Unlocking the Secrets of Public Policy in Arbitration
The foundation of public policy, deeply rooted in common law, consistently invalidated agreements that were harmful to the public interest. We delve into the evolution of the principle of ‘interpretation of public policy’ by examining two main trends: the alternation between narrow and broad interpretations of public policy & impact of legislative reforms on judicial interpretation. This blog will show the notable influence of landmark cases like Renusagar Power Co. Ltd. v. General Electric Co. (Renusagar case) and ONGC v. Saw Pipes Ltd. (ONGC case) that have significantly shaped the field of arbitration concerning public policy.
In Indian arbitration, public policy refers to fundamental principles guiding the Indian legal system. These guidelines act as a framework for judges participating in international arbitration. If an arbitral award goes against these principles, it cannot be upheld. Sections 34 and 48 of the Arbitration & Conciliation Act, 1996 (A&C Act) contain the ‘public policy exception’. These sections give the ability to render domestic awards void if they go against fundamental principles or involve illegal activities. Additionally, it offers flexibility by allowing for the avoidance of enforcement in cases where expected incentives are not present, such as breaches of Section 7.
Section 7 provides an explanation of an “arbitration agreement” as a written agreement between parties for resolving disputes. Enforcement may be excluded in the presence of an expectation of an award, even in the scenarios where Section 7 is breached. It shall be noted that Section 7 defines an ‘arbitration agreement’ as a one-mediator written contract signed by the parties in the course of a dispute that can be proved through signing, correspondence, and even oral agreement, which occurs at the time of making legal statements or in cases which affect the foreign party as shown in Section 28.
Narrow vs. Broad Judicial Interpretation
The Supreme Court has addressed high-profile cases challenging the implementation of foreign arbitral awards in India through different interpretations of public policy. In the Renusagar Power decision, this court followed a principle that enforceability is allowed unless contravention of fundamental laws or principles of justice is proved, which through this act evidenced India’s commitment to the New York Convention.
The amendments of 2015 to the A&C Act were made to ensure that there is no misreading of the ONGC judgment. There was also internal pressure to reduce judicial oversight in arbitration matters. This limited judicial intervention trend is beaming in cases arising out of arbitrations such as Ssangyong Engineering v. National Highways Authority of India and Vijay Karia v. Prysmian Cavi E Sistemi SRL, which focused heavily on enforcement which was absent in renusagar case which only focused on fundament principles of narrower interpretation. However, the recently taken decision in the case of National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. seems to be a regression. The Court’s revision of the foreign award in respect to dissimilar emotions of the law of the land portrays the conundrum of reconciling the need to secure the integrity of the arbitral process while ensuring compliance with domestic law.
Public Policy Challenges and Efficiency in Indian Arbitration
The ‘dual nature of the public policy exception’ presents challenges as well as opportunities in respect of the enforcement on arbitral awards in India. For instance, on the positive aspect, it readily ensures that there is fairness and justice in arbitration. Whereas, it induces prolonged & complex litigations, discouraging the international parties from choosing India as a seat for arbitration .
Challenges:
- The Supreme Court in the ONGC case sheds light on the issue of judicial discretion when it comes to matters of public governance. In India, there is a concept of an award that can be rendered ineffective, for instance, when it is opposed to public policy, therefore creating unpredictability and problems in the realizations due to the ambiguity of the term used.
- According to the judgement of the arbitration award in the 2009 case of Indian Oil Corporation Ltd. v. Amritsar Gas Service, generally speaking, disputes against arbitration awards tend to create prolonged litigation which serves to diminish the benefits of arbitration. . The Courts cautioned that enforcing awards, particularly in domestic jurisdictions, can be time-consuming, as parties may engage in prolonged discussions with solicitors on matters of public policy, leading to significant delays.”
- Another challenge is the impression of being bothersome. The case of ONGC case illustrates this very issue. The ruling of the Supreme Court affirmed the importance of public interest in regard to arbitration. It stated that any awards that are opposed or are in contradiction to the public policy may be set aside. This is due to the potential threat of interference in the arbitration process, leading international parties to prefer arbitration centers outside India to avoid delays and other obstacles.
Opportunities:
- The Supreme Court emphasised in Soleimany v. Soleimany (1999) that these factors include preserving the integrity of the arbitral process, circumscribing private agreements to agree about public policy, coercing weaker parties, and balancing judicial oversight with fairness.
- Ssangyong Engineering’s pro-enforcement stance aligns with international standards, which brings most of the foreign arbitrations in the country as well as enhances the overall reputation of arbitration in India. However, it raises some concerns about public policy considerations
- The government in India is pushing through a series of reforms to try and make the arbitration process more efficient, reducing court intervention. The Law Commission Report of 2014 (246th) has recommended cutting down the public policy to justice and morality as indicated by the Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano SPA (2014), on that behalf.
A Divergent View on Public Policy as a Loophole
In a society where the courts are considered an impediment and having a case has become part of life, arbitration provides alternative methods for parties in conflict to find solutions without resorting to litigation. The policies and regulations aim to prohibit the courts from engaging in arbitration as much as possible and maintain that it is up to the judiciary when it comes to ending awareness.
However, public policy exceptions often allow courts to delay resolution processes. The primary reason is that the Order of the Court seeks to limit such challenges under the public policy doctrine as much as possible. These factors are part of the vision of the Law Commission, which aims to develop India as a hub for commercial arbitration at an international or global scale. This can reduce the burden on parties challenging the enforcement of arbitral awards, boosting the volume of international arbitration in India and its standing in arbitration.
Furthermore, it is also important to ensure that the broad constructions of public policy do not constitute an impediment to the enforcement of arbitral awards. Over the years, the issues that come under the public policy exception have subjected courts, both in the common law and in the civil law, to considerable abuse; in the case of Richardson v. Mellish (1824) 2 Bing 229, public policy was described as an ‘unruly horse’, which can sometimes lead to capricious outcomes.
In recognition of the problem, The 246th Report noted that if challenges to the enforcement of arbitral awards based on public policy were allowed, then it would likely lead to capricious court decisions. The Commission criticized the cases of ONGC v. Western Geco International Limited and Associate Builders v. DDA for broadening the definition of public policy and, in turn, increasing the level of court interference in arbitration, consequently affecting its efficacy. Section 34 of the A&C Act should focus on internal matters of procession.
The widespread application of public policy exceptions in arbitration can lead to contradictory results, encourage parties not to opt for arbitration, and serve the interests of richer parties, who might have better access to the courts, when the latter are endeavoured to be kept out by arbitration agreements. , who may have no option but to engage with Additionally, if a stronger party anticipates a risk of judicial intervention, it may choose to avoid arbitration altogether, potentially disadvantaging weaker parties who are then forced to resort to the more costly traditional legal system.
Public Policy Exception within the New York Convention
The international arbitration framework created by the New York Convention aims to facilitate the enforcement of awards and address cross-cultural conflicts. It includes a significant public policy exception related to intricate domestic legal principles. Article V of the New York Convention outlines circumstances in which judicial authorities can reject the recognition of arbitration awards. Specifically, Article V (2)(b) states that denial can happen when enforcement goes against the state’s public policy obligated to enforce the award. This provision safeguards fundamental moral and equitable principles in the jurisdiction seeking enforcement of the award. Nevertheless, due to ambiguity, multiple interpretations have emerged in favour of it, thereby impeding the enforcement of international arbitration rulings. Parsons & Whittemore Overseas Co. v. Societe Generale De L’Industrie Du Papier (RAKTA), the U.S. Second Circuit Court of Appeals established that an arbitration award could be vacated based on public policy in circumstances where it would go against fundamental notions of uprightness and fairness within that enforcing jurisdiction. The court afresh emphasised even-handed enforcement of this exception, cautioning against its use for furthering personal interests within any state.
Conclusion
Putting all things in a nutshell, despite efforts to adopt a pro-enforcement approach, challenges remain in enforcing arbitral awards & ambiguous reading along with judicial intervention due to public policy exceptions in Indian arbitration. Public policy needs to be clearly defined by the judicial system, & need to be made clear while not departing from their original purposes so that similar interpretative ends can be achieved. This will also reduce the superfluous judicial intervention. Public policy carve-outs are crucial for promoting harmonious conditions in Indian arbitration proceedings, urging judges and lawyers to collaborate with lawmakers to improve the practice environment & such reforms, along with sufficient legal structures & bedrock principles, will strengthen India as a prominent hub for solving international disputes.
This blog is written by Yash Pathak and V. Harini, 2nd Year BBA-LLB students at IFIM Law School