Fundamental Policy of Indian Law and Enforcement of Foreign Arbitral Awards in India: A Judicial Ping-Pong?

Ananya Pratap Singh[1]

[Editorial Note: Ananya Pratap Singh writes again for our blog, this time tracing the jurisprudential development of the exception of ‘public policy’ to enforcing an award. For a further nuanced understanding of the NAFED case and a diagrammatic representation which makes lucid the status of ‘public policy’ exception as its stands today, refer to Ananya’s LinkedIn article here.’]

The expression ‘public policy’ is a ground for resisting both foreign and domestic awards under Section 48(2)(b) and Section 34(2)(b)(ii) of the Arbitration & Conciliation Act, 1996 (‘Indian Arbitration Act’). At the inception of the Indian jurisprudence, public policy in respect of foreign award was interpreted to inter alia include ‘fundamental policy of Indian law’ besides the interests of India and justice or morality. However, later while interpreting ‘public policy’ in respect of domestic awards, a new ground of patent illegality was included in it in addition to the three already available grounds. Further, the term ‘fundamental policy of Indian law’ was bloated with four more sub-parts i.e. compliance with statute and judicial precedent, need for judicial approach, natural justice compliance and Wednesburry’s principle of unreasonableness, only to be deleted later by the Supreme Court. As apparent, the term fundamental policy of Indian law has completed an entire 360 degrees rotation. In this article, the author analyses the jurisprudence of this term and its interpretation by Indian judiciary.

PART I

The Journey from Renusagar to Associate Builders: The jurisprudential development of ‘public policy’ as an exception to enforcement

The fundamental policy of Indian law is engraved in another overly interpreted term ‘public policy’. The question of what is the ‘public policy’ has been considered by the Supreme Court in Renusagar Power Co. Ltd. vs. General Electric Co[2](‘Renusagar’) while interpreting the words in Section 7(1)(b)(ii) of the Arbitration (protocol And Convention) Act, 1937 to mean the ‘public policy’ of India. In terms of resisting a foreign award, this expression has been used in a narrow sense and must necessarily be construed as applied in private international law which means that a foreign award cannot be recognised or enforced if it is contrary to

  • fundamental policy of Indian law; or 
  • the interests of India; or
  • justice or morality.

It was also held that the violation of a Statute (in this case 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. Thus, a narrower meaning to the expression ‘public policy’ was given therein by confining judicial review of the arbitral award only on the aforementioned three grounds.

An apparent shift can, however, be noticed later, in Oil Natural Gas Corporation Ltd. vs. SAW Pipes Ltd.[3](‘SAW Pipes’) wherein the Supreme Court added patent illegality in the meaning of public policy in addition to narrower meaning given to the term ‘public policy’ in Renusagar. The Court referred to its earlier dictum in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly[4] wherein the applicability of the expression ‘public policy’ on the touchstone of Section 23 of the Indian Contract Act, 1872 and Article 14 of the Constitution of India came to be considered. The Supreme Court therein was dealing with unequal bargaining power of the workmen and the employer and came to the conclusion that any term of the agreement which is patently arbitrary and/ or otherwise arrived at because of the unequal bargaining power would not only be ultra vires Article 14 of the Constitution of India but also hit by Section 23 of the Indian Contract Act.

Thus, the term ‘patent illegality’ was interpreted to mean that an award would be patently illegal if it is contrary to substantive provisions of law or the provisions of the Indian Arbitration Act or against the terms of the contract. Such patent illegality, however, must go to the root of the matter and should be unfair and unreasonable so as to shock the conscience of the court. Pertinently, Section 28(3) of the Indian Arbitration Act provides that in all cases the arbitral tribunal shall decide the dispute in accordance with the terms of the contract and shall also take into account the usages of the trade applicable to the transaction. Sub-section (1) of Section 28 provides that the arbitral tribunal shall decide the disputes submitted to arbitration in accordance with the substantive law for the time being in force in India. Interpreting the said provisions in SAW Pipes, the Court held that a court can set aside an award under Section 34(2)(b)(ii) of the Indian Arbitration Act, as being in conflict with the public policy of India, if it is (a) contrary to the fundamental policy of Indian Law; or (b) contrary to the interests of India; or (c) contrary to justice or morality; or (d) patently illegal.

At this juncture, it is germane to highlight that there was no difference in the interpretation of fundamental policy of Indian law provided under Section 48(2)(b) and Section 34(2)(b)(ii) which means that the additional ground of patent illegality which was inserted in SAW Pipes in respect of Section 34 was also available for Section 48. A later decision of the Supreme Court in Phulchand Exports Ltd. vs. OOO Patriot[5](‘Phulchand Exports’) evinces this lacuna in following words:-

13. There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd.2, the expression ‘public policy of India’ used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, ‘if it is patently illegal’. At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the subject award must be brought to an end finally one way or the other.

This flaw was rectified by the Supreme Court in Shri Lal Mahal Ltd. vs. Progetto Grano Spa[6] wherein the Court observed that the wider meaning given to the expression ‘public policy of India’ occurring in Section 34(2)(b)(ii) in SAW Pipes i.e. Patent Illegality is not applicable where objection is raised to the enforcement of the foreign award under Section 48(2)(b) overruling its dictum in Phulchand Exports.

Further, the Supreme Court after adverting to the principles laid down in Renusagar has held that those principles must apply for the purpose of section 48(2) (b) of the Indian Arbitration Act i.e. in respect of enforcement of foreign award in India. It is held that although the same expression ‘public policy of India’ is used both in Section 34(2)(b)(ii) and Section 48(2)(b) and the concept of ‘public policy in India’ is same in nature in both the Sections but, its application differs in degree insofar as these two Sections are concerned. The application of ‘public policy of India’ doctrine for the purposes of Section 48(2)(b) is more limited than the application of the same expression in respect of the domestic arbitral award. The Court has held that section 48 does not give an opportunity to have a “second look” at the foreign award in the award enforcement stage. Thus, it was held that under Section 48(2)(b) the enforcement of a foreign award can be refused only if such enforcement is found to be contrary to three grounds provided in Renusagar.

Subsequently, in ONGC Ltd. v. Western Geco International Ltd.[7](‘Western Geco’) the term ‘Fundamental Policy of Indian Law’ in respect of domestic award was further expanded by the Supreme Court and was interpreted to include three distinct and fundamental juristic principles. These principles as elaborated by the Supreme Court are:

  • failure to adopt judicial approach
  • failure to comply with the principles of natural justice, and
  • perversity and irrationality of the decisions to be tested on the touchstone of Wednesbury’s principle of reasonableness.

All these three principles were held to be the part of expression ‘Fundamental policy of Indian Law’. These three drawing were later interpreted by the Supreme Court in Associate Builders v Delhi Development Authority[8](‘Associate Builders’) wherein the Supreme Court after a complete review of all the authorities, enumerated the head of public policy as follows:

  1. fundamental policy of Indian Law which encompasses:
    • compliance with statute and judicial precedent
    • need for judicial approach
    • natural justice compliance
    • Wednesburry unreasonableness
  2. the interest of India
  3. justice or morality
  4. patent illegality.

Thus, from Renusagar to Associate Builders, public policy as a ground to challenge an award under Section 34 can be summarised as under: –

An award would be regarded as conflicting with the public policy of India if:-

  1. it is contrary to the fundamental policy of Indian law. An award would be liable to be regarded as contrary to the fundamental policy of Indian law, for example, if
    • it disregards orders passed by superior courts, or the binding effect thereof, or
    • it is patently violative of statutory provisions, or
    • it is not in public interest, or
    • the arbitrator has not adopted a “judicial approach”, i.e. has not acted in a fair, reasonable and objective approach, or has acted arbitrarily, capriciously or whimsically, or
    • the arbitrator has failed to draw an inference which, on the face of the facts, ought to have been drawn, or
    • the arbitrator has drawn an inference, from the facts, which, on the face of it, is unreasonable, or
    • the principles of natural justice have been violated.
  2. it is contrary to the interests of India,
  3. it is contrary to justice or morality,
    • “Morality” would imply enforceability, of the agreement, given the prevailing mores of the day. “Immorality”, however, can constitute a ground for interfering with an arbitral award only if it shocks the judicial conscience.
  4. it is patently illegal,
    • Insofar the “patent illegality” has to go to the root of the matter. Trivial illegalities are inconsequential.
  5. it is so perverse, irrational, unfair or unreasonable that it shocks the conscience of the court.
    • “Perversity”, as a ground for setting aside an arbitral award, has to be examined on the touchstone of the Wednesbury principle of reasonableness. It would include a case in which
      • the findings, in the award, are based on no evidence, or
      • the Arbitral Tribunal takes into account something irrelevant to the decision arrived at, or
      • the Arbitral Tribunal ignores vital evidence in arriving at its decision.
  6. At the same time,
    • a decision which is founded on some evidence, which could be relied upon, howsoever compendious, cannot be treated as “perverse”,
    • if the view adopted by the arbitrator is a plausible view, it has to pass muster,
    • neither quantity, nor quality, of evidence is open to re-assessment in judicial review over the award.

To sum up, ‘public policy’ is not a static concept. It varies with times and from generation to generation. But what is in public good and public interest cannot be opposed to public policy and vice-versa. Fundamental Policy of Law would also constitute a facet of public policy. This would imply that all those principles of law that ensure justice, fair play and bring transparency and objectivity and promote probity in the discharge of public functions would also constitute public policy. Conversely any deviation, abrogation, frustration or negation of the salutary principles of justice, fairness, good conscience, equity and objectivity will be opposed to public policy. It follows that any rule, contract or arrangement that actually defeats or tends to defeat the high ideals of fairness and objectivity in the discharge of public functions no matter by a private nongovernmental body will be opposed to public policy.[9]

Subsequently, the 246th Law Commission Report brought in amendments to the Indian Arbitration Act by way of Arbitration & Conciliation Amendment Act, 2015 (‘2015 Amendment Act’) narrowing the grounds of challenge available under the Indian Arbitration Act. By way of 2015 Amendment Act, the judgment in SAW Pipes, has been expressly done away with and so has the judgment in Western Geco. Further, it has brought both Sections 34 and 48 back to the position of law contained in Renusagar where ‘public policy’ will now include only two of the three things set out therein, viz., ‘fundamental policy of Indian law’ and “justice or morality”. The ground relating to ‘the interest of India’ no longer obtains.

Thus, ‘fundamental policy of Indian law’ is now to be understood as laid down in Renusagar. ‘Justice or morality’ has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the Court as understood in Associate Builders. Thus, an award rendered in an international commercial arbitration-whether in India or abroad-is subject to the same tests qua setting aside under Section 34 or enforcement under Section 48, as the case may be. The only difference is that in an arbitral award governed by Part I of the Indian Arbitration Act, arising out of an arbitration other than an international commercial arbitration, one more ground of challenge is available viz. patent illegality appearing on the face of the award. The ground of patent illegality would not be established, if there is merely an erroneous application of the law or a re-appreciation of evidence.[10]

PART II

The Recent Pronouncements: Vijay Karia and NAFED

Recently, the Supreme Court in Vijay Karia and Ors. vs. Prysmian Cavi E Sistemi SRL and Ors.[11] while dealing with enforcement of foreign award under Section 48 provided an interesting clarification. Placing reliance on a Delhi High Court decision in Cruz City 1 Mauritius Holdings v. Unitech Limited[12] the court observed that contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the principles and the legislative policy on which Indian Statutes and laws are founded. The expression ‘fundamental policy’ connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country.

Thus, it is necessary to bear in mind that a foreign award may be based on foreign law, which may be at variance with a corresponding Indian statute. And, if the expression ‘fundamental policy of Indian law’ is considered as a reference to a provision of the Indian statue, the basic purpose of the New York Convention to enforce foreign awards would stand frustrated. One of the principal objectives of the New York Convention is to ensure enforcement of awards notwithstanding that the awards are not rendered in conformity to the national laws. Thus, the objections to enforcement on the ground of public policy must be such that offend the core values of a member State’s national policy and which it cannot be expected to compromise. The expression ‘fundamental policy of law’ must be interpreted in that perspective and must mean only the fundamental and substratal legislative policy and not a provision of any enactment.

In a recent judgment of National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A.[13] similar approach has been adopted by the Supreme Court in respect of a foreign award. The Supreme Court refused to enforce a Federation of Oil, Seeds and Fats Associations Ltd. award, holding it to be against the fundamental policy of Indian law. In the facts of that case, the award debtor was not able to perform its contractual obligations owing to imposition of a ban by the Government of India on a contractual commodity which was the subject of bargain amongst the parties in their underlying contract. However, under the prohibition clause of the underlying contract, the parties specifically agreed that in such an eventuality (prohibition of export by executive order or by law), the contract will stand cancelled. The Supreme Court interpreted the prohibition clause in light of Section 32 of the Indian Contract Act, 1872 which renders a contingent contract void in case the underlying contract between the parties itself provides for contingencies upon happening of which contract cannot be carried out. Clearly, by way of prohibition clause, the parties have considered and agreed to render the contractual bargain as void in the eventuality of imposition of such a ban by Government. This in turn renders such an award as passed against the fundamental policy of Indian law (without considering Section 32 of the Contract Act) falling in teeth of ‘public policy’ ground of refusing to enforce a foreign award provided under Section 7(1)(a),(b)and (c) of the Foreign Awards (Recognition and Enforcement) Act, 1961 which is akin to Section 48 of the Arbitration & Conciliation Act, 1996.

Conclusion

What is clear, therefore, is that the expression ‘public policy of India’, whether contained in Section 34 or in Section 48, would now mean the ‘fundamental policy of Indian law’ as explained in Associate Builders i.e., the fundamental policy of Indian law would be relegated to the Renusagar understanding of this expression as follows except the ground of ‘interest of India

  • fundamental policy of Indian Law
  • justice or morality

It is important to notice that the ground for interference insofar as it concerns ‘interest of India’ has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the ‘most basic notions of morality or justice’ which finds mention in Explanation 1 to Sub-clause (iii) to Section 34(2)(b) in Part I of the Indian Arbitration Act.

This would necessarily mean that the Western Geco expansion i.e. compliance with statute and judicial precedent, need for judicial approach, natural justice compliance and Wednesburry unreasonableness has been done away with. In short, Western Geco as explained in Associate Builders, would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court’s intervention would be on the merits of the award, which cannot be permitted post 2015 Amendment Act.[14]


[1] Ananya is a graduate of Symbiosis Law School, Noida. He completed his LL.M in International Business Laws from National University of Singapore and is currently pursuing his M.Phil from University of Colombo. He is an associate at CSL Chambers, New Delhi and manages a blog dedicated to contemporary research on Arbitration across multiple jurisdictions.

[2] 1994 Supp (1) SCC 644.

[3] (2003) 5 SCC 705.

[4] (1986) 3 SCC 156.

[5] (2011) 10 SCC 300.

[6] (2014) 2 SCC 433.

[7] (2014) 9 SCC 263.

[8] (2015) 3 SCC 49.

[9] Board of Control for Cricket in India and Ors. vs. Cricket Association of Bihar and Ors. (2015) 3 SCC 251

[10] HRD Corporation vs. GAIL (India) Limited (2018) 12 SCC 471.

[11] 2020 SCC OnLine SC 177.

[12] (2017) 239 DLT 649.

[13] 2020 SCC OnLine SC 381.

[14] Ssangyong Engineering and Construction Co. Ltd. vs. National Highways Authority of India (NHAI) 2019 (8) SCALE 41.


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