Public Policy and Foreign Arbitral Awards

In India – the true import of the phrase ‘public policy’ was, at first, put to question in relation to the Indian Contract Act, 1872 (“ICA”). Section 23 of the ICA reads as: “The consideration or object of an agreement is lawful, unless… the Court regards it as immoral or opposed to public policy…” In 1959, in Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781 (“Gherulal”), the Hon’ble Supreme Court of India had the occasion to deliberate on the aforesaid section. A plethora of authorities were cited. A couple of these were: Cheshire and Fifoot, which explained that it is ‘not legitimate‘ for Courts to invent new heads of public policy. That, in fact, a judge must be ‘content‘ to merely apply, the ‘principles laid down in previous decisions‘ & Lord Atkin, who had once remarked, that the doctrine of public policy should only be invoked when the harm to the public is ‘substantially incontestable. In view of these opinions, and its likes, the SC noted in Gherulal that “Even if it is permissible for Courts to evolve a new head of public policy under extraordinary circumstances giving rise to incontestable harm to the society that the contracts in question could not be voided on ground of public policy since their unique nature were, in fact, ‘tolerated‘ by the ‘public and State alike‘ for ‘centuries‘. There was a subtle indication thus, at that juncture of history in 1959 that the SC was one with the view that judges should only ‘expound and not expand on the concept of public policy.

As the years rolled by there was, nonetheless, a marked shift in this attitude. In Murlidhar Aggarwal and Anr. v. State of Uttar Pradesh and Ors., (1974) 2 SCC 472 it had already been opined that concept of public policy was not ‘static‘. By the time it was 1986, in Central Indland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr., (1986) 3 SCC 156] (“Brojo”) the SC was only too happy to note that, “There are two schools of thought – ‘the narrow view’ school and ‘the broad view’ school. According to the former, Courts can not create new heads of public policy whereas the latter countenances judicial law-making in this area”. Inspired by Lord Denning [who the SC compared to a young Alexander the Great taming Bucephalus], the Court, this time around, suggested that, on a ‘proper occasion‘ it was indeed possible that the concept of public policy be expanded or modified.

It is in this context, that we must divert our attention to Section 7(1)(b) (ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 (“Awards Act”) that read: “a foreign award may not be enforced under this Act if the Court dealing with the case is satisfied that enforcement of the award will be contrary to public policy. Renusagar Power Co. Ltd. v. General Electric Co., 1994 (Supp) 1 SCC 644 (“Renusagar”), notably, tested the limits of the aforesaid clause. Brojo was, in fact, the first case mentioned in the Court’s analysis. The Hon’ble Judges admitted at the very outset, thus, that the doctrine of public policy is ‘somewhat’ open-textured and flexible. The SC while construing the term, reached the following conclusions a) the Awards Act, since it governs the recognition and enforcement of foreign awards, is governed by the principles of private international law; and b) therefore, enforcement of a foreign award could be refused in India, much like as in the English Courts, on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

With this interpretation in mind, in 2003, the SC addressed a public policy challenge to a domestic arbitral award in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 (“Saw Pipes”). It is to be emphasized that while Renusagar was, amongst other things, concerned with the refusal of enforcement of a foreign arbitral award (on grounds of public policy, to which now Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 applied) – Saw Pipes was, amongst other things, concerned with the setting aside of a domestic arbitral award (on grounds of public policy, to which Section 34(2)(b)(ii) applied). The SC distinguished ‘enforcement‘ and ‘setting aside‘ in the following terms: “It is settled law as well as it is provided under Code of Civil Procedure that once the decree has attained finality, in an execution proceeding, it may be challenged only on limited grounds such as the decree being without jurisdiction or nullity. But in a case where the judgment and decree is challenged before the Appellate Court or the Court exercising revisional jurisdiction, the jurisdiction of such Court would be wider.” The SC, therefore, felt there was no need to merely attach a Renusagaresque meaning to the term public policy of India as regards ‘setting aside‘ of a ‘domestic‘ arbitral award. Eventually, an additional ground was considered as a factor to consider an award against the public policy of India: ‘patent illegality‘, i.e., an award that is patently against the statutory provisions of substantive law. The illegality, however, had to go to the ‘root of the matter‘ and if the illegality was of ‘trivial nature‘ it could not be held that the award was against the public policy.

It is interesting to note the Saw Pipes was decided on 17th April, 2003. Only a year and a month ago, on 13th March, 2002, the SC had pronounced its judgment in Bhatia International v. Bulk Trading S.A. & Anr., (2002) 4 SCC 105 (“Bhatia”). Bhatia had held that Part I of the Act applies to foreign awards. A jurist reading Saw Pipes on 18thApril, 2003 could very well have feared therefore that the enforcement of a foreign arbitral award could now be refused on public policy grounds if it was patently illegal. Those fears took shape in reality in 2008 when in Venture Global Engineering v. Satyam Computer Services Ltd. and Anr., (2008) 4 SCC 190 (“Venture“) it was held that a Court could test a foreign award under Section 34 of the Act – which basically raises the question what happened to the explanation in Saw Pipes concerning how in a execution proceeding (like in a enforcement proceeding) the jurisdiction of the Court is limited? or how reviewing a foreign award on  a potential ground of ‘patent illegality‘ gives the Court hitherto unforeseen interfering powers? or how Saw Pipes never meant to give a wider meaning to the expression ‘public policy of India‘ in so far as Section 48 was concerned.

Despite the absurdities, in Phulchand Exports Ltd. v. OOO Patriot, (2011) 10 SCC 300 it was held in black white by an August bench of two Hon’ble Judges, both of whom are slated to be future Chief Justices of India, that, “there is merit in the submission …that in view of the decision of this Court in Saw Pipes the expression ‘public policy of India’ used in Section 48(2)(b) has to be given wider meaning and the award could be set aside, if it is patently illegal”.

Bharat Aluminium Company & Ors. v. Kaiser Aluminium Technical Service & Ors., (2012) 9 SCC 552 (“BALCO”), needless it is to say has changed the complexion of arbitration laws in India. It has not only overruled Bhatia and Venture  – but more importantly – BALCO now is arguably good authority to state that Part I of the Act (especially the tests concerning Section 34 in the context we discuss) can no longer be held applicable to foreign awards. BALCO was surely firmly etched in minds of the Hon’ble Judges the in Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433 even though it finds no mention. The SC has gone a little further, this time around, and all sense has been restored by explaining that, “enforcement of foreign award would be refused under Section 48(2)(b) only if such enforcement would be contrary to (i) fundamental policy of Indian law; or (2) the interests of India; or (3) justice or morality. The wider meaning given to the expression ‘public policy of India’ occurring in Section 34(2)(b)(ii) in Saw Pipes is not applicable where objection is raised to the enforcement of the foreign award under Section 48(2)(b);… The application of ‘public policy of India’ doctrine for the purposes of Section 48(2)(b) is more limited than the application of the same expression in respect to the domestic arbitral award.” ‘Patent Illegality’, therefore is no longer a factor be considered in considering refusal of enforcement of a foreign arbitral award. This marks yet another ‘pro-arbitration’ judgment of the SC and resolves most of the confusion that persisted in the post Bhatia-Venture era.