Briefing on the Law Commission of India's Report on Changes to the Arbitration Law

I recently wrote a post for Kluwer Arbitration Blog on the 246th Report of the Law Commission of India on the "Amendments to the Arbitration and Conciliation Act, 1996". The post covers the suggestions and amendments proposed by the commission and can be viewed on this link. 

To Rein if Not Tame the 'Unruly Horse' of Public Policy

Below is a guest post from Garv Malhotra who is a final year student at GNLU, Gandhinagar.

A substantial amount of literature has been dedicated to the topic of the Scope of Public Policy as a ground for 'set-aside' of Domestic arbitral awards under Section 34 (2)(b)(ii) of the Arbitration and Conciliation Act, 1996, especially in the past decade since the infamous expansive interpretation of the term 'public policy' by the Apex court. The decision in the case of ONGC v. Saw Pipes[1] has attracted much flak from all quarters[2]. However, recent decisions of the Supreme Court in the McDermott[3], Sumitomo[4], Rashtriya Ispat[5] among other[6] cases among others that have attempted to water down the ONGC Doctrine without overruling the same. 

The Law relating set-aside of Domestic arbitral awards in India is laid down under Section 34 of the Arbitration and Conciliation Act, 1996. It is based on Article 34 of the Model Law and states that the grounds contained therein are the "only" grounds on which an award may be set aside. However in the Indian context the word "only" prefixing the grounds is a bit of a misnomer as two additional grounds have been created by the Act itself under Section 13(5) and 16(6). Besides another ground of fraud and corruption is found in an Explanation to the public policy ground in Section 34.[7]

The scope of challenge and set-aside of a final award of a tribunal is very restricted as there is a legal presumption in favour of the validity of an award.[8] The arbitrator's interpretation of the contract and his decision on the merits of the case cannot be re-examined by the court and it cannot substitute its own decision in place of the final and binding award.[9] Additionally, the reasonableness of the reasons given by the arbitrator cannot are not subject to challenge in a court of law.[10] The court cannot simply term the award on fact and/or law erroneous and substitute the award with their own judicial decision[11] and where the opinion of the arbitrator is plausible[12], the courts will not interfere. In effect, if the tribunal passes an award (as per Section 31) or an order under Section 16(2) or 16(3) after considering rival submissions on both fact and law, its decision cannot be interfered with unless the conclusion shocks the consciousness with a blatant error apparent from a prima facie perusal of the award. 

Though most other grounds of set-aside mentioned in Section 34 can be literally constructed, the most malleable among all grounds is the residuary ground under S. 34 i.e. the award can be set aside if found violative of the 'public policy' of India, leaving room for immense 'judicial legislation' on the point. It is known that the term 'public policy' is incapable of any precise definition, however, some light may be drawn from the Ministry of Law, Justice and Company Affairs, Government of India's attempt[13]- "A set of principles in accordance with which communities need to be regulated to achieve the good of the entire community or public" 

The reason why Public Policy is incapable of any precise definition is because it is a concept premised on the socio-cultural needs of every society as distinguished from the socio-political Policies. e.g. the consumption of alcohol, though ubiquitous in most countries may be against the Public Policy in some Gulf Countries. 

The term 'public policy' has been called an 'unruly horse'[14] as it is a dynamic concept, not being static at anytime, in any jurisdiction . It is a residuary ground that vests with the judges a powers analogues to a 'Henry VIIIth Clause' i.e. 'power to remove difficulties' in Administration Law. This power can also be compared to the common law canon of Justice, Equity and Good Conscience. Clearly, the term public policy is very open ended and is impossible to straitjacket[15]. However, unlike the two analogies hereinbefore mentioned, the interpretation of 'public policy' has to be done in the backdrop of the intervention-restrictive scheme of the Act as seen from the Statement of Objects and Reasons and Section 5.

The term public policy is capable of both a narrow and a broad interpretation depending upon the socio-cultural needs of the society[16] and the pendulum of the Apex Court's interpretation has oscillated between both these stands for decades without conclusive settlement[17]. However, in the ONGC case, the court disturbed the delicate balance between party autonomy and judicial supervision sought to be achieved by Section 34 and tilted the scales strongly in favour of the latter thereby setting the clock back to the old position where an award could be challenged on merits and indeed renders the court (testing enforceability of an award) as a court of appeal. It opened the floodgates to many previously barred challenges on vague assertions of statutory violations or interpretation of documents or the law. Invariably today, almost every dispute being arbitrated is further being litigated under the garb of challenge.

Recent Developments 

It has been over a decade since the highly criticised ONGC Judgement but no bench faced with a similar question has recommended the Chief Justice to constitute a review bench. ONGC still stands as the Locus Classicus on the interpretation of Public policy. However, a few recent decision benches of the Supreme Court of equivalent strength as ONGC have attempted to dilute its overtly expansive interpretation without sitting in review of the ratio.

In the McDermott Industries v. Burn Standard[18] the Supreme Court held-

"The 1996 Act makes provision for the supervisory role of courts for review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct the errors of the arbitrators...this can be justified as the parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."

In Sumitomo Heavy Industries Ltd. v. ONGC Ltd.[19] the Hon'ble Supreme Court, relying on another recent decision in SAIL v. Gupta Brothers Steel Tubes Ltd.[20] held that the umpire is legitimately entitled to take the view which he holds to be correct...hence if the conclusion of the arbitrator is based on a possible view of the matter, the court is not expected to intervene. The Court further reiterated the position that a 'perverse view' is not a finding against the weight of the evidence but against the evidence itself of the grounds of inadmissibility or irrelevance.

Further in the Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran[21], the Supreme Court upheld the interpretation of the court in Sumitomo Case and SAIL Case and opined that even if the decision of the arbitrator is possible if not plausible, the court would not be justified in interfering.

The author submits that the overtly expansive stance on Public Policy as laid down in the ONGC Case is defeating the main objectives of the Act. It renders the Arbitral Tribunal a mere forum at the bottom of the Court hierarchy subject to just as many actions as a traditionally litigated dispute. Invariably today, most of the arbitral awards are challenged on grounds of violation of public policy and patent illegality premised on vague assertions of statutory violations imploring the court to 're-adjudicate' issues of fact and law under the pretext of a challenge. The recent decisions of the Supreme Court and a few High Court decisions mark a welcome trend in watering down the ONGC Doctrine and upholding the restrictive sanctity of the Act. However, it is only up to the next bench faced with a similar question to request the Chief Justice of India to constitute a larger bench to review this position and salvage the Domestic Arbitration scenario in India. 

[1] (2003) 5 SCC 705. 

[2] Sumeet Kachwaha, Arbitration Law of India: A Critical Analysis, Asia International Arbitrational Journal, Volume 1, Number 2, P. 105 http://www.kaplegal.com/upload/pdf/arbitration-law-india-critical-analysis.pdf ; Speech delivered by Mr. F.S. Nariman at the inaugural session of “Legal reforms in Infrastructure”. 

[3] (2006) 11 SCC 181. 

[4] (2010) 11 SCC 296. 

[5] (2012) 5 SCC 306. 

[6] SAIL v. Gupta Brothers Steel Tubes Ltd (2009) 10 SCC 63, Kwality Mfg. Corpn. v. Central Warehousing Corporation (2009) 5 SCC 142; Arulvelu v. State (2009) 10 SCC 206. 

[7] Sumeet Kachwaha, Enforcement of Arbitration Awards in India, Asian International Arbitration Journal, Volume 4, Number 1, PAGES 64-82. 

[8] Union of India v. Jai Narayan Misra AIR 1970 SC 753; Food Corporation of India v. Joginder Mahinderpal AIR 1989 SC 1263. 

[9] Union of India v. Jai Narayan Misra AIR 1970 SC 753; Francis Klein Pvt. Ltd. v. Union of India 1995 2 Arb LR 298. 

[10] Municipal Corporation of Delhi v. Jagan Nath Ashok Kumar AIR 1987 SC 2316; Id. 

[11] Lakshmi Mathur v. CGM, MTNL 2000 (2) ArbLR 684 Bom. 

[12] Supra Note 4, 5, 6. 

[13] P Anklesaria, "Scope of the expression Public Policy in Domestic and Foreign Awards". 9 AIR (2005) at 310. 

[14] Burrough, J., Richardson v. Mellish (1824), 2 Bing. 252; (1824) 130 Eng. Rep. 294, 303. 

[15] O.P. Malhotra, The Law and Practice of Arbitration and Conciliation (New Delhi: Lexis Nexis Butterworths, 2002) at 768. 

[16] Supra Note 19. 

[17] For a narrow view refer- Gherulal Parekh v. Mahadeodas Maiya AIR1959 SC 781 and Renusagar Power Co. Ltd. v. General Electric Co. AIR 1986 SC 1571; For a Broad view refer- Central Inland Water Transport Corp. Ltd. v. Brojo Nath Ganguly1986 SCR (2) 278 and ONGC v. Saw Pipes AIR 2003 SC 2629. 

[18] (2006) 11 SCC 181 para 52. 

[19] (2010) 11 SCC 296 para 41-43. 

[20] (2010) 11 SCC 296. 

[21] (2012) 5 SCC 306 para 43-45.

The Panna-Mukta Arbitrations: The Indian Supreme Court Adopts a Pro-Arbitration Stance. Another Step In The Right Direction?

Below is guest post from Nimoy Kher who is a third year student at NLSIU, Bangalore. 

In what may be seen as yet another step towards a more arbitration-friendly atmosphere in India, the Supreme Court of India on 27^th May, in the case of Reliance Industries and Anr. v. Union of India denied Indian courts’ jurisdiction over an ongoing foreign arbitration proceeding.

By way of context, the factual matrix surrounding the case is as follows. There were two Production Sharing Contracts (PSCs) between the parties to the dispute. These PSCs dealt with the exploration and production of petroleum from the Tapti and Panna-Mukta Fields located just off the western coast of Mumbai. In 2010, certain disputes arose between the parties with regard to these PSCs, and Reliance Industries referred the disputes to arbitration, in accordance with the contracts. The government argued that the claims before the tribunal were non-arbitrable on several grounds. The arbitral tribunal, however, passed a final partial award declaring that it had jurisdiction over the parties’ disputes.

Subsequently, the government sought to set-aside this partial award under S.34 of the Indian arbitration statute. Reliance Industries opposed the maintainability of the setting aside petition. Reliance Industries based their challenge to the setting-aside petition on the argument that S. 34 falls under Part I of Indian Statute, and would therefore apply only to domestic or Indian seated arbitrations. Further, Reliance Industries argued that the arbitration agreements in the PSCs expressly named England as the seat of the arbitration and as such, all challenges to the award would lie in England. The government, on the other hand, argued that S.34 would apply to the award since it was clear from parties’ agreement that they did not intend to oust the applicability of the Indian statute, and also since the disputes between the parties involved substantial questions affecting Indian public interest.

The High Court placed heavy reliance on judgments such as Bhatia International v. Bulk Trading S.A and Venture Global Engineering v. Satyam Computer Services to assert jurisdiction over the award under S.34. The court opined that S.34 would apply since there was neither an explicit nor implicit rejection of the domestic provisions of the Indian statute, as per the requirements of Bhatia International. To the contrary, the court gleaned a manifest desire to subject the arbitration agreement to Indian law, from parties’ choice of Indian law as proper law of the contract. The court reasoned that the fact parties had chosen the law of India to govern the substantive contract clearly indicated that parties did not intend to oust the applicability of Indian law. By choosing England as the seat, parties had merely desired that the English law would be the curial law, and would apply only to questions of the conduct of arbitral proceedings. For all other matters, including challenge of an award, Indian law would apply.

Further, the court reasoned that S.34 would apply since the parties in the instant case did not wish to exclude the applicability of Indian public policy. The court relied on Art.15 (1) of the PSCs which stated that “the companies and the operations under this Contract shall be subject to all fiscal legislation of India” to support this conclusion. In any case, irrespective of the parties’ intention, the High Court declared that it would retain jurisdiction over the award, since the question of the arbitrability of certain kinds of disputes must not be decided just against the touchstone of the lex arbitri. It stated that:

“Since the question of arbitrability of the claim is a larger question effecting public policy of State it should be determined by applying laws of India.”

It must be bourne in mind, that in Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Service Inc., a 2012 Supreme Court judgment, the court has overruled the judgments in Bhatia International and Venture Global. The Supreme Court has clearly stated that Part I of the Indian arbitration statute would not apply to foreign-seated arbitrations. However, as the High Court correctly recognized, the holding in the Bharat Aluminium Case applies prospectively, to arbitration agreements executed after 6^th September 2012. Since the arbitration agreements in the present case were entered into before that date the High Court relied upon the ratio in Bhatia International and Venture Global to come to the aforementioned conclusions.

Fortunately, in appeal the Supreme Court comprehensively overruled the High Court on both issues. In light of the High Court judgment, the first issue that had to be determined was whether the choice of seat in the instant case, amounted to an implicit exclusion of the provisions of the arbitration act, and excluded the award from the ambit of S.34, as per the requirements laid down in Bhatia International. The Supreme Court found that in the instant case the choice of seat did, in fact, amount to an implicit exclusion of the Indian statute. The court concluded that a ‘meaningful reading’ of the terms of the contract clearly indicated that parties understood the distinction between the proper law of the contract and proper law of the arbitration agreement, and parties intended both to be different. The court opined:

“In our opinion, it is too late in the day to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause”

The court relied on a number of previous judgments such as Videocon Industries Ltd. v. Union of India and Anr. and Dozco v. Doosan Infracore Co.Ltd  to find that the choice of seat clearly amounted to an ouster of the jurisdiction of Indian courts. Further, in clear contrast to the High Court ruling, the court held that the mere fact that Indian law applied to the PSC would not indicate that parties intended Indian law to be the proper law of the arbitration agreement.

With regard to the second issue – whether the Indian statute would apply by virtue of the fact that substantial questions of Indian interest involved - the court found that the applicability of the provisions of the statute would not depend on the nature of the challenge of the award. For the standard of public policy laid down in the Indian statute to apply, it would first have to be proved that the statute applied to begin with. Since, in the instant case the arbitration agreement fell outside the scope of the statute by virtue of the seat of the arbitration being England, an award passed thereunder would not be subject to setting aside proceedings under S.34. The mere fact that question of Indian public interest were involved was not sufficient to attract the applicability of the statute.

This judgment is commendable, since despite being forced to rely on the ruling in Bhatia International, the court still carved out a niche, which excluded the applicability of Part I of the Indian statute to the arbitration proceedings. This judgment clearly indicates the change in the attitude of Indian courts towards international arbitration. It indicates that the Indian judiciary is increasingly hesitant to exercise control over international arbitrations. Further, the Supreme Court has correctly identified the inconveniences that are likely to be caused to parties by allowing the applicability of the Indian statute to international arbitration. Finally, this judgment is significant because it explicitly recognizes the need to follow international trends embodied in other UNCITRAL Model Law and New York Convention. Post the holding in Bharat Aluminium Co Ltd. v. Kaiser Aluminium Technical Services Inc., this judgment will no doubt help bolster the confidence of the international arbitration community in India.  The question remains, though: are these cases just flashes in the pan, or are they representative of a true change in the Indian arbitration landscape?