Laws on Public Policy of India and its Impacts on Arbitration Awards in Construction Industry
The authors have made a case study for law on Public Policy of India and its impacts on arbitration awards. This study shall help the International Companies to be conversant with the Public Policy of India while working as a construction agency in joint venture or otherwise in India.
Therefore, it is desirable that the sole Arbitrator/Arbitral Tribunal are conversant with the terms "Public Policy of India" and the prevailing law on this, so that the sole Arbitrator/Arbitral Tribunal take care of the same, while making the award.
The best efforts have been taken by the authors to explain and highlight certain case laws on "Public Policy of India" for information and guidance of the sole Arbitrator/Arbitral Tribunal for taking into consideration while making the award. It may be kept in view that "Public Policy of India" has wider meaning and needs careful thought in making the award. It is added that there was no reference of "Public Policy of India" in the Arbitration Act,1940 except the "Misconduct" by the Arbitrator or the Arbitration proceedings. For 'Misconduct' the readers can refer to "The International Consultant" – Oct-Dec. 2006—Jan–March 2007.
Definition of Public Policy
'Public Policy' is equivalent to the "Policy of Law." Therefore any acts that have a mischievous tendency so as to be injurious to the interest of the state or the public is stated to be against "Public Policy" or against the 'Policy of Law."
In the case of Renusagar Power Co. Ltd v/s General Electric Co. 'the Supreme Court of India 1994 (2) Arb.L.R. 405 (S.C) has held that the Expression 'Public Policy' has a wider meaning in the context of a domestic award as distinguished from a foreign award."
Doctrine of Public Policy
Though misconduct of "Arbitral Tribunal" or of the "proceedings before an arbitral tribunal" and "error of law on the face of an arbitral tribunal award" by themselves are not made as grounds for recourse against an arbitral award under section 34 of the 1996 Act. Interpreting the doctrine of "Public Policy of India" in its broader view, courts of law may intervene permitting recourse against an arbitral award based on irregularity of a kind which the court considers has caused or will cause substantial injustice to the applicant. Extreme cases where arbitral tribunal has gone so wrong in its conduct of arbitration that justice calls out for it to be corrected may justifiably fall within the ambit of the doctrine of 'Public Policy of India" to enable courts of law in India to intervene under section 34 of the 1996 Act permitting recourse against arbitral award.
Concept of Public Policy
The concept of 'Public Policy' has very wide and general connotations. Anything that hurts collective consensus is against the 'Public Policy.' Hence the Acts in violation of law shall be considered against the 'Public Policy.'
New Concept of Public Policy
Public Policy of India
- Fundamental Policy of Indian law or
- The Interest of India or
- Justice or morality or
- Patently illegal.
Natural Gas Corporation Ltd. v/s Saw Pipes Ltd. 2003 (2) Arb. L.R.5 (SC)
Award in Conflict with "Public Policy of India"
International Public Policy
Foreign Award and Public Policy
- An agreement for return of money advanced for litigation together with stipulated share in the amount decreed, with an influential person with a view to use his influence to secure a decision in favour of the litigation, is opposed to public interest and detrimental to the health of the body politic and can not be enforced."
- Rattan Chand Hari Chand v/s Askar Nawag Jung (Dead)
- 1991 (1) Arb.L.R. 299 (S.C) – Decided on 12.2.1991
Against Public Interest
- The law is well settled that the writ court which is the discretionary remedy available to a party should refrain from quashing an order which would not be in public interest and the authentices must deal fairly and without discrimination and without unfair procedure with proper care."
Sudhir Prasad Singh v/s state of Bihar – 1995 (Suppl.) Arb.LR.177 (Patna)- Decided on 19.3.1993.
- "When it is a question of public interest against private interest, private interest must yicld to Public Interest."
Navyuga Engineering Corporation Ltd. Represented by its Executed director v/s Vishakhapatnam Port Trust represented by its chairman. -1998 (1) Arb.L.R 314 (AP) – Decided on 17.3.1997.
- Where the rules for award of Govt. contracts are ignored and the work is awarded to a person who is not qualified under the rules, the court can step in for nullifying such illegal award of contract to protect public interest."
- Om Metals & Minerals Ltd v/s North Eastern Electric Power Corporation Limited
- 1998 (2) Arb.L.R.-220 (Gawhati) – Decided on 5.5.1998.
- "While granting a licence to manufacture a drug under a trade mark, the drug Controller must see that more than one manufacturer was not authorised to produce and market the same product as it would be against Public Interest."
- Antox India (P) Ltd v/s State Drug Controller Tamil Nadu -1995 (Suppl.) Arb.L.R.641 (Madras) – Decided on 6.4.1990.
- "The importance of urgent research and development of the vital drugs cannot be permitted to be fore stalled at the instance of private parties."
- Jagdish Gandhi v/s Satish B.Vaidya.
- 2000 (l) Arb. L.R 217 (Bombay) – Decided on 22.6.1999.
- "Every activity of Govt. has a public element in it and must, therefore be informed with reason and guided by public interest" Girdharilal Constructions Pvt Ltd. v/s Union of India–2000 (3) Arb.L.R.278 (A.P) DB – Decided on 25.7.2000.
- "It is no doubt true that the policy of the Govt. , if goes against public interest, could be questioned in a court of Law"
- Armour pharmaceuticals Ltd. v/s Govt. of A.P.
- 1999 (2) Arb.L.R.240(A.P) DBDecided on 12.3.1999
- "It is well settled that action of the state must not only be transparent, based on fair play, reasonable but also in public interest when it enters into contract,"
Bhaichara Goods Transport Truck Union v/s State of Haryana.
- 2002 (i) Arb.L.R.73 (P&H) DB – Decided on 29.5.2001.
- "Securing Public Interest and Natural Justice nothing should be done which gives an appearance of bais, jobbery or nepotism rather than ordinary rule to be followed. There must not be any suggestive discrimination and reasons for the departure, if it is, must be rational."
Dr. C.Jayasree v/s Commissioner Municipal Corporation of Hyderabad.-1995 (Suppl.) Arb.L.R 50 (A.P)-Decided on 29.3.1994.
- "The court should exercise its discretionary power under Article 226 of the constitution of India, 1950 with great caution and should exercise it only in furtherance of public interest and not merely on the making out of a legal point." Swapna Constructions Hyderabad v/s Superintending Engineer, Sri Sailam Left Bank Canal, Nalgonda" – 2000 (Suppl.) Arb.L.R.361 (A.P)–Decided on 15.12.2000.
Arbitration Law on "Public Policy"
Explanation to section 34 of the 1996 Act, without prejudice to the generality of sub-clause (ii), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India if the making of the Award was induced or affected by fraud or corruption or was violation of Section 75 or Section 81 of 1996 Act.
The Supreme Court of India in the case of S.P. Chengalvaraya "Naidu v/s Jagannath–AIR 1994 SC 853 had held that "A litigant, who approaches the court, is bound to produce all documents executed by him, which are relevant to the litigation. If he withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party."
If an arbitrator accepted hospitality from one of the parties and the invitation was extended with the intention to induce the arbitrator to act unfairly or had the affect of inducing the arbitrator to act unfairly, it may be said that the award was induced or affeded by corruption. But mere dining or lunching with one of the parties or his witness or witnesses in the absence of the other may not make him guilty. To induce the court to interfere on such ground, there must be something more than mere suspicion.
In the matter of Chouthmal Jivrajjec poddar v/s Ram Chandra Jivrajjec Poddar–AIR 1955 Nagpur 126, it has been held that, "Putting up with one of the parties may not by itself be sufficient to vitiate the award, but if it enables the arbitrators to have a private conference with one of the parties on an important topic, it would entitle the court not to accept the award."
Section 48(2) of the Arbitration and Conciliation Act, 1996 pertaining to enforcement of New York Convention Awards is in identical terms. The said section provides that enforcement of foreign awards covered by the said provision may be refused if the court finds that the enforcement of such, Award would be contrary to the "Public Policy of India."
Explanation Without prejudice to the generality of clause (b), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India, if the making of award was induced or affected by fraud or Corruption.
Section 57 (1) (e) of the Arbitration and Conciliation Act, 1996 Prescribing Conditions for enforcement of "Geneva Convention Awards" Provides that the foreign awards covered under the said provision, shall not be enforced if the enforcement of the Award was in conflict with "Public Policy" or the Law of India."
Explanation: Without prejudice to the generality of clause (e), it is here by declared, for the avoidance of any doubt, that an award is in conflict with the Public Policy of India if the making of award was induced or affected by fraud or Corruption.
Section 75 in part (III) of the Arbitration and Conciliation Act, 1996 pertaining to Conciliation provides that the Conciliator and the parties shall keep all matters relating to the conciliation proceedings Confidential. It further provides that confidentiality shall extend also to the settlement agreement except where its disclosure is necessary for the purpose of implementation and enforcement thereof. Thus if an arbitral award is induced in violation of the provision contained in section 75, it shall be against the statutory provisions contained in Section 75 and as such, in conflict with the "Public Policy of India."
- Views expressed or suggestions made by the other party in respect of possible settlement of the dispute.
- Admissions made by the other party in the course of the Conciliation proceedings.
- Proposals made by the Conciliator.
- The fact that the other party had indicated his willingness to accept a proposal for settlement made by the Conciliator.
The statutory Proceedings given under Section 81 cannot be permitted to be misused and if an award is made in violation of the statutory provisions as contained in section 81, it would be in conflict with "Public Policy of India" and as such, the court shall be entitled to set it aside.
Section 57 (1) (e) of 1996 Act is in the same terms as section 7(1) of the Arbitration (Protocol and Convention) Act 1937, which existed prior to the reappeal of this Act by Act of 1996. Similarly, Section 48 (2) b of the 1996 Act is identical with Section 7 (1) b (ii) of Foreign Awards (Recognition & Enforcement) Act, 1961. Further Section 48 (2) (b) of 1996 Act do not provide that the foreign award can be challenged on the ground that the award was Contrary to the Law of India as provided by Section 57 of 1996 Act. In context of enforcement of Geneva Convention Awards.
- "Award not based on true construction of the terms and conditions of the contract between the parties and correct appreciation of the material in as much as he has ignored the certain important clauses of the agreement while arriving at the said findings is clearly in conflict with the "Public Policy of India." Shri Hans Enterprises v/s Air Port Authority of India.-2003 (2) Arb.L.R. 336(Delhi)- Decided on 6.5.2003.
- "Where an Arbitrator or an Arbitral Tribunal ignores a well recognized principle of interpretation, such an award would be against public policy." Oil and Natural Gas Corporation Ltd. v/s Schlumberger Asia Services Ltd.-2006 (3) Arb.L.R 610(Delhi)–Decided on 13.9.2006.
- "Arbitral Tribunal Discarding SEBI Regulations–Tribunal Considering a case which was not even pleaded by respondent –Award contrary to public Policy of India-Award liable to be set aside." Bharat M.Nagori v/s Stish Ashok Sabnis & Ann.-2003 (3) Arb L.R.427 (Bombay)–Decided on 28.3.2003.
- "If the award is found to be contrary to fundamental Policy of Indian law or Indian Interest or Justice or morality, the same could be held to be contrary to "Public Policy" of India" 2002 (Suppl.) Arb,L.R. 618 (Delhi).
- "Rule empowering the state Govt. to terminate service of its permanent employees by giving notice or pay in lieu of notice period is opposed to Public Policy and Violation of article 14 and directive principles contained in article 39 (a) and 41 of the constitution of India." Central Inland Water Transport Corporation Ltd. v/s Brajo Nath– AIR (1986) SC 1571.
- "Mere error of law is not necessary a breach of 'Public Policy' within the meaning of section 34 (2) b (ii)". Vijaya Bank v/s Maker Development Services Pvt Ltd. -2001 (3) Bombay CR 652 (DB).
- "Public Policy of India in no way stands in way of awarding interest against a Municipal Authority or against objection petitioner." 2006 (3) Arb.L.R 276 (Delhi) – Decided on 19.7.2006.
- "Award made and signed on 24.1.2003 by the Arbitrators and there after engrossed on Non- Judicial stamp papers furnished by Railways on 28.1.2003 can not be said that the award was passed on 28.1.2003 and was ante-dated as 24.1.2003. No Violation of "Public Policy." Chief Signal & Telecommunication Engineer (Project) South Central Railway v/s Hytronics Enterprises, Hyderabad & ors -2006 (2) Arb. L.R. 343 (A.P) (D.B) –Decided on 25.11.2005.
- "An agreement between the parties that the dispute shall be tried in one of the courts named, is neither contrary to public policy nor it contravene section 28 of the Contract Act. -1987 (1) Arb.L.R. 87 (Orissa).
- "An agreement that one of the courts having jurisdiction to try a suit alone shall try dispute is not contrary to public policy and does not contravene section 28 of the Indian Contract Act. - 1985 Arb.L.R.227 (Delhi).
- "Reference of disputes to foreign arbitration in accordance with arbitration clause adopted by the parties is not opposed to public policy" -1999 (3) Arb L.R.305 (SC)
- "There can not be any dispute about the proposition of Law that when more than one court is having jurisdiction in one such court, it would be valid and not against public policy" -1998 (i) Arb.L.R457 (Delhi)
- " Where the parties to a contract agree to submit the disputes arising from it to a particular jurisdiction which would otherwise also be an appropriate jurisdiction under the law that agreement to the extent that they agree not to submit to other jurisdiction can not be said to be void as being against Public Policy" -1997 (2) Arb.L.R.50 (Delhi).
- "Public Policy is a concept relating to public good and public interest- Something which is so unconscionable so as to be contrary to fundamental notions of justice or morality can be regarded as breach of Public Policy–court not to interfere merely because view taken by Arbitrator either on law or on fact does not accord with the judge before whom challenge made under section 34 of the 1996 Act."
Municipal Corporation of Greater Mumbai & ors v/s Jyoti Construction Company-2003 (3) Arb.L.R.489 (Bombay)-Decided on 25.10.2002
- "Before a contract can be said to be void on grounds of public policy it must be shown that the object and consideration of that contract was one which was illegal." -2002 (Suppl.) Arb. L.R.696 (SC).
- "In case where the validity of award is challenged there is no necessity of giving narrower meaning to the term "Public Policy of India." Wider meaning is required to be given so that the patently illegal award passed by arbitral tribunal could be set aside" -2003 (2) Arb.L.R.5 (SC).
- "Principles Governing what would be "Public Policy" will have to be construed on each occasion, on facts of each case and with the law as applicable at the relevant time" -2002 (Suppl.) Arb.L.R.487 (Delhi).
- "Public Policy is not to defeat the debt of the creditor, it is to ensure that the money of the creditor is secured and is recoverable in accordance with law" -1998 (Suppl.) Arb.L.R. 173 (A.P)
Under the Geneva Convention, 1927, in order to obtain recognition or enforcement of a foreign arbitral award, the requirements of clause (a) to (e) of Article 1 had to be full filled and in article 2, it was prescribed that even if the conditions laid down in that article were fulfilled recognition & enforcement of the award would be refused if the court was satisfied in respect of matters mentioned in clause (a), (b) and (c) as given hereunder:-
- The award has been annulled in the Country in which it was made.
- That the party being under a legal incapacity, he was not properly represented.
- That the award contains decisions on matters beyond the scope of the submission to arbitration.
The New York Convention has sought to remedy the said defects by providing for a much more simple and effective method of obtaining recognition and enforcement of foreign awards.
ii) New York Convention, 1958
The York Convention (1958), Art III provides that each contracting State Shall recognize awards as binding and enforce them in accordance with the rules & procedure of the territory, where award is relied upon. Accordingly the procedural laws of the Country in which the award is relied upon would govern the procedural aspect of the filing of foreign award.
Further New York Convention (1985) Article. v(2) provides that the enforcement of an arbitral award may also be refused, if the laws of the Country where the recognition and enforcement is sought finds that.
- The Subject matter of the difference is not Capable of Settlement by arbitration under the law of that Country or
- The recognition or enforcement of the award would be contrary to the public policy of that country.
The UNCITRAL model Law (1985), Article 36 (b) provides the grounds for refusing recognition or enforcement of an arbitral award, irrespective of the country in which it was made, it may be refused if the court finds that:-
- The subject matter of the dispute is not capable of Settlement by arbitration under the law of this state, or
- The recognition or enforcement of the award would be contrary to the public policy of this state.
It is, in general, suggested that a liberal view is necessary for the enforcement of International/ Foreign arbitral awards to enhance the development of International Commercial Arbitration. Suggestive measures made and its implications are discussed here under:-
Herold Goldman "Public Policy International Commercial Arbitration" (1985). 26 American Prosioners law journal 511.
It is further suggested that the states should bring their Domestic Laws in line with the emerging trend of " Transnational Public Policy" and allow only such grounds under their "Public Policy" which do not restrain the further development and growth of International Trade and Commercial Arbitration as well.
The suggestion of having "Domestic laws" and Public Policy in Conformity with "Transnational Public Policy" is considered appropriate for the developed Country, but not for developing country like India, where the public policy changes with the basic needs & economical conditions of the Public.
Moreover, the altitude of the apex court of India has been supportive towards arbitration awards domestic/foreign as evident from the following judgments:-
"The award of the arbitrator is alleged to be final & conclusive. Wrong or right decision is said to be binding on the parties and the court are not competent to reexamine and re-appraise the evidence considered by the arbitrator and sit in appeal over the conclusion of a arbitrator. The arbitrator is alleged to have acted judicially and observed all required for the arbitration." M/s Hindustan Tea Co V/s Shashi Kani & Co & Anr _ AIR 1987 – S.C. 81.
"A court should approach an award with a desire to support it, if that is reasonably possible rather than to destroy it by calling it illegal."
Smt. Shanta Sia Devi & Anr V/s Dhirendra Nath Sen & ors – AIR 1963S.C. 1677.
M/s Puri Construction (Pvt.) Ltd. V/s Union of India – 1989 (I) Arb.L.R. 159 (SC) & AIR 1989 S.C. 1263
Thus there is no need to enhance the power of the arbitrator as adequate Power are vested to him under arbitration and conciliation Act, 1996.
- The Arbitration and Conciliation Act, 1996 or the Contract Act, 1872 do not define the expression Public Policy or opposed to Public Policy.
- Public Policy is not the policy of a particular Government. It connotes some matter which concerns the public good or public interest.
- Doctrine of 'Public Policy' is some what open textured and flexible and this flexibility has been the cause of judicial censure of the doctrine.
- The concept of 'Public Policy' denote what is good for the public or in public interest or what would be injurious or harmful from time to time. New concept of Public Policy takes the place of the old. Transactions which were once considered against 'Public Policy' are now being upheld by the courts.
- Public Policy of India does not cover public policy of the country, mere contravention of law would not attract bar of public policy, but the award must be contrary to
1. Fundamental policy of Indian Law or
2. The interest of India or
3. Justice or Morality or
4. Patently illegal.
- An award is in conflict with 'Public Policy of India' if the making there of was induced or affected by fraud or corruption.
- Enforcement of foreign award, if resulting in variation of provision of Foreign Exchange Regulation Act, 1973 would be contrary to Public Policy.
- Principles governing what would be 'Public Policy' will have to be construed on each occasion on facts of each case and with the law as applicable at the relevant time.
- Public Policy does not defeat the debt of the creditor; it is to ensure that the money of the creditor is secured and is recoverable in accordance with law.
- New York convention 1958 & UNCITRAL-Model Law 1985 lay down that the International Arbitration Award be in conformity with the Public Policy of India and of the country, where the award is made.
- Suggestion for adoption of Transnational Public Policy is considered good for developed country, rather than developing country.