ABSTRACT:
In India, challenges to arbitral awards on the grounds of public policy and patent illegality have ignited discussions about judicial overreach and the limits of court involvement in arbitration. This research paper examines the intricate issues surrounding the use of public policy and patent illegality as bases for annulling arbitral awards, especially in light of concerns about undue judicial interference. Through the analysis of key judicial rulings and legal principles, it highlights the conflicts between maintaining public policy standards and protecting against patent illegality while honoring the independence and conclusiveness of arbitration in India. The evolving legal framework and doctrinal changes concerning these challenges reveal the careful equilibrium that courts must maintain to uphold the integrity and effectiveness of the arbitration process. This abstract aims to shed light on the difficulties arising from judicial interpretations of public policy and patent illegality in arbitral disputes in India, as well as the consequences of perceived judicial overreach for the validity and enforcement of arbitral awards.
KEYWORDS:
- Arbitration, 2. Arbitral award , 3. curative petition , 4.special leave petition 5. Patent illegality
INTRODUCTION
In India, arbitration has become a favored method for efficiently resolving commercial disputes, avoiding the lengthy delays commonly seen in traditional litigation. Nonetheless, the enforceability of arbitral awards is not guaranteed, as parties can contest these awards on specific legal grounds. One notable ground for contesting arbitral awards is the notion of patent illegality.
Patent illegality relates to the principle that an arbitral award should not contradict the substantive provisions of Indian law. This ground differs from simple legal or factual errors since it demands evidence of a clear and obvious illegality that fundamentally undermines the award. A party challenging an arbitral award on this basis must prove that the award violates a crucial legal principle or is so unreasonable that no rational individual would reach the same decision. In India, the grounds for invalidating arbitral awards are outlined in the Arbitration and Conciliation Act of 1996. Section 34 specifies various grounds for setting aside an award, including contradictions with public policy or matters exceeding the arbitration scope. Although the term patent illegality is not directly mentioned in the Act, Indian courts recognize it as a legitimate reason for contesting arbitral awards. Challenges based on patent illegality introduce specific complexities and considerations. A significant issue is defining what constitutes patent illegality within arbitration, as Indian courts have determined that simple legal errors or factual misinterpretations do not suffice unless they display a gross level of absurdity that no reasonable person would accept. This stringent criterion ensures that only severe legal violations are subject to challenge on these grounds. Furthermore, when addressing challenges to arbitral awards based on patent illegality, courts must balance judicial intervention with the need for arbitration processes to be final. Although judges have the authority to annul arbitral awards on the basis of patent illegality, they strive to avoid excessive interference with arbitration proceedings. This balance is crucial to preserving the effectiveness and credibility of arbitration as a preferred dispute resolution method.
Focusing on patent illegality, contesting arbitral awards in India demands a deep understanding of legal principles, judicial precedents, and the specific circumstances of each case. Courts play an essential role in assessing whether an award is flawed by patent illegality or represents a legitimate exercise of arbitral judgment within legal boundaries. As the legal framework surrounding patent illegality evolves in India, participants in arbitration must remain informed about the specific grounds for contesting awards and the evidentiary requirements for proving patent illegality.
REVIEW OF LITERATURE
According to strengthening arbitration and its enforcement in India an overview by Bibek Debroy and Suparana Jain has properly analyzed the background of alternate dispute resolution India with special reference to the process of arbitration its procedural rules and recent challenges in to it in India have been carefully analyzed .The involvement of courts has been identified as a significant factor contributing to delays in arbitration proceedings. A notable case illustrating this point is the White Industries V. Republic of India in 2011. In this instance, an Australian company successfully sought compensation equal to the arbitration award amount from the Indian government due to delays in the judicial process. Two key issues arise from this case: court interference and arbitration delays. Regarding court interference, there is a widespread consensus that the judiciary should minimize its involvement in arbitration, a practice adopted in several other jurisdictions. For example, in China, only the Supreme Court has the authority to intervene in arbitration matters, which helps reduce obstacles and constraints in arbitral awards. Another issue of concern is the lack of consistency in decisions made by the Indian judiciary concerning arbitration and other legal matters. The main key of interference has been through the grounds in of public policy and patently illegality
- Patent illegality and public policy evolution
According to research paper called “test of patent illegality” by Singhania & partners that
The landmark case which is precedent in Indian jurisprudence for arbitration was Renusagar Power Co. Ltd v. General Electric Co.. In this case, the apex Court set laid down the standards of public policy that should guide the assessment of foreign awards in the country. It ruled that, when determining the validity of an award in relation to public policy, the court doesn’t have the capacity to examine the merits of the award itself, but can only evaluate its validity based on the existing public policy standards. According to a journal titled “Public Policy and Indian arbitration: can the judiciary and the legislature rein in the unruly horse” written by Jahnavi Sindhu has deeply analyzed different vantage points in the case of Renusagar it says that additionally, the court specified the public policy criteria that must be considered when assessing an award’s valid in the significance of related decisions persists. The appellant raised multiple objections to the award, arguing that it violated the Foreign Exchange Regulation Act by allowing the payment of delinquent interest, provided damages on damages, permitted compoundable interest on interest, and would cause unjust enrichment for the respondent. The Supreme Court recognized both ‘narrow’ and ‘broad’ interpretations of public policy, stating that the applicable standard is determined by the specific context and purpose of the provision. It emphasized that public policy rules differ when dealing with domestic law versus matters involving conflicts of laws, noting that courts tend to hesitate in applying a broader view of public policy when foreign elements are present. The court stressed the importance of enforcing disputes to ensure swift resolutions, aligning with the intentions of the New York Convention and the Foreign Awards Act, and affirmed that public policy grounds cannot involve a mere merits review of the award.
The Supreme Court clarified that neither the Foreign Awards Act nor the New York Convention defines public policy to include simple violations of Indian law or contract terms. Enforcement of the award can only be denied if it contradicts: (i) fundamental principles of Indian law, (ii) India’s interests, or (iii) justice or morality. The court did not elaborate on these terms. While recognizing that a violation of the Foreign Exchange Regulation Act could constitute a public policy breach, it distinguished this from judging the merits of the award. Although the appellant claimed the award breached FERA, the court concluded that it could not evaluate delinquent interest issues as that would delve into the merits of the decision. However, it did consider the assertion regarding payments requiring prior approval from the Reserve Bank of India, concluding that no violations occurred, thus preserving national economic interests. Oil & Natural Gas Corporation Ltd. vs Saw Pipe ruling this case encompassed the idea of India’s fundamental policy, but the court failed to provide a thorough definition, leaving it open to interpretation that could be misused due to a lack of clarity. Introducing the term ‘patently illegal’ to the existing grounds under ‘public policy’ has been criticized as a severe setback for the evolution of the arbitration system established by the post-1996 Act. The Saw Pipes decision expanded the definition of public policy, increasing the potential for nearly unlimited judicial review, which contradicts the 1996 Act’s goal of reducing court involvement. Consequently, the Saw Pipes ruling represents a significant flaw in India’s arbitration jurisprudence. Internationally, the Supreme Court’s ruling in Kenusagar has received praise. Meanwhile, in Saw Pipes, the court contemplated whether it had the authority under section 34 to annul an award by the arbitral tribunal if it was deemed blatantly illegal, violated the Act’s provisions, or contradicted the contract’s terms. The court concluded affirmatively, though its reasoning was criticized for being flawed. The court maintained that since the tribunal was established by the A&C Act, any award breaching the Act’s provisions would be made outside its jurisdiction, justifying court intervention. It argued that failing to act otherwise would undermine the A&C Act’s provisions.
One critical flaw in the court’s reasoning is equating jurisdictional violations with procedural violations. Furthermore, the notion of a blatantly illegal award is not a specified ground for annulment under section 34. The court circumvented this by suggesting that the notion of patent illegality constitutes an additional public policy ground for annulment, separate from what was established in Renusagar. The appellant insisted that at this juncture, an award had not reached finality and could thus undergo a broader review. The decision emphasizes that under the New York Convention, the double exequatur requirement was abolished, making awards final upon issuance and enforceable in asset-locating jurisdictions without further approval.
Critics assert that the Saw Pipes decision represents a regression for India’s arbitration landscape. The interpretation of Saw Pipes raises concerns that it may expand the definition of public policy excessively, potentially influencing section 48. Some contend that Saw Pipes aligns with Renusagar, as the latter warned against viewing simple legal violations as public policy violations, while Saw Pipes highlighted patent illegality as significant breaches. However, a close reading of Renusagar indicates that any merits review, except in assessing the enforcement implications of an award, is not allo e the public policy of the enforcing country, rather than the award itself
AMENDMENT 2015 AND POST FACTO SCENARIO
The ruling in the ONGC case mentioned above, along with the decision in ONGC v. Western Geco International Ltd. have been explicitly revoked. Sections 34 and 48 of the relevant Act have reverted to the legal standards established in Renusagar Power Plant Co. Ltd. v. General Electric Co which now defines “public policy” to include only two of the three previously outlined criteria: “fundamental policy of Indian law” and “justice or morality.” Additionally, the situation where the award was influenced by fraud or corruption or violated Section 75 or Section 81, as stated in Section 34, remains applicable. The rationale concerning “the interest of India” mentioned in the referenced Judgment is no longer considered a legitimate basis. The “fundamental policy of Indian law” should now be interpreted as established in Renusagar (supra). The definitions of “justice or morality” have been refined to encompass only the essential concepts of these terms—specifically, those that would profoundly disturb the Court’s conscience, as described in Associate Builders v. Delhi Development Authority (2015) The primary aim of the 2015 amendment is to expedite the arbitration process and reduce court intervention, thereby facilitating easier business operations in India.
With the 2015 amendment, the explanation outlined in clause (b) of sub-section (2) of Section 34 of the Act has been replaced with new explanations, and sub-section 2A has been introduced in Section 34. The revised clause (b)(ii) of Section 34(2) is as follows:
RESEARCH METHODOLOGY
“(ii ) the arbitral award is in conflict with the public policy of India.
Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict
with the public policy of India, only if,—
(i) the making of the award was induced or affected by fraud or corruption or was in
violation of section 75 or section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.—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.”
Newly inserted sub-Section 2A read as follow;
“(2A) An arbitral award arising out of arbitrations other than international commercial
arbitrations, may also be set aside by the Court if the Court finds that the award is vitiated
by patent illegality appearing on the face of the award.
Provided that an award shall not be set aside merely on the ground of an erroneous
application of the law or by reappreciating evidence.”
Patent illegality has not been clearly defined in the amendment but the new ground of publlic policy has been explicitly defined as a ground for setting aside the domestic awards and not for the international matters. It is clear from the amendment of 2015 that re-appreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality on the face of the award.
In the case of Associated Builders, the Apex Court determined that “Patent Illegality” encompasses: a) instances of fraud or corruption; b) violations of substantive law that are fundamental to the issue; c) legal errors made by the arbitrator; d) breaches of the Act itself; e) situations where the arbitrator neglects to consider the contract terms and industry practices as mandated by Section 28(3) of the Act; and f) cases where the arbitrator fails to provide reasoning for their decision. In the earlier case of Ssangyong Engineering, the Apex Court referred to these findings from Associated Builders, affirming that if an arbitrator does not provide reasons for their award and violates Section 31(3) of the Act, it constitutes a clear instance of patent illegality in the award. The recent saga of DMRC vs DAMPEL, is a clear example of judicial overreach, affecting the finality and enforceability after several rounds of litigation and arbitral award being passed, in the case the Apex court quashed the arbitral award. The merits of the arbitral award were analyzed and the judges in the apex court functioned like the appellate authority which is not admissible in a an arbitration case . thus a clear violation and judicial overreach and grave miscarriage of justice
of DMRC VS DAMPEL questions that Do we even need public policy as a ground?
and whether patent illegality is a ground of judicial overarch.
Public policy is a constantly evolving and ambiguous concept, making it challenging to find the right words to define it. Judge Burroughs’s warning nearly two centuries ago still holds true today: “public policy is a very unruly horse, and once you get on, you never know where it will take you.
VIOLATION OF INTERNATIONAL CONVENTION
The unchecked expansion of judicial authority to intervene and review arbitration awards makes India an undesirable location for arbitration and leads to the country’s breach of international commitments under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which India signed on June 10, 1958. The main aim of the New York Convention was to promote the enforcement of foreign arbitration awards across various jurisdictions, achieved through several mechanisms. Firstly, it eliminated the double exequatur requirement, meaning that an award does not need prior validation in its country of origin to be enforced elsewhere. Secondly, it aimed for a limited and exhaustive scope regarding objections to enforcement. Specifically, the concept of public policy was meant to be interpreted narrowly, akin to the French concept of “ordre public”, addressing only the most foundational aspects of morality and justice. The choice of the term public policy over “ordre public” was made because the latter was unfamiliar to many legal systems. The intended narrow interpretation of public policy is reinforced by the Geneva Convention’s provisions, which state that awards can be annulled if they are “contrary to public policy or the principles of the law of the country.” Notably, the reference to the principles of law was intentionally omitted, confirming that merit reviews are not allowed.
CONCLUSION
In conclusion, challenges to arbitral awards in India that concentrate on patent illegality form a complex and developing legal area requiring careful examination of legal principles and case law. As arbitration becomes an increasingly common method of dispute resolution in India, parties must understand the limited legal grounds for successfully contesting arbitral awards, including the rigorous standard of patent illegality. A thorough grasp of these legal intricacies is essential for parties navigating the challenges of seeking to overturn arbitral awards on the basis of patent illegality. The Indian courts must diligently handle the arbitration matters as the question of finality and enforceability is always a risk in Indian dispute resolution which might affect the global reputation of India as an arbitration hub.
Raman Nagpal
Symbiosis Law School, Noida