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.

Can Two Indian Parties Have a Foreign Seat for Arbitration?

Recently, during a discussion with few friends, a point came up whether two Indian parties can have arbitration seated outside India. This post is to put things in perspective as to how law stands as of today.  

In TDM Infrastructure Private Limited vs. UE Development India Private Limited, the court had in clear terms held that “The intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country.”  Thus, two Indian parties cannot use law of a different country so as to bypass the Indian law.

The ratio of the court was that "When both the companies are incorporated in India, and have been domiciled in India, the arbitration agreement entered into by and between them would not be an international commercial arbitration agreement." Doing so would mean going against the public policy of the nation.

NTPCv Singer also stated that the choice of law could be invalidated if it was against the public policy. The judgment stated that: “The concept of party autonomy in international contracts is respected by all systems of law so far as it is not incompatible with (...) any overriding public policy.”

Even the revolutionary BALCO judgment has not changed this position of law where it was in fact discussed in a detailed manner by the counsel and it was also taken into account by the bench that:

“In other words, two Indian parties involved in a purely domestic dispute cannot contractually agree to denude the Courts of this country of their jurisdictions with respect to a legal dispute arising between them in India.”

“…when both the parties are Indian, the substantive law governing the dispute must necessarily be Indian irrespective of the situs of the arbitration and irrespective of any provision in the contract between the parties to the contrary….the same principle applies with equal force to the arbitration law too, that is to say, that if it is not open to two Indian parties with regard to an entirely domestic dispute to derogate from the Indian laws of contract, evidence etc., it is equally not open to them derogate from the Indian arbitrational law either.” Reliance has been placed on TDM Infrastructure.

This question also came in as recently as in 2013 in the matter of: Antrix Corporation Ltd.Vs.Devas Multimedia P. Ltd. but was resolved before court could decide on it.

Only in the following two ways can this stance be changed now:

1) A new case on this point is decided by the SC, or 2) an explanation is introduced in the Act through an amendment. 

Foreign awards that patently violate Indian substantive law are not enforceable: Supreme Court

Phulchand Exports Ltd. v. OOO Patriot is yet another case of a foreign award being challenged before Indian courts for non-conformity with substantive provisions of Indian law, but this time with more disastrous consequences.

The case surrounded the enforceability of an award dated October 18, 1999 (yes, it has been 12 years!) given by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of Russian Federation, Moscow in a dispute between an Indian seller and a Russian buyer. The arbitral tribunal had found that the seller was in breach and passed an award directing the seller to make partial reimbursement under a contractual clause providing for reimbursement in case of breach. The seller challenged the enforcement of the award claiming that the reimbursement clause was in nature of a penalty and hence violated Section 74 of the Indian Contract Act.

The Supreme Court on October 12th passed its judgment in the matter. It relied on ONGC v Saw Pipes to hold that an award that patently contravenes substantive laws of India will be against the public policy of India. However, the Court refused to engage in detail with the submission that the Saw Pipes judgment dealt with the definition of public policy under Section 34 of the Arbitration and Conciliation Act and there was no reason to extend the same definition to Section 48. The only observation of the Court in this regard is, "There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd., 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'."

This is extremely unfortunate as the Court has pronounced a position that can have far reaching implications without giving reasons for the same or considering submissions on this point with the due consideration they deserve. This hurry on the part of the Court to dispose off the matter has is explained by the following sentences in the judgment: "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." The Court went on to examine whehter the impugned award in this case was patently illegal and held it was not, allowing the enforcement of the award. Thus, the hurried decision of the Court appears to be motivated by the good intention of allowing enforcement of the award without any further delay. But just like the well intentioned judgment in Bhatia (which was motivated by the consideration that if the Court took a different stance, interim measures in support of arbitration could not be granted), this judgment will have devastating effects on the enforceability of foreign awards and the institution of arbitration as a whole.

It is well accepted in statutory interpretation that the same word, when used in different parts of the same statute carries the same meaning. But this is not so, if the context requires the word to be accorded different meanings in different parts of the same statute.

Section 34 is located in Part I and is concerned with the setting aside of awards. Section 48 is located in Part II and deals with the enforcement of awards. Great harm has already been done by Indian decisions holding that 'public policy' under Section 34 includes patent illegality and even foreign awards can be set aside for non-conformity with Indian law. While extending this definition to Section 48 too, the Court appears to have forgotten its own earlier judgment in Renusagar, which drew a clear distinction between public policy considerations in setting aside an award before a domestic court and public policy considerations while enforcing a foreign award:

"The Foreign Awards Act is, therefore, intended to reduce the time taken in recognition and enforcement of foreign arbitral awards. The New York Convention seeks to achieve this objective by dispensing with the requirement of the leave to enforce the award by the courts where the award is made and thereby avoid the problem of "double exequatue'. It also restricts the scope of enquiry before the court enforcing the award by eliminating the requirement that the award should not be contrary to the principles of the law of the country in which it is sought to be relied upon. Enlarging the field of enquiry to include public policy of the courts whose law governs the contract or of the country of place of arbitration, would run counter to the expressed intent of the legislation."

Though Renusagar decision was passed under the Foreign Awards Act, not the 1996 Act, neither the staturtory language nor the legislative intention appears to have undergone a transformation after that decision in such a manner as to permit the stance taken by the Court in the present case.

The present decision will have the effect of subjecting every single arbitral award, irrespective of its country of origin, to Indian law. While this was already achieved by the Venture-Satyam decision which permitted challenge of a foreign award under Section 34, the position has been worsened by the present judgment as a challenge based on Indian substantive law will operate even in cases where the award debtor does not take the active step of challenging the award under Section 34.

Some proposed amendments to the Arbitration and Conciliation Act (Part I)

This post is a short comment on some of the proposed amendments to the Arbitration and Conciliation Act, 1996 discussed here in which the Law Ministry has attempted to nullify the effect of some Supreme Court judgments and reinforce some others. LegallyIndia has discussed the ramifications of some of these amendments. Some further issues are discussed here.

The Venture case discussed in the earlier post based its decision on the landmark, yet controversial judgment of the Supreme Court in Bhatia International v. Bulk Trading S. A., (2002) 4 SCC 105. The Court held, inter alia, on an interpretation of section 2(2) of the Act that Part I of the Act applies to arbitration taking place outside India as well. The reasoning of the Court was based on the omission of the word "only" from clause (2) of section 2, which was present in the corresponding provision in the UNCITRAL Model Law on International Commercial Arbitration on which this Act was based. The proposed amendment to section 2(2), although not inserting the word "only", brings it more into line with the UNCITRAL Model Law, thus negating the reasoning in Bhatia, to that extent. This being the argument on which the Court based its decision, undermines the decision itself, thus leaving the Venture decision, too, without legal basis.

An important aspect of the Venture decision, other than applying Part I of the Act to arbitration held outside India was applying the ratio in ONGC v. SAW Pipes, (2003) 5 SCC 705. The Court in Venture held that to test if a foreign award is contrary to public policy, the criteria laid down in SAW Pipes would be applicable. The SAW Pipes judgment, rendered in context of a domestic award, expressly excluded applicability of this "broad view" of public policy from foreign awards. The test for the same was laid down in Renusagar Power Corporation v. General Electric Co., AIR 1994 SC 860, which adhered to the "narrow view" of public policy. The new amendments to the Act clearly define public policy in the context of domestic as well as foreign awards in Explanation 2 to section 34. This gives statutory backing to what was held in Renusagar and relied on in SAW Pipes. Further, a proposed new section 34A inserts the new ground for domestic awards introduced in SAW Pipes as "patent illegality". The words used in the amendment are "error which is apparent on the face of the arbitral award giving rise to a substantial question of law". This section is applicable only in case of arbitrations other than international arbitrations. However, a reading the newly inserted definitions of "domestic arbitration" and "international arbitration" indicates that all arbitrations held in India, even if one of the parties is not Indian. Therefore a broad meaning of the term "public policy" is attracted whenever an arbitration is held in India. Here, too, the decision in Venture stands to lose effect if the aforementioned amendments are enacted into law.

Another important amendment, this time reinforcing a Supreme Court judgment, S. B. P. & Co. v. Patel Engineering Ltd., AIR 2006 SC 450, replaced the term "Chief Justice" with "High Court" and "Chief Justice of India" with "Supreme Court". This decision, too was controversial, overruling a 3 judge bench decision in Konkan Railway Corporation v. Mehul Construction Co., (2000) 7 SCC 201 and a Constitutional Bench decision in Konkan Railway Corporation v. Rani Construction Co., AIR 2002 SC 778 and with a strong dissent by Justice Thakker.

The question in all these cases was the nature of authority of the Chief Justice under section 11 of the Act in appointing arbitrators. The Konkan Railway cases held that it was an administrative function whereas Patel Engineering overturned them, holding it to be a judicial function. This matter would not be in controversy any longer, after substitution of the Chief Justice with the High Court and Supreme Court in the Act. However, the distinction between the office of the Chief Justice and the Court he presides over, which was stressed on in Patel Engineering, becomes irrelevant as the function is no more vested in the Chief Justice.

The amendments proposed are several in number, and many of them might have far reaching consequences for arbitration in India. These will be discussed in further posts.