The recent judgment in Sri LalMahal Ltd v ProgettoGrano Spa has caused a major shift in the way the courts in India have been and would in the future enforce international arbitral awards. The judgement opposes the earlier judicial stance with regard to refusal of enforcement of international arbitral awards in context of public policy of India.
Enforcement of International arbitral awards in India is regulated by Section 48 of the Arbitration and Conciliation Act, 1996 . One such ground that allows the courts to refuse the enforcement of foreign awards is the ‘public policy of India’. It has been established that ‘public policy’ within the meaning of Section 48(2)(b) is not the policy of a particular government but connotes some matter which concerns the public good and the public interest. It has been further argued that since the ideas of public interest and public good have varied over time, the definition for the same ought to be capable of expansion and modification. However, certain instruments like the preamble to the constitution, the fundamental rights and the directive principles of state policy make the basic framework for determining what would be in consonance with the public policy of India. Also Section 34(2)(b)(ii) of the 1996 Act allows courts to “set aside” an arbitral award if it is against the public policy of India. Furthermore, the court can set aside an arbitral award if it is contrary to contract between the parties or is patently illegal.
So on one end, the Saw Pipes case gave a wider import to ‘public policy of India’ under Section 34(2)(b)(ii) than section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961; on the other, the Renusagar case effected the same import given to Section 7(1)(b)(ii) of FARE Act and Section 48(2)(b) of the Arbitration and Conciliation Act and hence gave ‘public policy of India’ a narrower construction than section 34 of the Act.
Therefore, the questions that one would needs to answer is what was meant by public policy within the meaning of Section 7(1)(b)(ii) of the India Foreign Awards (Recognition And Enforcement) Act 1961 ; secondly, whether the same meaning can be imported to both Sections 34 and 48 of the 1996 Act . In the Renusagar case Section 7(1)(b)(ii) was held to be of a narrow import to the extent that mere contravention of law would not attract the provision. In other words, for an arbitral awards to berejected for enforcement within the said provision and for the bar of public policy to be attracted something more than the contravention of law would be required. The Renusagar case further relied on the doctrine of public policy as per private international law and held that anything that is contrary to the fundamental policy of Indian law, the interests of India and justice or morality would be deemed to be against the ‘public policy of India’.
In the Saw Pipes case the construction of Section 34(2)(b)(ii) was under scrutiny. Here the court held that ‘public policy of India’ needs to be understood in context of the jurisdiction at a time when the arbitral award has reached its completion and is ready to be executed juxtaposed to section 48 where the awards has reached is finality and the enforcement of the same is challenged. That is, Section 34 deals with setting aside an arbitral award and such an award may not have necessarily reached finality as opposed to section 48. Keeping this in mind, the court gave section 34(2)(b)(ii) a wider meaning and added a new category of ‘patent illegality’ to the interpretation. Therefore, illegality may in itself be a cause for deeming an award to be against the public policy of India but the illegality must go to the root of the matter and should not be of a trivial nature. Apart from this is an award is so unfair and unreasonable that it shocks the conscience of the court.
It must be noted that once an award becomes final and the question is that of enforceability then the jurisdiction at that stage would be limited. Hence it is pertinent to note that the Saw pipes case did indirectly make a distinction between the ambit of ‘public policy of India’ under Section 48 and section 34. Therefore, in a case where the validity of award is challenged, there is no necessity of giving a narrower meaning to the term “public policy of India”. On the contrary, wider meaning is required to be given so that the “patently illegal award” passed by the Arbitral Tribunal could be set aside. In other words, if such a wide meaning is not given to Section 34 then one would not be able to read ‘patent illegality’ into ‘public policy of India’ by reading section 28(3) into the said provision hence deeming the provision nugatory. Section 28(3) of the 1996 Act requires that the arbitral tribunal shall give an award in accordance with the terms of the contract. If this is not complied with, the awards would be in contravention of Section 28(3) and hence would be contrary the law in force in India which would then deem it to be patently illegal.
Therefore, the Saw Pipes case widened the meaning of public policy much beyond the private international law interpretation that was ascribed to in Renusagar Case. It has been argued that standards for something being “unfair and unreasonable” are rather liquid and introduce a lot of uncertainty to laws. Certainty is of greater significance and sensitivity when the matters are related to international arbitration as in most cases these are associated with companies investing in India and investor confidence.
Lastly, the court in the Phulchand Case held that the meaning given to the expression “public policy of India” in Section 34 in the Saw Pipes Case must be applied to the same expression occurring in Section 48(2)(b) of the 1996 Act.
The supreme court in this case held that Section 48(2)(b) is not of a wider import than Section 7(1)(b)(ii) of the FARE Act thereby limiting the interpretation of‘public policy of India’ to that determined in the Renusagar Case.
Therefore the judgment has deleted considerations of patent illegality, which were introduced via the Phulchand Case, from the interpretation and has limited it to the three pronged test of fundamental policy of Indian law, the interests of India and justice or morality.
This is in consonance with the fact that the interpretation attached to Section 34(2)(b)(ii) of the Act in the Saw Pipes case is distinguishable from section 48(2)(b) for reasons being- that Section 34 and Section 48 deal with arbitral awards at different degrees of finality and hence the jurisdiction of the court is different for both. Consequently, the ambit of ‘publicpolicy of India’ would need to be narrower for Section 48 where the arbitral award has reached it finality and is up and ready for enforcement. The court, thereby, effectively overruled the division bench ruling in Phulchand Exports Case.
It is important for India to be a pro arbitration nation because of its infamously backlogged judiciary. A country with an efficient domestic arbitration and easyenforcement of international commercial arbitral awards is an important propellant on international investments.
On a larger perspective the interpretation of public policy is beyond a mere academic question. The public policy defence was introduced in the UNCITRAL model as a legitimate means of state control and represents the long running debate over investment promotion and state control. Such a state control is also a method of protecting Indian parties which would have lower bargaining power as against parties from developed nations. In lieu of the same, the 1996 act was passed with minimization of supervisory roles of the courts as one of the main objectives, a legislative intent that cannot be overlooked. Also, Section 5 of the 1996 Act requires minimal court interference in arbitral proceedings. However, the section also provides for judicial interference where it has been expressly provided for in the Act. Therefore, judicial interference in order to protect the public policy of India has been expressly recognised and is in consonance with finding the balance between promoting investments at the same time maintaining a reasonable regulatory structure.
The Sri LalMahal case has taken leaps in the direction of finding the said balance by clearly distinguishing and establishing the ambit of ‘public policy of India’ under section 34 and section 48 of the 1996 Act. This would ensure that the law becomes free of ambiguity and is predictable, which is an essential element for securing future investments. At an academic level too, the case has negated a common critical angle of attack on the SAW Pipes judgment that it “erroneously expanded the meaning of ‘public policy of India’ which was given a narrow interpretation in Renusagar judgment” by establishing that the Renusagar judgment would not have a precedential effect on Section 34 of the act as it dealt with enforcement of a foreign award and not setting aside of a domestic award. The judgement also happens to be consonance with the Bharat Aluminium Cov. Kaiser Aluminium Technical Services judgement that has decisively established that Part I of the Act would apply only to domestic arbitrations.
Furthermore, a wide interpretation of Section 34(2)(b)(ii) and a narrow construction of Section 48(2)(b) will ensure that ad hoc arbitrations in India, which are often riddled with errors , are dealt with strictly and at the same time international arbitral awards that have reached their finality are allowed a freer application.
There is, however, no recourse in law against spurious litigation on grounds on abridgment public policy of India in order to delay enforcement of arbitral awards for several years. A Special Arbitration Bench, specifically designed to hear and adjudicate arbitration-related petitions, is likely to reduce such delays if not spurious litigation and also induce a certain constancy to the construction of public policy which otherwise is a rather dynamic concept and is likely to change with time and the economic, political and legal scenario of India. A clear jurisprudence is pertinent in this case.
The clear distinction established in the interpretation of ‘public policy of India’ in Section 34 and Section 48 of the 1996 Act by the overruling of the Phulchand Case in the Sri LalMahal case will go a long way in establishing a clearer and less ambiguous arbitration law in India. This would further the agenda of the 1996 Act to reduce court interference and present India as a proarbitration nation. Furthermore, this has ensured that Section 48 be closer to the UNCITRAL model and in turn the international arbitral scenario. The Sri LalMahal Case is a decisive leap towards fortifying investor confidence in India.
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