Scope of Interference in Section 34 Applications on Public Policy & Patent Illegality Grounds

One of the most important topics that has always caught the attention of scholars and commentators on arbitration is the scope of review of arbitral awards on the ground of public policy. The Indian scenario is no exception. In the past few years, there have been many clarificatory amendments and judgements attempting to elucidate the law but there are certain questions that have required answers and are rarely forthcoming.

The law as it stands today is that if the court finds that an arbitral award is in conflict with public policy, the award can be set aside [Section 34(2)(b)(ii)]. By virtue of the 2015 amendments, the scope of public policy has been made even narrower. Explanation 1 to Section 34(2)(b)(ii) explains what public policy is. It says that an award is in conflict with public policy only if:

• the making of the award was induced by fraud or affected by fraud or corruption or was in violation of Section 75 (confidentiality) or Section 81 (admissibility of conciliation material in other proceedings), or 
• the award is in contravention with the fundamental policy of Indian law. The second explanation states that the test as to whether the award is in contravention of the fundamental policy of Indian law does not entail the review of merits of the award, or
• the award is in conflict with the basic notions of morality or justice.

Section 34(2A) carves out an exception to the above rule. It says in purely domestic awards (without international context), a review of the arbitral award on the ground of patent illegality on the face of the award is permissible but not on mere erroneous application of law or re-appreciation of evidence. 

This is the entire gamut of provisions permitting review of arbitral awards on the ground of public policy and patent illegality. There are a few notable things:

1. Patent illegality does not include public policy post-2015. Both grounds are different. Public policy is dealt with under Section 34(2)(b)(ii) and the two explanations while patent illegality is provided in Section 34(2A).
2. Mere error in interpretation of contract is not a sufficient ground for testing the validity of the award. 
• Where two plausible views can be taken and the arbitrator has taken one such views, the award cannot be reviewed that she did not take the other. 
• The question regarding whether a contractual clause is against public policy of India is different from the question as to whether the interpretation of a contractual provision necessitates setting aside the arbitral award. The former comes under Section 34(2)(b)(ii) while the latter comes under Section 34(2A)[as applicable for awards rendered after 2015]. Hence, unless Section 34(2A) is pleaded, an arbitral award cannot be questioned for error in contractual interpretation under Section 34(2)(b)(ii), except in exceptional situations. 
• Further, Section 28(3) has been amended such that post-2015, the tribunal needs to "take into account the terms of the contract" while rendering the award as against the earlier position that the "tribunal shall decide in accordance with the terms of the contract". The effect of this is aptly explained in a recent article: "Whereas as per the pre-amended Section, the Arbitral Tribunal was necessarily required to decide the dispute strictly ‘in accordance’ with the terms of the contract, while being entitled to merely ‘take into account’ the usages of trade; under the amended Section, the necessity to decide ‘in accordance’ with the contract has been done away with and replaced with a softer approach requiring the Tribunal to ‘take into account’ the terms of a contract just as it would ‘take into account’ usages of the trade." Thus, even if the tribunal deviates from the contract, so long as sufficient and cogent reasons for the deviation, the award should be upheld. 
• On the other hand, if no reason is given for the deviation or if the deviation is patently wrong, the award could be set aside. But the patent illegality as provided in Section 34(2A) in the deviation from the contract should appear on the face of the award and not on the materials relied upon. In other words, if the tribunal interprets or ignores a contractual provision and such an act is grossly wrong and shocks the conscience of the court on the perusal of the arbitral award, such an act can entail review of merits.  
3. In all cases in Section 34(2A), the patent illegality should be apparent on the face of the arbitral award. This means that that in order to make a case for setting aside an arbitral award under this provision, the petitioner cannot rely on any material except the arbitral award. However, this provision does not prohibit the award holder from relying on the materials in the arbitration proceedings to support an interpretation. For instance, if the conclusion of the arbitral tribunal is that an agreement is actually an integral part of another agreement based on interpretation of the contract, the petitioner can only rely on the award to support his reasons for setting aside, while the Respondent can rely on, say, a term of the contract defining the term "agreement" even if the definition does not appear in the award. 

The next post will deal with the the concepts such as "review on merits", "erroneous application of the law", "reappreciation of evidence", etc. and also with the other aspects relating to setting aside the award on the grounds of patent illegality and public policy such as the procedure to be followed, and the restrospective operation of the 2015 amendments for reviewing awards.