public policy in international commercial arbitration

PUBLIC POLICY IN INTERNATIONAL COMMERCIAL ARBITRATION

INTRODUCTION:

The basic purpose of arbitration is to bring about cost-effective and expeditious resolution of disputes and further preventing multiplicity of litigation by giving finality to an arbitral award. The article ambidextrously and comprehensively analyzes India’s Commitment and challenge to the International Arbitration in the era of globalization when the investment by the foreign entities is at the peak.

Public Policy of India has most important role in the whole process of enforcement of an arbitral awards particularly the foreign awards because it involves parties, lawyers and arbitrators form diverse legal &cultural traditions. Most often the arbitral tribunal consists of arbitrators from multiple jurisdictions & legal traditions different from those of parties and of their council. It is thus desirable that the International Companies/firms working in India as Joint venture or otherwise should be fully aware for the law on public policy of India and its impact on arbitration awards. 

Arbitration continues to grow at a rapid pace, antitrust cases in particular are increasingly being arbitrated; and the law is still evolving in relation to the tension between the domestic legitimate claims of a nation and the arbitral finality given to an International arbitral award. Further when the arbitration proceedings are in themselves requiring a judicial process by producing the evidence and giving the parties opportunity of hearing, why should the court at this level interfere with the decision frustrating the very purpose of arbitration? If disputes are going to end up in courts anyway, there is scant incentive for parties to bother to arbitrate in the first instance. What should be the realm of judicial interference in such arbitral awards and where should it meet the barricades. A supportive yet non-interventionist approach without undue interference should be adopted by the courts to facilitate an efficient arbitral process within the permissible or jurisdictional limits.

Definition of Public Policy:

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 Govt. It connotes some matter which concerns the public good or the public interest. 

‘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. General Electric Co. the Apex Court has held that the Expression ‘Public Policy’ has a wider meaning in the context of a domestic award as distinguished from a foreign award.”

The concept of the ‘Public Policy’ denotes that what is good for the public or in public Interest or what would be injurious or harmful from time to time. It 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’.

Public policy can be generally defined as an attempt by the government to address a public issue. According to Lord Truro, “Public policy is that principle of law which holds that no subject can lawfully do, which has a tendency to be injurious to the public or against the public good, which may be termed, as it sometimes has been, the policy of the law or public policy in relation to the administration of the law.” Public policy connotes some matter which concerns public good and public interest. The concept of public policy varies from time to time and is open to interpretation

Doctrine of Public Policy:

Doctrine of ‘Public Policy’ is somewhat open textured and flexible, and this flexibility has been the cause of judicial censure of the doctrine. There is a general agreement that the courts may extend existing ‘Public Policy’ to new situations and the difference between extending on existing principle as opposed to creating a new one will often be wafer thin. ‘Public Policy’ is not immutable. Rules which rest on the foundation of ‘Public Policy,’ not being rules which belong to the fixed Customary Law, are capable on proper occasion, of expansion or modification depending upon circumstances. In the broader view, the doctrine of “Public Policy” is equivalent to the “Policy of Law,” whatever leads to obstruction of justice or violation of a statute or is against the good morals when made the object of contract would be against ‘Public Policy of India” and being void, would not be susceptible to enforcement. 

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.

Public Policy of India:

The expression ‘Public Policy’ used in section 48 sub-section 2 refers to the “Public Policy of India” and does not cover policy of the country, whose law governs the contract or of country or of place of arbitration. More 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. (After the case of ONGC v. Saw Pipes Ltd.)

International Public Policy:

In view of the absence of a workable definition of “International Public Policy” the Supreme Court of India in the case of “Renusagar Power Co Ltd. v. General Electric Co. –while construing section 7 (1) (b) (ii) of the foreign Award Act held that it was difficult to construe the expression ‘Public Policy’ in Article (v) (2) (b) of the New York convention to mean international Public Policy and the said expression must be construed to mean the doctrine of ‘Public Policy’ as applied by the courts in which the foreign award is sought to be enforced and consequently the expression ‘Public Policy’ in section 7 (1) (b) (ii) of the foreign Award Act means the doctrine of Public Policy as applied by the courts in India. This controversy has been set at rest by the legislature now using the expression ‘Public Policy of India” in section 48 (2) of Arbitration and Conciliation Act, 1996.

Foreign Award and Public Policy:

Enforcement of foreign award, if resulting in violation of Provisions of foreign Exchange Regulation Act, 1973, would be contrary to “Public Policy” as envisaged in section 48 (2) of Arbitration and Conciliation Act, 1996.

Arbitration Law on “Public Policy”:

The Arbitration and Conciliation Act, 1996 restrain an Arbitral Tribunal or sole Arbitrator to make any award which is against the Public Policy of India. Various provisions laid down under 1996 Act are briefed here under:- 
Section 34. (2) (b) (ii)
Section 34. (2) (b) (ii) of the said -Act lays down that an Arbitral Award may be set aside if the court finds that the arbitral award is in conflict with the Public Policy of India.” 

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. 
 

ARBITRATION:

Arbitration, in law, is a form of Alternative Dispute Resolution - specifically, a legal alternative to litigation, whereby the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a NEUTRAL third party called the Arbitrator (s) or Arbiter (s) for resolution.

Major kinds of Arbitration

(1)   Ad-hoc Arbitration:

 When a dispute or difference arises between the parties in course of commercial transaction and the same could not be settled friendly by negotiation in form of conciliation or mediation, in such case ad-hoc arbitration may be sought by the conflicting parties. This arbitration is agreed to get justice for the balance of the un-settled part of the dispute only.

The parties may chose to refer the disputes to arbitration under the 1996 Act, independent of any institutional rules. Arbitrations arranged by parties themselves, without recourse to an arbitral institution, are referred to as 'ad hoc arbitrations'2. In India, ad hoc arbitrations usually use retired judges of High Courts and The Supreme Court of India to act as arbitrators. This is because there is a severe dearth of specialized arbitrators in the country.

In our experience, the efficiency of these arbitrations is very low. The retired judges who act as arbitrators are often in their seventies and find it difficult to work at high levels of efficiency. The judges are comfortable adjourning arbitrations like they would in the courts. As such, arbitrations can take up to 3-5 years.

Furthermore, there is usually little continuity between the hearings, as arbitrators are often heavily booked, making it extremely difficult to get continuous dates for hearings. Owing to their long years of training and service, the judges also tend be influenced by procedural statutes like the Code of Civil Procedure and the Evidence Act, which have no strict applicability to arbitration proceedings.

(2)   Institutional Arbitration:

This kind of arbitration there is prior agreement between the parties that in case of future differences or disputes arising between the parties during their commercial transactions, such differences or disputes will be settled by arbitration as per clause provide in the agreement.

Institutional arbitration has been defined as an arbitration conducted by an arbitral institution in accordance with prescribed rules of the institution3. The Indian Council of Arbitration is the sole noteworthy Indian body providing facilities for institutional commercial dispute resolution. The Rules of Arbitration of the Indian Council of Arbitration are very comprehensive, setting out matters in great detail, often at the risk of appearing ambiguous.

The Council has wide supervisory powers and all communication between the parties and the arbitrators have to be routed through the Council's Registrar. The Council is empowered to reject requests for arbitration without giving any reason, and can also determine any challenge to an arbitrator's eligibility.

A notable feature of conducting arbitration under the Council is the extremely low administrative costs and arbitrators' fees payable. However, the benefits flowing from such low costs and fees are limited in that the established and reputed arbitrators shirk from participating in Arbitrations under the Council, because of the low levels of remuneration that they are entitled to.

Furthermore, arbitrations under the Council often suffer from a lack of efficiency, whilst deadlines are extended with alarming frequency.

(3)   Statutory Arbitration:

It is mandatory arbitration which is imposed on the parties by operation of law. In such a case the parties have no option as such but to abide by the law of land. It is apparent that statutory arbitration differs from the above 2 types of arbitration because

(i) The consent of parties is not necessary;

(ii) It is compulsory Arbitration;

(iii) It is binding on the Parties as the law of land;

For Example:

Section 31 of the North Eastern Hill University Act, 1973, Section 24,31 and 32 of the Defence of India Act, 1971 and Section 43(c) of The Indian Trusts Act, 1882 are the statutory provision, which deal with statutory arbitration.

(4)   Domestic or International Arbitration:

Arbitration which occurs in India and have all the parties within India is termed as Domestic Arbitration. An Arbitration in which any party belongs to other than India and the dispute is to be settled in India is termed as International Arbitration.

(5)   Foreign Arbitration:

When arbitration proceedings are conducted in a place outside India and the Award is required to be enforced in India, it is termed as Foreign Arbitration

International Conventions on Arbitration:[1]

India is a party to the following conventions:

1.The Geneva Protocol on Arbitration Clauses of 1923

2.The Geneva Convention on the Execution of Foreign Arbitral Awards, 1927:

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:-

a) The award has been annulled in the Country in which it was made.
b) That the party being under a legal incapacity, he was not properly represented.
c) That the award contains decisions on matters beyond the scope of the submission to arbitration.

The principles which apply to recognition and enforcement of foreign awards are in substance, similar to those adopted by the English court at Common law, It was, however, felt that the Geneva Convention suffered from certain defects which hampered the speedy settlement of disputes through 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. 

3.The New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards:

 It became a party to the 1958 Convention on 10th June, 1958 and ratified it on 13th July, 1961.

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 law of the Country where the recognition and enforcement is sought finds that.
a) The Subject matter of the difference is not Capable of Settlement by arbitration under the law of that Country or

b) The recognition or enforcement of the award would be contrary to the public policy of that country.

4. UNCITRAL Model law (1985) 

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:-

a) The subject matter of the dispute is not capable of Settlement by arbitration under the law of this state, or

b) The recognition or enforcement of the award would be contrary to the public policy of this state.

Perusal of the International laws laid down at Geneva Convention, 1927, New York Convention 1958 & UNCITRAL Model Law (1985) reveals that Public Policy of any Country has a great impact on the International/Foreign awards. Therefore, it is desirable that the constructing agency should be conversant with the Public Policy of the Country, where it undertakes construction works.

There are no bilateral Conventions between India and any other country concerning arbitration.

The Indian Arbitration and Conciliation Act, 1996 (The governing arbitration statute in India)
It was conceived by the compulsions of globalisation. It is based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985.

Previous statutory provisions on arbitration were contained in three different enactments:
• The Arbitration Act, 1940, the Act which governed the domestic arbitration
• The Arbitration (Protocol and Convention) Act, 1937 and
• The Foreign Awards (Recognition and Enforcement) Act, 1961, which governed international arbitral awards.

The Indian Arbitration and Conciliation Act, 1996[2] applies to both domestic arbitration in India and to international arbitration. Section 2(1)(f) of the Act defines "International Commercial Arbitration" as arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India where at least one of the parties is:

1. An individual who is a national of, or habitually resident in any country other than India; or
2. A body corporate which is incorporated in any country other than India; or
3. A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
4. The Government of a foreign country.

The main objectives set out in the Statement of Objects and Reasons of the 1996 Act are “to minimise the supervisory role of courts in the arbitral process” and “to provide that every final arbitral award is enforced in the same manner as if it were a decree of the Court”.

Public policy in relation to international commercial arbitration:[3]

There have been few instances of the use of Public Policy in context of arbitration proceedings. The prominent cases are:
• Renusagar Power Plant Ltd. v. General Electric Co., AIR 1994 SC 860
• ONGC v. Saw Pipes Ltd., AIR 2003 SC 2629; (2003) 5 SCC 705
• Venture Global Engineering v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)

Renusagar Power Plant Ltd. V. General Electric Co.[4]

Short Facts:

Renusagar Power Plant Ltd. had entered into a contract with General Electric Co., a company incorporated under the laws of State of New York in USA under which it had to supply equipment and power services for setting up a thermal power plant. The said contract was approved by the Government of India. The total price of the contract was US$13,195,000. All the items were to be delivered in 15 months from the effective date and the completion of the plant was to be done within 30 months. The contract provided for payment in installments and also required execution of unconditional negotiable promissory notes for all the installments. The contract contained an arbitration clause which provides that any disagreement arising out of or related to the contract which the parties are unable to resolve by sincere negotiation shall be finally settled in accordance with the Arbitration Rules of the International Chamber of Commerce. It seems there was some delay on the part of General Electric in adhering to the time schedule for supply of equipment and consequently Renusagar rescheduled the payment installments and certain installments were unpaid under due dates.

Case Proceedings:

Renusagar approached the Government of India for approval of the revised schedule regarding the payment of installments which was not approved by the Government of India and Renusagar was asked to take necessary action to make the payment of the past installments immediately. At this stage General Electric initiated arbitration proceedings before the Arbitration Court of ICC. Both the sides filed civil suits in Bombay and Calcutta High Courts. The arbitration proceedings resulted in an award in favour of General Electric and it also awarded compensatory damages and computed the same by applying the average prime rate to the amount withheld. The award came to be challenged on several grounds and one of them was that it was contrary to public policy of India, the reason being the order relating to the payment of interest in particular in foreign exchange would be contrary to the Foreign Exchange Regulation Act. This case arose in particular under Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961. The Supreme Court was faced with the question whether to give the words ‘public policy' a narrow or a broad meaning.
Final Judgment: After referring to the various decisions of the English, and American courts and quoting classic textbooks on international commercial arbitration the Supreme Court went on to very rightly give narrow interpretation to the words public policy and held that

1. the payment of interest on interest (compound interest),
2. possibility of violation of FERA,
3. payment of damages,
4. possibility of unjust enrichment by General Electric

did not amount to or was not contrary to the public policy of India.
The Supreme Court concluded that “it is obvious that since the Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction.”

Renusagar thus was very correctly decided; when it took a narrow view of the word ‘public policy' thus leaving little scope of judicial interference in arbitration proceedings and the final determination of awards.

ONGC V. SAW Pipes Ltd.[5]

Short Facts: In this case, ONGC ordered pipes from SAW Pipes Ltd. on certain terms and conditions and for dispute resolution it also had an arbitration clause. Disputes arose as SAW Pipes was unable to conform to the time schedule prescribed for supplies due to the strike of the workers in Europe for almost two months. SAW Pipes informed these facts to ONGC which in turn replied that damages as per the contract would have to be paid. SAW Pipes thereafter supplied the pipes and ONGC deducted a large sum from the bill on account of delay without there being any adjudication or determination by a third party.

Case Proceedings: The matter was referred to arbitration and an order was passed in favor of the respondents. The same was challenged before a single Judge of High Court which dismissed the petition. A further challenge before a division bench was also negated. An appeal to the Supreme Court under Article 136 (Special Leave Petition) came to be heard by two Judges who allowed the appeal and set aside the award. It then considers the facts of the case, and concluded that ONGC was justified in deducting the amount and the arbitrators were wrong in awarding the amount with interest and set aside the award.

The Court held that any arbitral award which violates Indian statutory provisions is “patently illegal” and contrary to “public policy”. By equating “patent illegality” to an “error of law”, the Court effectively paved the way for losing parties in the arbitral process to have their day in Indian courts on the basis of any alleged contraventions of Indian law, thereby resurrecting the potentially limitless judicial review which the 1996 Act was designed to eliminate. The ONGC case's decision was widely criticized in the International community. Three years later the Supreme Court had an opportunity to refer the matter to a larger Bench which it did not though it accepted that ONGC's case had invited considerable adverse comments.

The Bench in Renusagar case held that the term ‘public policy of India' was to be interpreted in a narrow sense, the Division Bench in ONGC case went ahead unmindful of the prior precedent and expanded the same to such an extent that arbitral awards could now be reviewed on their merits. This is a huge step backwards in laws relating to alternate dispute resolution in the era of globalization.

Venture Global Engineering v. Satyam Computer Services Ltd.[6]

Short Facts:

In this case Venture Global Engineering (VGE) incorporated in the USA and Satyam Computer Services Ltd (SCSL) of Hyderabad, India, entered into a joint venture agreement in 1999 to constitute a company named Satyam Venture Engineering Services Ltd. (SVES) in which both VGE and SCSL have 50 per cent equity shareholding. A Shareholders Agreement (SHA) was also executed between the parties on the same day which provides that disputes have to be resolved amicably between the parties and failing such resolution, the disputes are to be referred to arbitration.

Case Proceedings:

In February 2005, disputes arose between the parties. SCSL alleged that the appellant had committed an event of default under the SHA owing to several venture companies becoming insolvent and they had exercised its option to purchase the VGE shares in SVES at its book value. On a request from SCSL, the London Court of International Arbitration appointed an arbitrator and he passed an award directing VGE to transfer the shares to SCSL. SCSL filed a suit for enforcement and recognition of the award before the US District Court of Michigan under the New York Convention, which was allowed to SCSL. Aggrieved, VGE filed a suit in the City Civil Court, Secunderabad, to set aside the award and the court passed an interim order of injunction restraining SCSL from seeking or effecting the transfer of shares under the terms of award or otherwise. On appeal from SCSL, the Andhra Pradesh High Court suspended the trial court's order holding that the award cannot be challenged even if it is against the public policy and in contravention of statutory provisions, but made it clear that SCSL would not affect the transfer of shares until further orders. Thereafter, the trial court rejected the suit filed by VGE and the High Court dismissed VGE's appeal. The present civil appeal by VGE in the Supreme Court of India is directed against this order. VGE asserted that the relief in the award violated certain Indian corporate and foreign investment statutes, specifically the Foreign Exchange Management Act, 1999, and therefore constituted a “conflict with the public policy of India” pursuant to the general provisions contained in Section 34 of Part I of the Arbitration Act.

Final Judgment:

The Supreme Court in its judgment stated: “The provisions of Part I of the Act (Arbitration and Conciliation Act, 1996) would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. We further hold that where such arbitration is held in India, the provisions of Part-I would compulsorily apply and parties are free to deviate to the extent permitted by the provisions of Part-I. It is also clear that even in the case of international commercial arbitrations held out of India provisions of Part-I would apply unless the parties by agreement, express or implied, exclude al or any of its provisions.”

Implications:

The Arbitration and Conciliation Act, 1996 (Act), is divided into four parts. The first two parts consists as follows:
Part I of the 1996 Arbitration Act deals with domestic arbitration, i.e., those arbitrations where the seat of arbitration is in India.

Part II deals with provisions relating to enforcement of New York Convention Awards and Geneva Convention Awards in India.

This has been the basis of all the Arbitration clauses incorporated in the contract between various Indian and Foreign companies until now. However, with the recent judgment by the Supreme Court of India in the case of Venture Global Engineering v Satyam Computer Services Limited, Part I of the Act is now made applicable to all international commercial arbitrations, which consequently has led to a great deal of mistrust, confusion and uproar amongst the foreign companies.

CONCLUSION

The law of arbitration in India is very much at its crossroads. An eminent personality has commented at the state of affairs of arbitration laws in India as “arbitration in India is not for the faint-hearted”.

The 1996 Act was designed primarily to implement the UNCITRAL Model Law on International Commercial Arbitration and create a pro-arbitration legal regime in India. Prior to its enactment, there was widespread discontent over the excessive judicial intervention allowed by its predecessor, the 1940 Act. The 1996 Act attempted to rectify this problem by narrowing the basis on which awards could be challenged, thereby minimising the supervisory role of courts, ensuring finality of arbitral awards and expediting the arbitration process.
The continued intervention of courts in arbitration is harmful in two ways:[7]

1) In a legal system plagued by delays, a pro-arbitration stance would reduce the pressure on the courts. Recent reports indicate that over 30 million cases are currently pending resolution in India. Arbitration is therefore not just an attractive option for resolving disputes, it is essential to maintaining the integrity of the Indian legal system.

2) For a country seeking to attract foreign investment, it is imperative that its legal system provides efficient and predictable remedies to foreign investors. When commercial parties enter into transactions, they factor in the potential legal costs of enforcing their rights. If a legal system does not hold the promise of speed or certainty, a risk premium is added to the cost of the transaction which, if excessive, may make the transaction commercially unviable. Foreign investors typically prefer arbitration and have shied away from Indian courts due to prolonged delays in litigation.

The recent judgment in the Satyam case has made Part 1 of the 1996 Act applicable to all International arbitrations. Many foreign companies having relevant business interests in India have relied heavily upon Indian law based on the Act itself and already opted for Arbitration procedures. This recent judgment has totally turned over the original intention of the legislators while enacting the Act, thereby infusing a strong feeling of insecurity in dealings of foreign companies with their Indian counterparts.
So, it is largely upto the Indian Judiciary to step in and contain the interventionist role it has assumed for itself and have greater trust in the arbitral process.

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[1]  http://economictimes.indiatimes.com/Opinion/What-next-for-Indian-arbitration/articleshow/1933720.cms?curpg=1

[2] Indian Arbitration and Conciliation Act, 1996

[3] Public Policy International Arbitrations | LawTeacher http://www.lawteacher.net/arbitration-law/essays/public-policy-in-international-arbitrations.php#ixzz2sBP3kW83

[4] Renusagar Power Plant Co. Ltd v. General Electric Co., AIR 1994 SC 860

[5] ONGC v. SAW Pipes Ltd., AIR 2003 SC 26299

[6] Venture Global Engineering v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)

[7] http://www.halsburys.in/judicial-intervention.html