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:
- 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" 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).