Arbitration in India operates within a framework shaped by both public policy and patent illegality, two distinct yet often overlapping grounds for challenging arbitral awards. While both concepts aim to uphold justice, they function differently, each offering unique grounds for judicial intervention. The tension between promoting arbitration finality and allowing judicial intervention has been a key area of debate, with both public policy and patent illegality being used, at times inconsistently, to justify annulment of awards. Public Policy and Patent Illegality is talked in Section 34 of Arbitration and Conciliation Act, 1996 (Hereinafter referred as ‘the Act’).
The Doctrine of Public Policy in Arbitration: Evolution, Impact and the Gray areas
The New York Convention’s Article V[1] defines public policy as the policy of the state where the arbitral award is sought to be enforced. However, the New York Convention leaves the definition of public policy open to interpretation, requiring courts to assess whether enforcing the award would violate this policy.
In India the Hon’ble Supreme Court interpretated the New York Convention through various judgements, in Renusagar Power Co. Ltd. v. General Electric Co.[2] the Apex Court held that public policy in international arbitration is limited to: –
- Fundamental Policy of Indian Law
- Interests of India
- Principles of Justice and Morality
However, in India the notion of public policy is not explicitly defined in legal statutes, making it a dynamic and evolving concept. In the context of arbitration, public policy serves as a ground for resisting the enforcement of an arbitral award under Section 34[3] and Section 48[4] of the Act. Section 34(2)(b)(ii) of the Act states that an arbitral award may be set aside by the court if the arbitral award is in conflict with the public policy of India. Relevant extract from the provision is as follows: –
“Application for setting aside arbitral awards
(2) An arbitral award may be set aside by the Court only if—
(b) the Court finds that—
(ii) the arbitral award is in conflict with the public policy of India.”[5]
The concept of public policy is broad and focuses on principles like fairness, justice, and morality. It allows courts to annul arbitral awards that violate the core values of society. In India, public policy has been interpreted to cover issues like fraud, corruption, and certain procedural irregularities.[6]
In ONGC v. Saw Pipes Ltd.[7], the Apex Court expanded the scope of public policy to include ‘patent illegality’, allowing courts to set aside awards for errors in applying Indian law. However, this decision was criticized for increasing judicial interference and undermining the finality of arbitration.
The Hon’ble Supreme Court clarified the scope of public policy through the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[8]. This ruling overruled the earlier judgement given in Bhatia International v. Bulk Trading S.A.[9] about the increasing judicial interference by the Apex Court.
However, the Court of last resort in ONGC v. WesternGeco International Ltd.[10], temporarily revived the broader interpretation, allowing courts to evaluate the merits of an award and potentially undermine arbitral decisions. The highest court of appeal later corrected this in Associate Builders v. DDA[11] by introducing a ‘reasonability’ test for patent illegality. This established that only unreasonable contract interpretations would warrant judicial intervention and clarified the boundaries of ‘justice and morality’ and ‘interests of India’ as valid grounds for setting aside awards. The 246th Law Commission Report[12] criticized the expanded public policy judgments, leading to the 2015 Amendments to the Act.
Recent cases have affirmed this narrower view, in Ssangyong Engineering v. National Highways Authority of India[13] the Hon’ble Supreme court held that an arbitral award can be set aside if it is found to be in conflict with the public policy of India, defined to include: –
- Awards induced or affected by fraud or corruption.
- Awards that contravene the fundamental policy of Indian law.
- Awards that conflict with the most basic notions of morality or justice. Furthermore, the court introduced the concept of ‘patent illegality’, which allows an award to be set aside if there is a clear illegality appearing on the face of the award, but this does not permit courts to reappreciate evidence or intervene on mere errors of law.
The Apex Court aligned with the 2015 amendments and rejected the expansive approach of WesternGeco[14]. The Apex Court further in Vijay Karia v. Prysmian Cavi E Sistemi SRL[15] upheld India’s pro-enforcement stance, ruling that mere legal violations do not suffice to deny enforcement of foreign arbitral awards.
However, the Apex Court in National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A.[16] introduced a nuance, holding that foreign awards violating the Indian Contract Act[17] or conflicting with export policies may not be enforceable. This suggests foreign arbitral awards may face increased scrutiny in line with domestic law, potentially tempering India’s pro-enforcement stance.
Patent Illegality: Striking at the core of unlawful Awards
Patent illegality refers to blatant errors in the arbitral award that go to the root of the matter. It encompasses violations of substantive law, errors apparent on the face of the award, and a contravention of the terms of the contract.
In India, Section 34[18] of the Act, outlines specific grounds for setting aside an arbitral award, including incapacity of parties, invalid arbitration agreements, non-receipt of notice, and the public policy clause. Section 34 (2A) of the Act was inserted in 2015 through amendment, addresses an additional ground for setting aside arbitral award in case of domestic arbitration. Relevant extract from the provision is as follows: –
“Application for setting aside arbitral awards
(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence[19].”
Patent illegality refers to obvious legal errors on the face of the award. It was first introduced in the ONGC v. Saw Pipes case[20], effectively merging it with public policy, but was later differentiated to prevent excessive judicial interference. An arbitral award is considered ‘patently illegal’ if it contains an error of law so fundamental that it affects the core of the matter. Such errors may involve contradictions to common law, constitutional principles, or statutory provisions.
India’s recent legislative approach aims to attract foreign investment and establish a business-friendly environment. Amendments to the Act reflect this goal, limiting judicial intervention to cases of evident legal error or perversity. This limitation aligns with India’s goal of attracting foreign investments and promoting international arbitration. Since public policy lacks a universal standard, conventions governing foreign arbitral awards provide grounds for refusal based on the enforcing state’s public policy. This domestic interpretation ensures international consistency and fosters India’s role as a global arbitration hub.
The Court of last resort in Renusagar Power Co.[21] established a narrow application for foreign awards, while ONGC v. Saw Pipes[22] defined patent illegality, allowing judicial intervention in conflicting awards.
Recent cases have further clarified patent illegality’s scope. Hon’ble Delhi High Court in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.[23] ruled that errors of law do not always constitute patent illegality, it requires fundamental errors impacting the award’s core. Hon’ble Supreme Court in Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum Rajgurunagar[24] reiterated tribunals’ contractual term bindings and potential patent illegality deviations.
In contrast, international jurisdictions lack a direct patent illegality equivalent. The United Kingdom allows challenges for lack of jurisdiction or serious irregularity, while Singapore limits grounds to breaches of natural justice and public policy, adopting a pro-arbitration stance.
This distinction underscores India’s unique approach to patent illegality, balancing arbitration efficiency with judicial oversight to ensure integrity in the arbitration process.
Demarcation between Public Policy and Patent Illegality
While public policy and patent illegality are often used interchangeably, they represent distinct grounds for challenging arbitral awards. Public policy applies to both domestic and international awards, with a narrower interpretation in the latter context. Patent illegality, on the other hand, is confined to domestic awards and focuses on evident violations of statutory or contractual provisions.
Conclusion and Way Forward
India’s arbitration landscape has undergone significant evolution since 1940, with the Act marking a pivotal shift.
The Delhi High Court’s recent decision in Ogilvy & Mather Pvt Ltd v. Union of India[25]raised concerns about judicial overreach. The court intervened in an arbitral award, treating factual errors as legal errors, diverging from established precedent.
To prevent judicial overreach, mechanisms like specialized arbitration benches and a supervisory body overseeing arbitration practices can promote consistency and professionalism. The inherently flexible concept of ‘public policy’ demands balance between its core tenets morality, justice, and equity and limited judicial intervention. Ultimately, sustaining arbitration’s efficiency requires clarity and restraint in public policy interpretations, ensuring India remains an attractive arbitration hub.
Authored By:
Varun S. Ahuja
Ahuja Law Offices
M: 9971673660
[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V.
[2] 1994 SCC (SUPP) 1 644.
[3] Arbitration and Conciliation Act, 1996 (Act 26 of 1996), S. 34.
[4] Arbitration and Conciliation Act, 1996 (Act 26 of 1996), S. 48.
[5] Supra Note 3.
[6] Ssangyong Engineering V. NHAI AIR 2019 SUPREME COURT 5041.
[7] AIR 2003 SUPREME COURT 2629.
[8] (2012) 9 SCC 648.
[9] 2001 SCC OnLine SC 174.
[10] 2014 (9) SCC 263.
[11] (2004) 73 DRJ 551.
[12] Law commission of India, “246th report on Amendments to the Arbitration and Conciliation Act, 1996” (2014).
[13] AIR 2019 SUPREME COURT 5041.
[14] ONGC v. WesernGeco International Ltd, 2014 (9) SCC 263.
[15] AIR 2020 SUPREME COURT 1807.
[16] (2020) 19 supreme Court Cases 315: 2002 SCC OnLine SC 32.
[17] Indian Contract Act, 1872 (Act No. 9 of 1872).
[18] Supra Note 3.
[19] Supra Note 3.
[20] ONGC v. Saw Pipes Ltd, AIR 2003 SUPREME COURT 2629.
[21] Renusagar Power Plant Co. Ltd. v. General Electric Company, 1994 SCC (SUPP) 1 644.
[22] AIR 2003 SUPREME COURT 2629.
[23] 2018 SCC OnLine Del 7549: (2018) 250 DLT 330.
[24] (2022) 4 Supreme Court Cases 463.
[25] 2012 SCC OnLine Del 3364.
