Traversing the Highs and Lows of Judicial Intervention in Arbitration
[Tanmay is a student at NALSAR University of Law, and Shobhit is a student at Maharashtra National Law University, Mumbai. The following post is one of the winning entries in the Second IRCCL Blog Writing Competition (2021-22), organised in association with Khaitan & Co.]
With the recent verdicts in Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited (Delhi Airport), Gemini Bay Transcription v. Integrated Sales Service (Gemini Bay) and The Project Director NHAI v. M. Hakeem & Another (NHAI), the growing inclination of the judiciary towards minimizing its intervention with arbitral awards within the statutory scheme of Sections 34 and 48 of the Arbitration and Conciliation Act 1996 (A&C Act) has become quite discernible. While the first two acknowledged the limited scope of the public policy grounds provided under Sections 34 and 48 with regard to the enforcement of domestic and foreign arbitral awards respectively, the last one affirms that due restraint must be exercised by courts in choosing to modify arbitral awards in keeping with the legislative intention.
All of these decisions from 2021 have contributed towards settling some contentious issues within the realm of Section 34 with a long history of conflicting pronouncements. Hence, it is imperative to trace the origin of the odyssey that the judiciary had embarked upon to finally reach this destination and examine the interpretive struggles that it had to face on its way.
It is also crucial to note that even though the aforementioned judgments may indicate an increasingly noticeable tendency of the judiciary to interfere less with arbitral awards, there are still some aspects of the arbitral process in which judicial intervention can be minimized. Hence, this article seeks to not only appreciate the notable strides made by the judiciary in its endeavour of achieving minimal interference in arbitration matters but also highlight the considerable scope for improvement in this regard for the judiciary by discussing some case laws related to such aspects.
Tracing the Gradual Limitation of the Scope of Public Policy
Prior to the enactment of the A&C Act, in Renusagar Power Electric Company Limited v. General Electric Company (Renusagar), the Apex Court had the chance to elucidate India's conception of public policy, as used in Section 7 of the Foreign Awards (Recognition and Execution) Act of 1961, against the backdrop of a foreign-seated arbitration. The court noted in its opinion that the expression could be subjected to both restrictive and expansive interpretations. Thus, a distinction between how public policy is applied in the national and foreign domains was delineated. In view of considerations pertaining to private international law and the pro-enforcement inclination inherent in 1958 New York Convention, the court stated that India's public policy should be considered narrowly. Its ruling in this case was widely regarded as a foundational authority on the norm that reconsideration of an arbitral award on merits cannot be undertaken during the enforcement stage. It was quite evident that the pro-arbitration bias globally prevalent at the time was duly recognized by the court in its verdict.
Later, as the A&C Act came into being in 1996, clouds of incertitude loomed over Renusagar’s precedential utility it was approved by a court under the reformed arbitration framework. In ONGC v. Saw Pipes Limited (ONGC), the Supreme Court was tasked with clearing these clouds when it had to outline the parameters of public policy with regard to the setting aside of a domestic arbitral award under Section 34(2)(b)(ii) of the A&C Act. Specifically, it was compelled to determine if it had the jurisdiction to set aside an award that may be deemed as ‘patently illegal’ or reconsider an award on its merits. The ruling in ONGC was antithetical to the one in Renusagar. The court decided that because it was the A&C Act itself that created an arbitral tribunal, it would be necessary for the court to interfere if the arbitral tribunal breached the A&C Act's requirements. The court incorrectly confused jurisdictional and procedural errors, holding that the arbitral tribunal's infringements of the A&C Act constituted jurisdictional violations. To further bolster ONGC's precedential significance, the court added the issue of "patent illegality" to the list of grounds established by the court in the Renusagar case, thus opening the floodgates for Section 34(2) lawsuits.
In ONGC v. Western Geco International Limited (Western Geco), the court was faced with an appeal an international commercial arbitration having a seat in India. The court not only conformed to the verdict in ONGC but also allowed the reassessment of an award on its merits on the grounds of safeguarding the “fundamental policy of Indian law,” which goes against the spirit of Renusagar. Moreover, the court failed to recognize that the public policy test is to be employed to determine whether the award’s enforcement would result in a breach of public policy, and not to determine the arbitral award’s merits. Consequently, the court had irrevocably tied India's public policy with the merits of an arbitral award without realizing its consequences. Furthermore, the court in Renusagar had clarified that an award cannot be set aside by a court merely on account of a disagreement with the arbitrator’s legal or factual rationale. Lastly, the court’s discussion of the “fundamental policy of Indian law” has resulted in a repetition of the grounds already listed in Section 34(2)(a). As a result, the procedural errors covered by Section 34(2)(a) are now covered by Section 34(2)(b)(ii) as well, which encompasses principles of natural justice as a ground. This has allowed obstinate parties to wreak havoc by challenging arbitral rulings through a backdoor.
Despite the concept of stare decisis and the consequence burden of the precedents set in Western Geco and ONGC, the court attempted to alleviate the detrimental consequences of these previous rulings. Despite having to concede to ONGC that violating the contract's terms would amount to “patent illegality,” the court in Associate Builders v. Delhi Development Authority (Associate Builders) has tactfully relied on the dictums of McDermott International v. Burn Standard Company Limited (McDermott International) and Rashtriya Ispat v. Dewan Chand Ram Saran to give primacy to the arbitrator's findings concerning contract interpretation. The court further stated that when a court applies the public policy test to an arbitral award, it does not serve as a court of appeal, and, as a result, factual mistakes cannot be addressed, which a notable shift from the approach taken in ONGC and Western Geco. Despite the precedential burden, the decision in Associate Builders may be regarded as a landmark decision that signalled the beginning of a more pro-arbitration approach to preserving arbitral verdicts.
In Ssangyong Engg. and Construction Company Limited v. National Highways Authority of India (Ssangyong Engg.), the Supreme Court made extensive observations on the situation following the 2015 amendment to the A&C Act. It ruled that only arbitral rulings that shock the court's conscience may be considered under the head of ‘justice or morality’. The court also stated that “patent illegality” must clearly appear on face of the award, implying that such an illegality goes to the heart of the matter but excludes an erroneous application of law by the tribunal or a reappreciation of evidence as an appellate court. The court in Ssangyong Engg. appropriately implemented the legislative intent by correcting the flaws in its previous decisions, thereby rectifying the flaws created by Saw Pipes and restoring Renusagar.
The latest reiteration of the stance taken by the Supreme Court in Ssangyong Engg. comes in Delhi Airport wherein it was held that not every alternative interpretation embraced by an arbitral tribunal or ostensibly erroneous application of law can be included under the umbrella of ‘patent illegality’ to set aside the award.
While articulating its stance on the extent of public policy under Section 48 of the A&C Act in Phulchand Exports Limited v. O.O.O. Patriot, the court adopted a fairly arbitrary approach and deviated from the widely acknowledged norm that the public policy ground should be applied narrowly to foreign awards. It ruled that the scope of public policy grounds under both Sections 34 and 48 is the same, despite the fact that it was clearly defiant of the principle of comity of nations and the worldwide pro-enforcement prejudice. However, it was later overruled in Shri Lal Mahal Limited v. Progetto Grano Spa (Shri Lal Mahal) wherein the court affirmed that “patent illegality” would not constitute a component of the public policy grounds stated under Section 48. This was also acknowledged by the court very recently in Gemini Bay.
Reduced Propensity to Modify Arbitral Awards
Another notable development within the statutory scheme under Section 34 emanated from the Supreme Court’s verdict in NHAI. Herein, the Supreme Court cited many decisions such as Dakshin Haryana Bijli Vitran Nigam Limited v. Navigant Technologies Private Limited, Kinnari Mullick v. Ghanshyam Das Damanito and McDermott International to support its conclusion that Section 34 only provides a constricted right with limited remedies. Specifically, these include the opportunity to have either the case returned to the arbitral tribunal or the award set aside. The court established that Section 34 is not an appellate provision, and so does not necessitate a reconsideration of the case’s merits. The court emphasized upon the significance of considering the legislative intention to state that the Parliament’s intention with regard to the provision at hand is fairly lucid, which is to safeguard the arbitral awards from unwarranted judicial intervention so that the status of arbitration as an effective and expedient alternative remedy is maintained. In spite of the ostensibly progressive attitude of the court in NHAI in terms of promoting minimal judicial intervention with arbitral awards, there still subsists some scope for concern in this regard. In its judgment, the court had also taken note of some of its previous decisions such as Hindustan Zinc Limited v. Friends Coal Carbonisation, Gautam Constructions and Fisheries Limited v. National Bank for Agriculture & Rural Development and Krishna Bhagya Jala Nigam Limited v. G. Harischandra Reddy. In all these judgments, it had engaged in the modification of the award by altering either the sum granted by the arbitral tribunal or the interest, thus also prompting the High Courts to normalize varying, correcting or modifying arbitral awards. While acknowledging these previous pronouncements, the court defended them by citing the authority bestowed upon it by Article 142 of the Constitution “to do complete justice between the parties”. This indicates that there may be instances, although limited, wherein it presses into service this authority to modify arbitral awards, and hence, leaves room for judicial interference.
Subsisting Scope for Unwarranted Stay on Arbitral Awards
Previously, filing an application under Section 34 of the A&C Act for the setting aside of an arbitral award would result in an automatic stay, and this provision was condemned by the Apex Court in National Aluminum Company Limited v. Pressteel & Fabrications Limited for not leaving with it any discretion to place the parties on terms.
In 2015, the automatic stay of awards was abolished by an amendment that entirely supplanted Section 36 of the A&C Act. The reason behind this abolition was that dealing with cases involving the setting aside of arbitral awards had become inordinately time-consuming for the courts, and rendering the entire mechanism inefficient. As a consequence of the amendment to Section 36, complemented by the BCCI v. Kochi Cricket (Private) Limited (BCCI) verdict stating the amendment would apply retrospectively to all setting aside applications as well, it seemed the idea of automatic stay of arbitral awards was abrogated for good.
However, through an amendment to the A&C Act in 2019, Section 87 was inserted. This provision indicated that the 2015 amendment is to be applied prospectively, thus implying that unconditional stay on arbitral awards would still apply to arbitration proceedings that were initiated prior to 23 October 2015. This, in effect, overturned the verdict in BCCI.
Subsequently, in the case of Hindustan Construction Company v. Union of India, the Supreme Court expressed its dissatisfaction with the 2019 amendment’s upshot of disregarding the legislative intention to minimize excessive deferrals in the enjoyment of the benefits that the award debtor is entitled to by virtue of the award. Hence, in this case, the court pronounced Section 87 as unconstitutional on the grounds of manifest arbitrariness under Article 14 of the Indian Constitution. Nevertheless, the impact of this judgment was negated by an ordinance amendment to the A&C Act promulgated in 2020, which was later approved by way of the 2021 amendment to the A&C Act. It defies the growing resistance to unconditional stay on arbitral awards by stating that the same can be granted when a prima facie case for the arbitration agreement or contract, which constituted the basis of the award, or the making of the award being induced by corruption or fraud can be made.
Scope for Intervention under the garb of Judicial Scrutiny under Section 11
For the past few years, the extent of judicial examination or inspection under Section 11 of the A&C Act has been a particularly contentious issue. SBP & Co. v. Patel Engineering was one of the first important cases addressing the assessment of this power's ambit. Herein, the Supreme Court had arrived at the conclusion that that this function was essentially a judicial one, and not merely administrative. Subsequently, the scope of judicial inquiry was re-evaluated through the 2015 Amendment to the A&C Act, which stated that the same was limited to establishing the “existence of the arbitration agreement.”
Nevertheless, the Supreme Court's recent decision in DLF v. Rajapura has enlarged the purview of judicial scrutiny in arbitration matters. As per the ruling, the court's function has evolved from just finding the ‘existence of the dispute’ to confirming that there exists a discernible connection between the parties' dispute and their arbitration agreement. If the parties fail to demonstrate this nexus, the courts now have the right to turn down the application for arbitration, a power that was previously reserved exclusively for arbitral tribunals.
Although the broadened extent of judicial examination has been applauded by some, it has been highlighted by several sceptics that allowing courts to decide whether or not an arbitration agreement is valid would take a long time and cause unwarranted inconveniences in the process of resolution of the dispute. Furthermore, as has always been the case, in the event of a conflict, the court’s judgement will take precedence over the tribunal's. As a result, the arbitral tribunal's authority to resolve the issues before it might be affected adversely.
Therefore, the precedent set in this case is clearly at variance with the concept of ‘Kompetenz-Kompetenz,’ and aggravates the scope for excessive judicial intervention in arbitration matters.
After examining the augmentation and restriction of the scope of “public policy of India" embodied in Section 34(2)(b)(ii) of the A&C Act from the Renusagar judgment in 1994 to the Delhi Airport judgment in 2021, there appears to be a long-drawn battle finally reaching its conclusion. Despite the far-reaching consequences of McDermott International, Shri Lal Mahal, Associate Builders, Ssangyong Engg. and Delhi Airport decisions, there appears to be an opportunity for mischief that might harm India's aspirations to become a pro-arbitration regime. Although the ratio laid down by the Supreme Court in Renusagar was of considerable utility in its endeavour of minimizing judicial interference, it ended up falling victim only to the “unruly horse.” Although the Supreme Court restored the status of Renusagar in Ssangyong Engg., a more authoritative ruling by it is required, one that strictly limits the judiciary’s powers, preventing it from reading more profound into the term “public policy of India” and thus, emerging victorious in its battle against the “unruly horse.”
In addition to this, the subsisting issues pertaining to the modification of arbitral awards, unconditional stay of arbitral awards and greater scope for judicial scrutiny under Section 11 must also be given higher consideration since they may pose a significant impediment in making India a favoured arbitration centre.
The government must establish a strategy that encourages foreign corporations to invest in India. In addition, in order for India to realize its goal of becoming a global arbitration hub, the courts must adopt a pro-arbitration system, which calls for minimal participation in the implementation of international arbitral awards, as envisioned in the Vedanta decision.