Scope of Public Policy in Setting Aside Awards: Ssangyong v NHAI

As stated in the previous post, the decision of the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. V. NHAI [Civil Appeal No. 4779/2019 dt. 8 May 2019]  is significant for several reasons and one of the important reasons is because it lays down the contours of setting aside arbitral awards on the grounds of public policy and patent illegality post the 2015 amendments. 

In this post, we look at what the Supreme Court held as regards the scope of the ground of public policy in setting aside the arbitral award.

Provisions of Law

Some salient provisions of the amended Arbitration and Conciliation Act, 1996 ("Act" or "1996 Act") are given below:

Section 28(3): "While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction."

Section 34(2)(b)(ii): "An arbitral award may be set aside by the Court only if—... 

(b) the Court finds that—...

(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."

Section 34(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 reappreciation of evidence."

The Contours of Public Policy and Patent Illegality: Ssangyong

The Supreme Court laid down what can be done and what cannot be done in a petition for setting aside an arbitral award on the ground of public policy and patent illegality. These are given below:

General

• The amended provisions would apply for petitions filed on or after 23 October 2015 (see last post)
• "Public policy" under Section 34(2)(b)(ii) and Section 48(2)(b) will have the same meaning. Additionally, purely domestic awards could be set aside on the ground of patent illegality appearing on the face of the record.
• The ground of interest of India as was recognised in Renusagar v GE  has been deleted and no more exists.

Fundamental Policy of Indian Law

• "Fundamental policy of Indian law" would not entail a review on merits of the dispute. 
•  Disregarding orders passed by superior courts of India, violation of foreign exchange laws  and contravention of statute linked to public policy or public interest would amount to contravention of the fundamental policy of Indian law.
• But fundamental policy of Indian law does not entail a review on the merits of the dispute.
• Fundamental policy of Indian law does not mean perversity. Wednesbury principles do not apply to the ground of fundamental policy of Indian law and decisions which fall short of reasonableness cannot be questioned on this ground. 
• While audi alterem partem principle is of great importance, it falls is already covered in Section 34(2)(a)(iii) and therefore does not fall within the scope of fundamental policy of Indian law. 

Justice and Morality

• The ground of justice and morality as provided in Renusagar v GE has been replaced with the most basic notions of morality or justice. These grounds as explained in p. 26 to 29 of Associate Builders would apply.
• An award which shocks the conscience of the court is likely to be set aside under this ground. If the claimant claims, say, Rs. X but the tribunal awards Rs. X + Y (i.e., Y is not at all claimed) without reason or justification, the award is liable to be set aside it is is opposed to the most basic notions of justice.
• Morality would obtain the meaning as is given in Section 23 of the Indian Contract Act, 1872. As such it would include sexual morality, such as an award providing for specific performance of an agreement involving prostitution. 
• Morality would also cover agreements that, though not illegal, are against the prevailing mores of the day. 
• However, if an award has to be set aside under this ground, it has to shock the court's conscience. 

In the next post, we shall see what the Supreme Court stated on the scope of Section 34(2A) and its impact on the interpretation of "public policy" in Section 48(2)(b).

Whether Section 34 Amendments are Retrospective?: Ssangyong v NHAI

The decision of Ssangyong Engineering & Construction Co. Ltd. V. NHAI [Civil Appeal No. 4779/2019 dt. 8 May 2019] is important in the history of Indian arbitration. It not only clarifies the scope of the ground of public policy for setting aside an arbitral award post the 2015 amendment but also decides the vexed question regarding the applicability of these amendments to petitions for setting aside awards that were passed in arbitrations commenced prior to 23 October 2015. In doing so, it impliedly overrules decisions of several High Courts which applied the amended provisions retrospectively to S 34 petitions that were filed much before 23 October. After BCCI v. Kochi Cricket (P) Ltd. [(2018) 6 SCC 287], most High Courts and District Courts began applying the amended Section 34 to petitions that were filed even prior to 23 October 2015. This decision clarifies that the amendments did not apply to Section 34 petitions filed before that date and is in the right direction.   

There are several aspects to the decision that would be the subject of many posts in this blog. This post, however, looks at the limited aspect of retrospective applicability of the amended Section 34. Before embarking on this exercise, it would do well to recap what the Supreme Court stated in BCCI v. Kochi Cricket (P) Ltd. [(2018) 6 SCC 287].

In Para 39 of the Supreme Court's decision in BCCI v Kochi, it held that "where the Section 34 petition is filed after the commencement of the Amendment Act, and an application for stay having been made under Section 36 therein, will be governed by Section 34 as amended and Section 36 as substituted." In order to make the amended Section 36 apply to even pending Section 34 applications, the Supreme Court used the procedure-substance dichotomy and held that the 2015 amendments applied to procedural provisions retrospectively. The consequence of this reasoning was that Section 36 as amended applied even to pending S. 34 petitions.

In para 54 of the decision, the Supreme Court noted the argument of Sr. Counsel Mr. KV Viswanathan that although the amendments to Section 34(2) regarding public policy were styled as clarificatory, they were substantive in nature and that since these amendments did away with at least two precedents, ONGC v. SAW Pipes (2003) and ONGC v. Western Geco (2015) on setting aside arbitral awards on the ground of public policy the amendments could only be prospective. [Readers may kindly note that para 54 of the decision is cited in Ssangyong as para 75, probably referring to the numbering in the SCC report.]. 

But the court in Kochi Cricket held that it was not expressing any final opinion on the issue: "We do not express any opinion on the aforesaid contention since the amendments made to Section 34 are not directly before us. It is enough to state that Section 26 of the Amendment Act makes it clear that the Amendment Act, as a whole, is prospective in nature. Thereafter, whether certain provisions are clarificatory, declaratory or procedural and, therefore, retrospective, is a separate and independent enquiry, which we are not required to undertake in the facts of the present cases, except to the extent indicated above, namely, the effect of the substituted Section 36 of the Amendment Act."

In Ssangyong, the court had to deal with the issue. The court agreed that the amendments were clarificatory in its language. However, the court viewed that the effect of these provisions was that it substantively changed the law and held: "Therefore, even in cases where, for avoidance of doubt, something is clarified by way of an amendment, such clarification cannot be retrospective if the earlier law has been changed substantively." In support of its conclusion, the Supreme Court cited Sedco Forex International v CIT (2005) 12 SCC 717, which was cited by Sr. Counsel Mr. KV Viswanathan in Kochi Cricket.

The court held that since fundamental changes were made in the ground of public policy, it cannot be retrospective and would apply only to Section 34 applications that were filed on or after 23 October 2015 (para 12).

It must be borne in mind that retrospectivity for the purposes of Section 34 is not the date of signing the arbitration agreement or the date of the dispute but the date when the Section 34 petition was filed. If an agreement (with arbitration clause) is signed on 01.01.2012 and a dispute arose on 01.01.2015 and the award is passed on 01.10.2015, the unamended law would apply if the application is filed on  22.10.2015 but the amended law would apply if the application is filed on 23.10.2015.