INTRODUCTION

Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) stipulates that an arbitral award may be set aside by the Court if “the arbitral award is in conflict with the public policy of India”. However, the term “Public Policy” has not been defined in the Act. In the explanation to the said section, it is stated that an award is in conflict with the public policy of India, only if:

  1. “the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
  2. it is in contravention with the fundamental policy of Indian law; or
  3. it is in conflict with the most basic notions of morality or justice.”1

In a recent judgement of the Hon'ble Supreme Court of India inHaryana Tourism Limited vs. Kandhari Beverages Limited2 , dated 11.01.2022, pronounced by a bench consisting of Hon'ble Justices Mr. M R Shah and B V Nagarathna, it was held that an arbitration award can be set aside only if the award is against the public policy of India. The Hon'ble Supreme Court was hearing an appeal filed by Haryana Tourism Ltd against an order of the Hon'ble Punjab and Haryana High Court which set aside a 2005 award passed by the arbitrator along with the order passed by the Additional District Judge, Chandigarh.

CASE DISCUSSION

Haryana Tourism Limited, the Appellant herein, issued invitation for tenders for the supply of aerated cold drinks at its Tourist Complexes for the period from 15.05.2001 to 14.05.2002. The tender submitted by Kandhari Beverages, the original claimant and Respondent herein was subsequently accepted by the Corporation. 

However, certain disputes arose between parties and the Appellant later terminated the contract. The matter was referred to arbitration by a sole arbitrator. The arbitrator directed Kandhari Beverages to pay Rs 9.5 lakh while the counter claim lodged by it claiming Rs 13.92 lakh was dismissed. Kandhari Beverages thereafter challenged the award passed by the arbitrator, before the Ld. Additional District Judge, Chandigarh under Section 34 of the Act. The Ld. Additional District Judge dismissed the Section 34 petition after which it filed further appeal before the Hon'ble Punjab and Haryana High Court under Section 37 of the Act. The Hon'ble Punjab and Haryana High Court allowed the said appeal by entering into the merits of the claim, quashing and setting aside the award passed by the arbitrator as well as the order passed by Additional District Judge, Chandigarh.

However, when the Appellants filed an appeal before the Hon'ble Supreme Court of India challenging the order of the Hon'ble Punjab and Haryana High Court, the Apex Court quashed the impugned order passed by the High Court and restored the award passed by the Ld. Arbitrator by which the arbitrator directed the Appellant to pay a sum of Rs. 9.5 lakhs and dismissed the counter-claims. The Hon'ble Supreme Court stated that the Hon'ble High Court had entered into the merits of the claims of the parties, which is not permissible in exercise of powers under Section 37 of the Act.

DOCTRINE OF PUBLIC POLICY

PRE AMENDMENT

The ambit of “public policy” has been constantly broadened in years through a plethora of judgments, as the explanation provided in Section 34(2)(b)(ii) of the Act has been interpreted too widely especially the second and third ground. The term public policy was discussed in the landmark case of Renusagar Power Co. Ltd. Vs. General Electric Co. [1994]3 , wherein the Hon'ble Supreme Court held that the award passed by the arbitrator will be against the public policy if the award was in contravention of “Fundamental policy of Indian law, Interest of India and Justice and Morality”. In the case of ONGC Ltd. Vs. Saw Pipes Ltd. (2003),4 the term public policy was again broadened and the court added a new ground of “Patent illegality” in addition to the grounds mentioned in Renusagar case. 

The court stated that “the concept of public policy connotes some matter which concerns public good and public interest which varied from time to time”. This led to opening of gate of litigation as the error in the award in relation to provisions of the statute could then be challenged. The ground “fundamental policy of Indian law” was given another wide interpretation in ONGC Vs. Western Geco [2015],5 wherein the court held this ground encompasses three distinct parts i.e. “Duty (of the tribunal) to adopt a judicial approach, Adhering to the principles of natural justice (by the tribunal) and the decision (of the tribunal) should not be perverse or so irrational that no reasonable person would have arrived at the same”. The court also went ahead and held that the award ensuing in “miscarriage of justice” can be altered or completely set aside. Further in Associate Builders vs. Delhi Development Authority [2015]6 , the court explained the ambit of “most basic norms of justice and morality” and held that the award can be set aside on the ground of justice and morality if the award is of such a nature that it shocks the conscience of the court.

2015 AMENDMENT

In 2015, the Law Commission of India reacted to these judgments and emphasised that Section 34 provided an elaborate list of grounds to challenge arbitral awards but these grounds concerns with the process of “tribunal's arriving at its decision, not the merits of an award”. The Commission criticized the judgments of Saw Pipes, Western Geco and Associate Builders for giving such wide scope of the term public policy. The Law Commission brought an amendment in Section 34 and added an explanation for the grounds mentioned under the public policy i.e. “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.7 ” This means that the award will not be set aside if the tribunal has made a mistake of law or if the court takes another view of the evidence. 

POST AMENDMENT

In Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors. [2017]8 , the court emphasised that “the award of an arbitral tribunal can be set aside only on the grounds specified in section 34 of the Act and no other ground”. This view has been taken in another judgment of Sutlej Construction vs. The Union Territory of Chandigarh [2017]9 . After the amendment of 2015 and these judgments, there is a clarity on the scope of public policy.

AUTHORS' ANALYSIS

The series of the judgments mentioned above goes against the very foundation of the process of arbitration which provides for minimal judicial intervention as envisaged in Section 5 of Arbitration and Conciliation Act. If the parties go for arbitration for resolving their disputes, it clearly shows their intention that they want to avoid litigation. The wide ambit of public policy allows the losing party to challenge the arbitral awards on several grounds thereby rendering the arbitration infructuous. Therefore, any award should be challenged only on those grounds which are mentioned in Section 34 of the Act.

CONCLUSION

T22)10 has followed the 2015 amendment and emphasised that the award under the arbitration act can only be set aside if it is found to be contrary to the fundamental policy of Indian Law, interest of country, justice or morality or if it is patently illegal, thereby once again providing clarity on the subject of ambit of public policy. The Apex Court, therefore, allowed the appeal stating that the Hon'ble Punjab and Haryana High Court did not have the jurisdiction to enter into the merits of the case under Section 37 of the Act.

Footnotes

1. Section 34 of Arbitration and Conciliation Act, 1996.

2. Haryana Tourism Limited vs. Kandhari Beverages Limited, MANU/ SC/0033/2022.

3. Renusagar Power Co. Ltd. Vs. General Electric Co., AIR 1994 SC 86

4. ONGC Ltd. –v- Saw Pipes Ltd. 2003 (5) SCC 705.

5. ONGC Ltd. –v- Western Geco International Ltd. 2014 (9) SCC 263.

6. Associate Builders –v- Delhi Development Authority 2014 (4) ARBLR 307.

7. The Arbitration and Conciliation (Amendment) Act, 2015.

8. Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors., (2018) 1 SCC 656.

9. Sutlej Construction vs. The Union Territory of Chandigarh., (2017) 14 SCALE 240 (SC).

10. Haryana Tourism Limited vs. Kandhari Beverages Limited, MANU/ SC/0033/2022.

Originally published February 2022

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