 of the Act). The Indian courts have interpreted "public policy of India" widely. In ONGC v Saw Pipes¹(Saw Pipes) the Supreme Court said it included circumstances where a tribunal has made an error in applying Indian law. This interpretation has led to the courts reviewing the merits of awards, as if the arbitrators were a lower tier of the court system.

When considering the enforcement of foreign awards, the courts have adopted a narrower approach.²As far as domestic awards are concerned, however, the broad view of public policy still holds sway. This has been confirmed in two recent Supreme Court decisions.

ONGC –v- Western Geco

In ONGC –v- Western Geco,³ ONGC engaged Western Geco to upgrade a seismic survey vessel. Western Geco was due to source hydrophones from the USA but was denied an export licence. After a period of time, it obtained replacements from Canada. ONGC then withheld part of its payment because of the delay. Western Geco commenced arbitration; the arbitrators awarded it US$3m.

ONGC challenged the award on the grounds of public policy. It failed in front of a single judge of the High Court of Bombay, and again on appeal to the Division Bench. In a judgment handed down in September 2014, however, the Supreme Court reversed the decisions of the lower courts and upheld (in part) ONGC's challenge to the award. The Supreme Court thought the arbitrators "fell in a palpable error leading to miscarriage of justice" for not considering the action that Western Geco could have taken to make up for the delay. The Supreme Court reduced the amount awarded to Western Geco by one-third.

In doing this, the Supreme Court restated the Saw Pipes approach to public policy. It said this includes "all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country." In particular, a court could assess whether a tribunal: (i) has applied a "judicial approach", i.e. has not acted in an arbitrary manner; (ii) has acted in accordance with the principles of natural justice, including applying its mind to the relevant facts; and (iii) has avoided reaching a decision which is so perverse or irrational that no reasonable person would have arrived at it (adopting the Wednesbury principle from administrative law).

Associate Builders -v- DDA

A few months later, the Supreme Court gave judgment in Associate Builders -v- DDA⁴. DDA had employed Associate Builders to build houses in eastern Delhi. The contract required completion of the houses within 9 months, but in fact it took 34 months. Associate Builders submitted various claims to arbitration. The arbitrator ruled that DDA was responsible for the construction delay, and awarded Rs. 23.39 lakhs (about US$37,000) to Associate Builders.

DDA challenged the award in the High Court of Delhi. The challenge was dismissed at first instance, but was upheld by the Division Bench on appeal. The Division Bench set aside part of the award, and scaled down another part, through reductions which it described as "rough and ready justice".

The Supreme Court reversed the Division Bench. It stated that section 34 does not normally permit the courts to review findings of fact made by arbitrators. It therefore restored the arbitral award. However, the Supreme Court only clarified, and did not restrict, the law concerning public policy. In particular, the Supreme Court said an award can be set aside if it is:

• contrary to the fundamental policy of Indian law, i.e. it is "arbitrary" or "whimsical", as opposed to being fair, reasonable and objective, or it contains a decision so irrational that no reasonable person would have arrived at it;
• contrary to the interest of India, i.e. it affects India's relations with other countries;
• contrary to justice and/or morality, i.e. it "shocks the conscience of the court", or it relates to an immoral contract; or
• patently illegal, i.e. it contains a ruling which contravenes the law of India, or it contravenes the provisions of the Act, or it is based on an interpretation of the terms of a contract that no fair-minded or reasonable person would adopt.

The Reaction of The Law Commission

In February 2015, the Law Commission of India responded to these judgments, by issuing a Supplement to the Report about the Act that it had published in August 2014. The Law Commission emphasised that section 34 sets out an exhaustive list of grounds to challenge an award, and these relate to the process of a tribunal's arriving at its decision, not the merits of an award. The Law Commission criticised Saw Pipes for "opening the floodgates", and criticised ONGC -v- Western Geco and Associate Builders -v - DDA for reinforcing the broad scope of public policy.

The Law Commission had recommended in its previous Report that section 34 should expressly state that an award cannot be set aside merely because the tribunal has made a mistake of law, or because the court takes a different view of the evidence. It has now suggested that section 34 also states: "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." (emphasis added)

Comment

Public policy has become an Achilles heel for arbitration in India: a means by which losing parties can attack arbitral awards, on much broader grounds than are permitted in other countries. The latest Supreme Court cases have confirmed this again, and it is no surprise that the Law Commission – whose August 2014 Report had called for the Act to be revised to bring it in line with arbitration laws in other countries – has issued a swift response.

That response is significant because it appears the Government of India will recommend the Law Commission's revision of the Act to Parliament in the coming months. The Law Commission's proposed new wording may therefore become law in the near future, and bring an end to the expansion of public policy in Indian arbitration.

<sub>Notes
1. ONGC Ltd. –v- Saw Pipes Ltd. 2003 (5) SCC 705.
2. See our update on Shri Lal Mahal Ltd -v- Progeto Grano Spa (Civil Appeal No. 5085 of 2013) here.
3. ONGC Ltd. –v- Western Geco International Ltd. 2014 (9) SCC 263.
4. Associate Builders –v- Delhi Development Authority 2014 (4) ARBLR 307.</sub>