Introduction
The idea of arbitration under the Arbitration and Conciliation Act, 1996, (hereinafter “the act”), which was based on the UNCITRAL Model Law, was envisioned as an out-of-court settlement mechanism under the alternative dispute resolution framework. Under this, the enforcement of arbitral awards is a critical component of the process, ensuring that the final resolution is binding and executable. However, arbitration in India, in practice, has just become another layer in the litigation process, with applications for setting aside the arbitral award under Sections 34 or 37 of the act flooding the district and High courts, causing a major impediment in the enforcement of the award. Although it is true that an application for setting aside an award does not automatically make it unenforceable, more often than not, the courts have stayed the award when the application is sub-judice.
Apart from the long litigation process delaying the enforcement of the award, the vague and wide ambit of public policy as a ground for setting aside the arbitral award presents a serious concern regarding its enforcement. This article explores these impediments in detail, analyses the practical difficulties that arise while trying to enforce the arbitral award, and offers some solutions for the same.
Public Policy as a Ground for Refusal
The concept of public policy under the Arbitration and Conciliation Act, 1996, is crucial in determining the grounds for setting aside an arbitral award. The Supreme Court in Renusagar Power Electric Co. vs. General Electric Co explained that “public policy” under Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 should be interpreted narrowly, meaning enforcement would be refused if the award contravenes (i) the fundamental policy of Indian law, (ii) the interests of India, or (iii) justice or morality.
The Supreme Court in the Saw pipes case broadened the scope, interpreting “public policy of India” to include awards violating statutory provisions. However, the Supreme Court subsequently reinstated the Renusagar position in Lal Mahal for foreign awards, emphasizing a narrower interpretation of public policy. Further clarification came in Western Geco where the court outlined three juristic principles constituting the fundamental policy of Indian law: (i) judicial approach, (ii) principles of natural justice, and (iii) rational decision-making. The Court in Penn Racquet stated that enforcement of a foreign award would not be denied merely due to contravention of Indian law unless it opposed the fundamental policy of Indian law.
In Associate Builders, the Supreme Court defined the contours of “justice” and “morality” within the scope of public policy, asserting that an arbitral award may be set aside if it shocks the conscience of the court. The 246th Law Commission report underscored that Section 34 of the Arbitration and Conciliation Act provides a comprehensive list of grounds for challenging an award, primarily addressing procedural flaws rather than substantive merits. The 2015 Amendment Act further refined this approach, limiting judicial intervention by restricting challenges on public policy grounds and clarifying that a breach of fundamental policy does not warrant review on merits.
Since the 2015 amendments, courts have narrowed the application of public policy to prevent challenges based on mere errors in contractual interpretation by the tribunal. In Venture Global, the court reiterated that an award may only be set aside on the grounds enumerated in Section 34, without delving into the merits. Further, in Vedanta Limited, the court reaffirmed the Renusagar principles, emphasizing that challenges on public policy grounds must focus on fundamental policy, the interests of India, and principles of justice and morality.
The Supreme Court in Vijay Kataria differentiated between FEMA and FERA, noting that a violation of FEMA, which can be rectified with RBI permission, does not breach the fundamental policy of Indian law. The court confirmed that “public policy of India” for international commercial arbitration in India aligns with resisting foreign awards.
Arbitrator Bias and Its Implications
Arbitrator bias undermines the integrity of the arbitration process. Bias can be actual, where there is demonstrable partiality, or apparent, where circumstances suggest a likelihood of bias. In India, the test for bias has been articulated in several cases, focusing on whether a reasonable person would perceive a likelihood of bias.
The Arbitration and Conciliation Act, 1996, post amendment, includes provisions in Schedules V and VII to address potential arbitrator bias by listing specific grounds that may raise doubts about an arbitrator’s independence and impartiality. While these schedules mandate arbitrators to disclose any circumstances that could lead to justifiable doubts about their impartiality, practical challenges persist. The subjective nature of disclosure requirements, coupled with insufficient penalties for non-compliance, often undermines their effectiveness. This inconsistency can deter parties from choosing arbitration, thereby weakening trust in the process as a reliable alternative to litigation. A significant development in addressing arbitrator bias came with the practice of the Railway Board choosing arbitrators in cases against the Railways. The Supreme Court in Perkins held that the practice of allowing one party to unilaterally appoint an arbitrator was inherently biased and violated the principle of impartiality in arbitration. This judgment is a crucial step toward ensuring impartiality in the arbitration process, reinforcing the need for neutral arbitrators who do not have a vested interest in the outcome of the dispute.
Yet, despite this advancement, the issue of arbitral bias continues to impact the enforcement of arbitral awards. Section 34 of the Act, which governs applications for setting aside arbitral awards, provides limited grounds for challenging an award, including bias. While this restricted scope is designed to uphold the finality and efficiency of arbitration by preventing frivolous challenges, it also means that parties with legitimate concerns about an arbitrator’s impartiality may struggle to have biased awards set aside. This creates a paradox: as on the one hand, maintaining narrow grounds under Section 34 promotes efficiency and certainty in arbitration; on the other, it risks enforcing awards that may be fundamentally unjust due to arbitrator bias.
Such bias in arbitration, if left unchecked, becomes a significant impediment to the enforcement of arbitral awards. Awards influenced by an arbitrator’s partiality can result in perceptions of unfairness and injustice, complicating the award’s enforceability and reducing trust in arbitration. This undermines arbitration’s core promise of being a neutral and efficient mechanism for dispute resolution. Consequently, while measures like the Perkins judgment signal progress, the arbitration framework still requires stronger safeguards and more consistent enforcement practices to ensure impartiality and prevent biased awards from eroding the credibility of the arbitration process.
The Tedious Task of Enforcing Arbitral Awards
Securing an arbitral award often marks the start of a lengthy legal journey. Enforcement can be arduous, involving multiple rounds of litigation. The losing party commonly files appeals and challenges under Section 34, citing public policy and procedural irregularities. Even after these appeals, enforcing the award is complex and time-consuming, often requiring additional litigation.
The appeals process under Section 37 adds further delays, complicating enforcement. Legal challenges, including interim applications and counterclaims, can impede progress, leading to piecemeal litigation. Beyond legal hurdles, practical issues like identifying and attaching the losing party’s assets complicate enforcement, resistance and further legal battles often arise when enforcement courts issue attachment orders.
Cross-border enforcement presents additional challenges as highlighted in Avitel v. HSBC, which makes it clear that Indian courts will apply a high standard when enforcement of a foreign award is challenged on the ground of arbitrator’s bias. Further, when assets are in a foreign jurisdiction, the winning party must seek recognition and enforcement there, navigating different legal systems and regulatory frameworks.
The prolonged enforcement process defeats the purpose of arbitration as noted by the court in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. It imposes significant financial and emotional strain on the parties. Legal fees, court costs, and outcome uncertainty are particularly overwhelming for smaller businesses or individual claimants. The financial burden of prolonged litigation and enforcement can erode the value of the arbitral award, diminishing the economic benefit sought through arbitration.
Potential Reforms and Conclusion
In summary, this article has highlighted the primary challenges obstructing the enforcement of arbitral awards in India, particularly focusing on the expansive interpretation of the public policy exception, concerns over arbitrator bias, and the drawn-out enforcement process. These issues emphasise the need for legislative reforms aimed at narrowing the public policy exception, thereby curtailing judicial discretion and ensuring greater consistency in enforcement outcomes. Improving arbitrator independence through rigorous disclosure requirements and enforceable sanctions could further strengthen the arbitration system, while fostering judicial restraint and minimising court intervention in arbitration matters would support reliable and predictable results. Establishing specialised arbitration benches could also streamline processes and reinforce consistency in enforcement decisions. Finally, encouraging institutional arbitration would help address procedural delays, facilitating faster and more efficient award enforcement. Together, these reforms would not only resolve current enforcement obstacles but also enhance India’s appeal as a global arbitration hub, laying the groundwork for a robust and dependable arbitration framework.
This blog is written by Arnab Kumar Mullick, 3rd Year Ba LLB (Hons.) at NALSAR University of Law, Hyderabad.