Devesh Sharma, Author
Introduction
Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the act”) deals with setting aside of an arbitral award passed by an arbitral tribunal (hereinafter referred to as “tribunal”). The powers of a tribunal are parallel to that of a civil court and the orders passed by both of them holds the same significance. But section 34 of the act provides some of ground under which a person can challenge the arbitral award passed by a tribunal. Out of the many grounds that are mentioned under section 34 of the act, there is a ground that is, “the arbitral award is in conflict with the public policy of India”.
In a society where litigation is often seen as slow and burdensome, arbitration offers an alternative way for parties to resolve disputes without going to court. Laws and regulations are designed to limit court involvement in arbitration, ensuring that disputes are settled efficiently. However, courts sometimes intervene through public policy exceptions, which can delay the arbitration process.
The goal of the Law Commission of India is to establish India as a global centre for commercial arbitration. By reducing the number of challenges to arbitral awards, the process can become more efficient, making India a preferred destination for international arbitration. This would also ease the burden on parties involved in disputes, ensuring quicker resolutions.
However, the broad interpretation of public policy has historically led to excessive court interference in arbitration. In the case of Richardson v. Mellish[1], public policy was described as an ‘unruly horse’, meaning it can be unpredictable and lead to inconsistent decisions. Courts in both common law and civil law systems have sometimes misused public policy exceptions, causing unnecessary delays in arbitration.
Recognizing this issue, the 246th Law Commission Report warned that excessive challenges based on public policy could lead to unpredictable court decisions. The Commission criticized rulings in ONGC v. Western Geco International Limited and Associate Builders v. DDA, which expanded the definition of public policy and increased judicial interference in arbitration. This interference has weakened the effectiveness of arbitration.
To prevent such issues, Section 34 of the Arbitration and Conciliation Act should focus primarily on procedural matters, ensuring that courts do not overstep their role in arbitration proceedings.
Judicial Precedents regarding “Public Policy”
- The Renusagar Case
In the case of Renusagar Power Co. Ltd. v. General Electric Co., the Supreme Court of India interpreted the term public policy under the Foreign Awards (Recognition and Enforcement) Act, 1961. The court explained that since foreign awards are governed by private international law, the concept of public policy should be understood in that context. It ruled that a foreign arbitration award can be denied enforcement in India only if it violates:
The fundamental principles of Indian law,
- The interests of the country, or
- Basic standards of justice and morality.
This decision helped clarify when Indian courts can refuse to enforce foreign arbitration awards.[2]
- The ONGC case
The Supreme Court’s decision in ONGC v. Saw Pipes Ltd has faced significant criticism.[3] Notably, the Law Commission of India, in its 176th Report, and Arden LJ, in a detailed lecture,[4] have expressed concerns. The main argument against the ruling is that it revives the pre-1996 approach, where arbitral awards could be challenged for legal errors visible in the award itself. This goes against the purpose of the UNCITRAL Model Law and the 1996 Act, which aimed to move away from that approach.
In contrast, the Supreme Court’s decision in Renusagar took a narrower view of the public policy of India, limiting judicial interference in arbitration awards to only three specific grounds, which were meant to be final and not open to expansion.
In this case, the respondent company had agreed to supply casing pipes to the appellant. To manufacture these pipes, the respondent ordered steel plates from an Italian supplier within a set time frame. However, due to a general strike by steel mill workers across Europe, the respondent requested an extension of the deadline. The appellant agreed but imposed a condition that any delay in supply would lead to deductions as liquidated damages, as mentioned in the contract. Accordingly, the appellant deducted these amounts while making payments.
During arbitration, the appellant failed to prove that it had suffered any actual loss due to the delay. The arbitral tribunal ruled in Favor of the respondent, stating that the deductions were wrongfully made. When the case reached the Bombay High Court, the court refused to set aside the arbitral award. It held that a mere violation of some legal provision does not automatically mean that an award is against the public policy of India under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act.
However, on appeal, the Supreme Court took a broader view of public policy than in Renusagar. It held that public policy includes matters concerning the public good and public interest, which can change over time. The Court ruled that an arbitral award could be set aside if it patently violates the law, in addition to the three grounds already established in Renusagar.[5] However, the Court clarified that the illegality must be serious and affect the core of the matter—minor violations would not make an award contrary to public policy.
The Court further held that an award could also be annulled if it was so unfair and unreasonable that it shocked the conscience of the court. On examining the facts, the Court found that the award violated the contract terms and Section 28(3) of the Arbitration Act. In other words, it was patently illegal, and allowing such an award to stand would promote injustice. The Court concluded that if an award contained an error of law apparent on the face of the record, courts have the power to intervene. Otherwise, limiting court interference for the sake of finality would defeat the purpose of arbitration if patently illegal awards were upheld.
This raises the question: What exactly qualifies as an error of law apparent on the face of the record, warranting the annulment of an arbitral award or refusal to enforce a foreign award?
Error of Law
In administrative law, error of law apparent on the face of the record is a recognized reason for overturning judicial or quasi-judicial decisions through a writ of certiorari.
In the United Kingdom, tribunals cannot make legal errors in their decisions. If a tribunal makes an error of law, its decision can be overturned as ultra vires (beyond its legal power). Courts will set aside any clear legal mistake because all legal errors are considered to affect the tribunal’s authority.[6]
In India, however, not every legal mistake leads to a decision being overturned. The error must be clearly visible in the decision or legal proceedings—it must be a patently illegal mistake.[7] The court will only intervene if the decision is clearly inconsistent with the law, making it easy for the reviewing court to recognize the mistake.[8]
For an error to be apparent on the face of the record, it must be obvious and undeniable. It should not require a complex legal argument or a long debate where different opinions are possible. The mistake must be so clear and glaring that once pointed out, no detailed reasoning is needed to prove that the decision is wrong.
Some clear examples of blatant legal errors that can make an arbitral award invalid include situations where the award contradicts:
- A constitutional provision,
- An Act of Parliament or a State Legislature,
- A ruling by the Supreme Court of India or the relevant High Court.
If an arbitral award goes against any of these, it contains a clear legal mistake and is legally flawed. In arbitration, an award that violates any provision of the Arbitration and Conciliation Act, 1996 also contains a serious legal error. Such awards are considered null and void—meaning they have no legal effect. Courts describe these invalid awards using terms like ‘void’, ‘void ab initio’ (invalid from the beginning), ‘non est’ (does not exist), and ‘coram non judice’ (decided by a court without jurisdiction).
Section 38 of the Code of Civil Procedure, 1908 states that a decree may be executed by the court to which it is sent for execution. Normally, an executing court cannot question the validity or correctness of a decree—it must enforce it as it is.[9] However, there is one exception to this rule:
If the decree is invalid due to a lack of jurisdiction in the court that issued it, its invalidity can be challenged even during execution. If the court that passed the decree had no legal authority to do so, then the decree is considered a nullity and cannot be enforced. This legal defect can be raised during the execution proceedings.[10]
Conclusion
A review of modern English and Indian law shows no reason to criticize the ONGC ruling, as it simply expands the definition of public policy in India beyond what was established in Renusagar. It introduces an additional ground for setting aside an arbitral award—patent illegality, but only if the illegality is fundamental to the case or so unjust that it shocks the conscience of the court.
On the other hand, if the court had not made this change, it would have failed in its responsibility to protect societal interests and prevent harm to the public good.
In summary, while India has taken steps to promote the enforcement of arbitral awards, challenges remain due to unclear interpretations and judicial interference under public policy exceptions. To address this, the judiciary must clearly define public policy without straying from its original intent. This clarity will help ensure consistent legal interpretations and reduce unnecessary court involvement in arbitration matters. Public policy exceptions are important for maintaining fairness in arbitration, but judges and lawyers should work with lawmakers to refine these rules. By implementing these reforms and establishing strong legal frameworks, India can position itself as a leading centre for international dispute resolution.
[1] (1824) 2 Bing 229
[2] These points were based on CHESHIRE & NORTH, PRIVATE INTERNATIONAL LAW 131 (1992) which classified four grounds on which English courts would refuse to enforce a foreign acquired right on the ground that its enforcement would affront some moral principle the maintenance of which admits of no possible compromise: (i) where the fundamental conceptions of English justice are disregarded; (ii) where English conceptions of morality are infringed; (iii) where a transaction prejudices the interests of the United Kingdom or its good relations with foreign powers; (iv) where a foreign law or statute offends English conceptions of human liberty and freedom of action.
[3] D.IR Dhanuka, A Critical Analysis of the Judgment ONGC v SAW Pipes Ltd., 2003 (2) Arb. L.R. 5 (SC) – Plea for Consideration by Larger Bench, 51(3) Arb. L.R. 1 (2003); S. Gupta, Challenge to Arbitral Awards on Public Policy: A Comment on ONGC v. Saw Pipes Ltd., 52(3) Arb. L.R. 1 (2003)
[4] Delivered at the 2nd Conference on Dispute Resolution 2003 on Arbitration and the Courts, published in the journal of the International Centre for Alternative Dispute Resolution (ICADR).
[5] ONGC v. SAW Pipes Ltd., (2003) 5 S.C.C. 705, 727
[6] William wade & Christopher Forsyth, administrative law 286 (2000).
[7] Prem Singh v. Deputy Custodian General, A.IR. 1957 S.C. 804 at 809, Parry & Co Ltd v. P.C. Pal, (1970) 2 L.L.J. 429 (SC), Bijili Cotton Mills Pvt. Ltd. v. Industrial Tribunal, 1972 Lab I.C. 1122 (SC); West Coast Motors v. District Magistrate, (1963) 1 L.L.J. 196.
[8] Syed Yakoob v. Radhakrishnan, A.IR. 1964 S.C. 477, 480
[9] Bank of Behar v. Saranghaidhai Singh, A.I.R. 1949 P.C. 8.
[10] Jnanendra Mohan v. Rabindra Nath, A.IR. 1933 P.C. 61.
