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The Study Of Public Policy Bar On Enforcement Of Arbitral Awards In India Vis-A-Viz The Idea In Economics

The expression public policy has not been defined in the Arbitration and Conciliation Act, 1996. The expression 'public policy' is not capable of a precise definition because it is a variable notion, depending on changing manners, morals, and economic conditions. Public Policy is a very unruly horse, and once you get astride it you never know where it will carry you. It may lead you from sound law and is never argued but when all other points fail.

It's because the Supreme Court of India in Bhatia International v. Bulk Trading SA (Bhatia International) and Venture Global v. Satyam Computer Services Ltd. & Anr. (Venture Global)  �held that the public policy exception of Section 34 of the Arbitration and Conciliation Act, 1996 ("the 1996 Act") also applies to foreign arbitrations. This was rectified in the decision of BALCO v. Kaiser Aluminum (BALCO) where the Supreme Court held that Part I of the 1996 Act does not apply to foreign seated arbitrations.

However, there's still ambiguity as to whether under Section 48 of the 1996 Act. Public policy is a principle of law, under which freedom for contract or private dealings is restricted by law for the good of the community. However, the concept of public policy is not static and varies with time and changing needs of society. The expanded scope of the public policy doctrine would be applicable as it was in Phulchand Exports Ltd v. Patriot. In the recent case of Shri Lal Mahal Ltd v. Progetto Grano Spa (Shri Lal Mahalal case), the Supreme Court has finally narrowed the scope of the defense of public policy and strengthened the pro-enforcement policy of the Indian Courts as evidenced in BALCO.

The ground stated in section 34(2)(b)(ii) for setting aside an arbitral award means the party challenging the award on the ground that the award is against the public policy of India need not plead or prove the existence of these grounds. The court has ex officio jurisdiction to set aside an arbitral award under the provisions of section 34(2)(b)(ii) if the award conflicts with the public policy of India.

The concept of public policy as a res publica coincides daily with private legal issues in the field of law. Although it may be defined as the last recourse for the claimant or arbitrator, it can serve as a decisive factor in contractual issues, arbitrations, and international rulings when challenged with evidence for valid reasons.

Public policies are one of the most common reasons why international arbitration parties are widely used to refuse to enforce arbitral awards. Although parties are free to enter into any agreement as they like, they cannot make a binding contract in violation of law or of public policy. There has been an extremely important change in mindset recently in India, where the implementation of the internationally accepted concept of public policy was delayed by several court decisions due to various approaches or methods adopted by the courts.

Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and article 36(1)(b)(ii) of UNCITRAL's Model Law both provide that a State may refuse to enforce an award if doing so would be contrary to the public policy of the State in which enforcement is sought. Unfortunately, neither defines public policy. In October 2015, the International Bar Association released a report on the Public Policy Exception in the New York Convention that reaffirmed that public policy remains a nebulous and evolving concept that defies precise definition.

In Kesar Enterprises v. DCM Sriram Industries Ltd., the arbitrator, a former Chief Justice of India, did not return a finding on every question that was raised. It was contended that the arbitrator did not appreciate and duly consider all the questions raised before him. It was held that failure of the arbitrator to return a finding on every question raised before him did not amount to infraction of public policy. In such circumstances, it would be deemed that the arbitrator rejected the contention.

Objective of Study
The objective of this research paper is to understand the way public policy works for setting aside an arbitral award and the philosophy around public policy viz-a-viz the idea in Economics as the act curtails the judicial intervention with some acceptable cases since public policy leads to bafflement which further leads to bemused understanding and decisions given by the courts. This paper is meant to unify the meaning and purpose of this broadly understood term by analyzing different interpretations of tribunals over time.

Research Questions:
  • What is the public policy bar in context to the enforcement of arbitral awards in India?
  • What can we learn from the idea of public goods in economics vis-�-vis the question of public policy in arbitration?
  • Is there a need for more robust jurisprudence around the term public policy in context to a globalized world?

Research Methodology
The researcher has used the doctrinal method i.e. reference from available primary sources like Acts, Rules, and Regulations to study the present questions at hand. The researcher has also taken references from secondary sources like books, articles, and newspaper reports to understand the issue of public policy related to the above questions.

Chapter I: Public Policy And Enforcement Of Arbitral Awards
To have minimal judicial intervention in the arbitration procedure, the Indian Arbitration Act was introduced. Nevertheless, the Indian courts have demonstrated a strong propensity to interfere with international arbitration. In this respect, it is the most controversial judicial intervention in public policy award enforcement.

In Renusagar v General Electric, the Hon'ble Supreme Court of India (hereinafter, the SC), held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to:
  1. fundamental policy of Indian law; or
  2. the interests of India; or
  3. justice or morality
This decision was based on private international law and was widely followed in most existing arbitration jurisdictions like the US and France in conjunction with foreign standards. This decision reiterated the perception that the national courts must deal with arbitral awards based on public policy, only in extreme circumstances. It was also held that Public policy protection should not be used by the judges to test the validity of the arbitral award.

Yet, the SC took a different approach in Oil & Natural Gas Corp v Saw Pipes by misinterpreting the public policy defense. The Saw Pipes litigation emerged from a nationwide controversy over the award of liquidated damages under a contract of supply. The case has been remitted to arbitration and the tribunal held that ONGC has no right to liquidated damages because it has not made any loss due to Saw Pipes ' late delivery.
They justified as a wider meaning was required to be given to public policy than in the case of Renusagar because the public policy concept connoted issues of public good and public interest. According to the SC, ONGC was not required to prove its loss and, therefore, was entitled to the liquidated damages.

The SC believed that the award violating the law could not be said to serve the public interest as it would have negative effects on the administration of justice. In addition to the 3 heads which the SC stated in the Renusagar case, it held that an arbitral award may be set aside on grounds of public policy if it is patently illegal. It ruled that an award is clearly illegal if it was in breach of substantive law, of the Indian Arbitration Act, and/or the contractual terms. The case of Saw Pipes has been criticized by many distinguished commentators.

By clearly stating that the public policy ground includes errors of law by the arbitral tribunal, the Saw Pipes case went beyond the scope of the Indian Arbitration Act and created a new ground for setting aside arbitral awards. By bringing errors of law within the ambit of public policy, the Indian courts have created a backdoor to review the merits of an arbitrator's decision, which is in clear contravention of arbitration law and practice.

Saw Pipes is particularly disturbing because the Indian Supreme Court has not expressly excluded international awards from its rationale. Moreover, in Bhatia International v Bulk Trading, the Supreme Court held that provisions of Part 1 of the Indian Arbitration Act (which applies to domestic arbitrations only) would also apply to foreign awards under Part 2 of the Indian Arbitration Act unless specifically excluded by the parties. The case of Bhatia generated much debate since it reversed the accepted position that Part 1 of the Indian Arbitration Act would not apply to international arbitration.

In 2008, the SC, extending its earlier decision in the Bhatia case, held that a foreign arbitral award could be set aside on grounds of public policy as formulated in the Saw Pipes case. It held that the losing party could bring an independent action in India to set aside a foreign arbitral award on the expanded grounds of public policy as set out in the case of Saw Pipes.

The Satyam case has been described by Nariman, one of India's most renowned arbitrators, as simply 'inexplicable' and one which can not be defended.

Seems that in a manner that violates the New York convention the Indian courts have consistently misinterpreted the terms of the Indian Arbitration Act. The Bombay High Court in Western Maharashtra Development Corporation Ltd. v Bajaj Auto Ltd, relying on the ONGC case, set aside an arbitral award on the ground that it was contrary to the substantive provisions of law and, as a result, patently illegal.

The Bombay High Court analyzed the Supreme Court decision in the Saw Pipes case and held that the award could be set aside on grounds of public policy. The Bombay High Court felt that the arbitrator did not apply the provisions of the Indian company law correctly and, as a result, the award contradicted the substantive provisions of law and was patently illegal.

Such judgments have ignited considerable on-shore and offshore debate and agitation with lawyers worldwide who remember that such judgments, if left unsolicited, would seriously damage the reputation of India globally.

Even when the tribunal may have complied with the agreed procedure, courts have refused to enforce the award as contrary to public policy if the same violates inherent notions of due process. Similarly, enforcement could also be refused by resorting to the public policy ground when the conduct of the tribunal and the procedure adopted by it was antithetical to the fundamental requirements of due procedure. The public policy bar is, thus, quite large, and this is one of the words which the judicial authority has continuously understood and described since antiquity and, thus, the researcher concludes that some rules that characterize the word ' public policy ' need to be formulated constantly.

Chapter II: Jurisprudence Around Public Policy

Sections 34(2)(b) and 48(2) of the Arbitration Act allow judges, by keeping the issue of arbitrability to courts, to assign the award if the disagreement was not settled by arbitration or if the award conflicts with Indian public policy. In this connection, it is worth noting that the above paragraphs give two separate reasons for arbitrability and public policy.

In Booz Allen & Hamilton Inc v SBI Home Finance Ltd., the SC advocated the test of 'in rem and in personam' which are basically rights against the person are arbitrable whereas rights against the society aren't. These two factors are the primary determinants that influence considerations of arbitrability and the same has been reaffirmed in the recent holding of the Supreme Court in A. Ayyasamy v. A. Paramasivam [A. Ayyasamy]. The Courts have misinterpreted and wrongly applied the public policy exception while determining the arbitrability of a dispute due to a lack of clear reasoning. Many courts have criticized the judgment and said it wasn't complete enough to ensure the arbitrability of the disputes.

In simpler terms:
if the subject matter of a dispute qualifies to be a non-arbitrable subject, the courts will not be obligated to refer the parties to the arbitration and such a ruling will be binding on the arbitral tribunals, an arbitral tribunal cannot be seen to oust the jurisdiction of a special court.

There are 2 types of public policy: International & domestic. For there to be a violation of domestic public policy, it has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good. The definition of domestic public policy can have a great deal of variation; essentially, domestic, public policy is what is in the interests of each jurisdiction. This provision is premised on Article V(1)(b) of the Convention which was included to account for the special importance accorded to fair hearings under international law. If we dig deeper, we find that Article V(1)(b) was in turn borrowed from the 1927 Geneva Convention, providing further credence to its historical and political origins.

Therefore, it can be said that the mere effect of specific due process requirements being present in Section 48(1) is that for these particular violations, the party arguing for non-enforcement will have to furnish conclusive proof while for other due process violations; the court can find violations on its own accord. It is widely accepted that 'public policy' as used here, covers fundamental principles of law and justice in substantive as well as procedural respects.

Some jurisdictions have adopted a narrower scope of what is against public policy, whereas other jurisdictions have adopted a broader scope. The Countries which have a narrow scope are Switzerland, India, Singapore, the US. Public Policy is violated by an illegal act, this demonstrates the difficulty of their existing uniformity of domestic public policy as there exists differences in the legal status of many acts across jurisdictions. According to Winfield, public policy is "a principle of judicial legislation or interpretation founded on the current needs of the community". It suggests that the courts must weigh the interests of the whole community as well as the interests of a considerable section of it.

Chapter III: Public Policy In Arbitration Viz-A-Viz Public Goods

Public Policy is a factor that is brought into play by the government which is elected by the people. Generally, public policy is a set of rules and regulations, ideologies on which an elected government or an authoritarian government may use to regulate the use of public goods because if public goods are overused, then there would be a free-rider problem. It is widely accepted that 'public policy' as used here, covers fundamental principles of law and justice in substantive as well as procedural respects.

Public goods are those when the individuals cannot be excluded from using them, and one individual's use of it does not limit its availability to others. Public policy is an unruly horse that is supposed to be defined by mostly judicial interpretations and societal conventions.

Indian courts were not provided with any guidance as to the meaning of the public policy. After going back and forth multiple times, the apex court concluded that for Section 48(2)(b), public policy can be understood to mean:
  1. the fundamental policy of Indian law;
  2. the interests of India; or
  3. justice or morality.

A state by enforcing a uniform public policy may prevent the negative externalities from arising. Having a strong and flexible public policy has always stood the test of efficiency in economics. A public good is a good that is both non-excludable and non-rivalrous in that, individuals cannot be excluded from use or could be enjoyed without paying for it, and where use by one individual does not reduce availability to others or the goods can be effectively consumed simultaneously by more than one person. Public goods that are available everywhere are sometimes referred to as global public goods.

Many public goods may at times be subject to excessive use resulting in negative externalities affecting all users; for example air pollution and traffic congestion. Public goods problems are often closely related to the "free-rider" problem, in which people not paying for the good may continue to access it. Thus, the good may be under-produced, overused. A government may avoid undesirable externalities from occurring by implementing a consistent public policy. Strong and flexible public policies have always been a measure of economic efficiency.

The doctrine of public policy is a multi-faceted concept with three distinct�yet intertwined�constitutive logics. The confusion of courts indicates the often-neglected intricacies of the discussion on public policy. Courts' opinions have oscillated between a moralistic account i.e. analyzing it based on basic notions of morality and justice and a rigid positivistic interpretation that subjugates the doctrine only to laws and precedents.
In the eyes of the national court which attempts to intervene with the arbitration process, public policies are still today an important advantage. The reason is that there is no consensus about what its contents should include, and there is a difference between states in public policy. Even though the public policy may be an unruly horse that may deceive you, this unruly horse cannot be beaten.

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