Home | Feedback | Contact Us
Legal Articles  
“Judicial Intervention in arbitral awards: the obsolete notions of ‘Public policy’ and Applicability clause”

In the milieu of such globalized setting, it is pertinent to analyze the judicial interference in or review of the arbitral awards in the cases concerning International Commercial Arbitration particularly where the award has been pronounced by an International authority writes Tanuj Hazari.


When nothing seems to work out in India, the organ which leads the forefront is judicial wing of the state. Momentous in this regard is to analyze the recent trends in judicial intervention in the arbitral awards in the era of globalization. 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.

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.

The Object of the Arbitration Act and its success

The Arbitration and Conciliation Act, 1996 was designed primarily to implement the UNCITRAL Model Law on International Commercial Arbitration and create a pro-arbitration legal regime in India. The intention was to minimize the supervisory role of courts, ensure finality of arbitral awards and expedite the arbitration process. The entire rational behind this Act was that there should be minimum interference by Courts. Arbitration was meant to be a speedy, expeditious and cost-effective method of dispute reconciliation. So, the primary object of ADR movement is avoidance of vexation, expense and delay and promotion of the ideal of "access to justice". The Supreme Court in the case of R.M. Investments Trading Co. Pvt. Ltd. v. Boeing Co. & Anr.35 while construing the expression "commercial relationship" in context with International Commercial Arbitration held:

 "The term "commercial" should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not."

Ironically, insofar as the 1996 Act is concerned, the reality has been far removed from the ideals professed by the legislation. The act has supposedly not worked out the way or the manner in which it was intended. A panoramic view of the judgment shows that the judicial interference that was supposed to be warded off has been followed by the courts to set aside the arbitral awards. Strange in this regard is to see the court’s stance in reviewing the international arbitral awards and the challenges it has posed to the International arbitration community.

There are certain grounds, like ‘public policy’, on which an arbitral award can be set aside by the court. The term has undergone a paradigm shift since the enactment of the act by virtue of regular judicial interpretation. Furthermore there have been certain judgments that have given the strained interpretation to the applicability of the Act to the International commercial Arbitration even where the place of Arbitration is outside India. If the parties want to exclude the jurisdiction of the Indian courts in such cases, they may explicitly or impliedly by virtue of an agreement can do so. Considering the aforesaid legal position, one might either call it a neglect or a deliberate attempt on the part of the courts to expand their extra territorial jurisdiction and sanctioning interventions in the international arbitral awards.

On the touchtone of ‘public policy’: arbitral finality or judicial review

The Hon’ble the Supreme Court, on a number of occasions has held that a suit can be filed in a court in India challenging a foreign award passed by an arbitrator in a matter concerning International Commercial transactions if the award is against the ‘public policy’ and in contravention of statutory provisions. It is always in the domain of the judiciary to interpret the public policy at a given point of time.

In the historic ruling of Renusagar Power Co. v. General Electrical Corporation the Supreme Court construed the expression "public policy" in relation to foreign awards as follows:

"This would mean that "public policy" in Section 7 (1) (b) (ii) has been used in narrower sense and in order to attract to bar of public policy the enforcement of the award must invoke something more than the violation of the law of India.. Applying the said criteria it must be held that the enforcement of a foreign award would be refused 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."

In its later judgment of Oil & Natural Gas Corporation v SAW Pipes (2003) 5 SCC 705, the apex court addressed a challenge to an Indian arbitral award on the ground that it was “in conflict with the public policy of India”. The said decision has been followed in a large number of cases. Despite precedent suggesting that “public policy” be interpreted in a restrictive manner and that a breach of “public policy” involves something more than a mere violation of Indian law, the Court interpreted public policy in the broadest terms possible. The Court held that any arbitral award which is violative of Indian statutory provisions is “patently illegal” and contrary to the canons of “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 doctrine of public policy undoubtedly is governed by precedents. Its principles have been crystalised under different heads. Recently in Patel Engineering case, the Supreme Court has sanctioned further court interventions in the arbitral process. It was held that the Chief Justice, while discharging this function, is entitled to adjudicate on contentious preliminary issues such as the existence of a valid arbitration agreement and the Chief Justice’s findings on these preliminary issues would be final and binding on the arbitral tribunal.

In the Venture Global case AIR2008SC1061, the consequences are far reaching for it creates a new procedure and a new ground for challenge to a foreign award (not envisaged under the Act). The new procedure is that a person seeking the enforcement of a foreign award in India has not only to file an application for enforcement under Section 48 of the Act, it has to meet an application under Section 34 of the Act seeking to set aside the award. The new ground is that not only must the award pass the New York Convention grounds incorporated in Section 48, it must pass the expanded "public policy" ground created under Section 34 of the Act.

The review should be “more or less extensive depending on the circumstances”. If the contractual claims were addressed and decided in an international arbitration, but (allegedly) wrongly, a court should satisfy itself that the institutional determination by such arbitration body was not perverse and in consonance with the legal dictates of the country.

Where absolute arbitral finality is inimical to a rational system of ‘public policy’ as recognized by the Apex court in several judgments and on the other hand, it is necessary for an effective international arbitral system. Balancing the conflicting claims of public policy and arbitral finality is difficult. In order to facilitate the International Arbitration process, it is important to exercise judicial restraint in scrutinizing the International arbitral awards. A new and narrower definition of the term public policy is required in the era of globalization to encourage the foreign investors to carry out healthy commercial relationships in India. A globally compatible definition of ‘public policy’ should be adopted or the court should abdicate the public policy to some extent so as to ensure the edifice of International Commercial Arbitration.

Construction of the Applicability Clause

In the Historic Ruling of Bhatia International v. Bulk Trading S.A. and Anr. AIR2002SC1432, the court held that provisions of Part I of the Arbitration and Conciliation Act, 1996 are applicable also to International commercial arbitration which take place outside India unless the parties by agreement express or impliedly exclude it or any of its provisions. The court reached the conclusion that by not specifically providing that the provisions of Part I apply to international commercial arbitrations held out of India, the intention of the legislature appears to be to allow parties to provide by agreement that Part I or any provision therein will not apply.

The court said that such an interpretation does not lead to any conflict between any of the provisions of the Act and there is no lacuna as such and if not applied in such a case, it will create an anomalous situation and make Sec. 2 incompatible with sec. 2(4) and Sec.2(5). The reasoning given by the court is that provisions shall apply if arbitration takes place in India, does not say that it will not apply if arbitration takes place outside India. The court further said that it would make parties remediless if the arbitration takes place outside India. This judgment adopts a strained interpretation of the Arbitration and Conciliation Act, 1996, and throws into grave doubt our commitment to international commercial arbitration. It is likely to affect pending and future transactions and impact India's credibility in the international market.

A fair reading of sub-sections (3), (4) and (5) of Section 2 would necessarily show that they only apply to arbitration which take place in India. Generally in cases, where arbitrations take place outside India they would be governed by the rules of the country or the body under whose jurisdiction they are being conducted. A plain reading of governing sections of Part I (Section 9 and Section 36) also makes it clear that it would not apply to arbitrations which take place outside India and also deals with enforcement of domestic awards only taking place in India. As far as the positive implication is concerned, the positive implication includes negative exclusion in the absence of any contrary meaning. Where the parties are fully aware of the provisions to choose the place of arbitration outside India, agreeing to go outside jurisdiction of Indian courts, after due deliberation, knowledge, they cannot complaint against the award.

According to the rule of literal construction of a statute, the words of a statute are first understood in their literal, ordinary and natural sense unless the absurd interpretation is being received. It is unnecessary to read the words into a statute unless it is absolutely necessary to do so. Furthermore it is presumed that the statutes are not intended, in the absence of contrary language or clear implication, to operate on events taking place outside the territories. In the light of aforesaid legal position, by no stretch of imagination, can Part I of the Act apply to International Arbitrations when the place of Arbitration is outside India.

Marriott International Inc. v. Ansal Hotels Ltd. 2000(3) ARBLR369 (Delhi) which was overruled by the above judgment which declined to entertain the extra-territorial jurisdiction of the court by saying that the Courts' duty to expound arises with a caution that the Court should not try to legislate.

In the ruling of J.K. Cotton Mills Spinning and Weaving Milk Co. Ltd v. State of U.P. [1961]3SCR185, it was observed:

“In the interpretation of statutes the courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect."

This principle has received widespread acceptance by this court in numerous decisions. Relying on this judgment, the apex court in a recent ruling, Venture Global Engineering Vs. Satyam Computer Services Ltd. and Anr AIR2008SC1061, (Hereinafter referred as Venture Global case), considered the objection to the enforcement of the Award which ordered transfer of shares which was in violation of Indian Laws and Regulations specifically the Foreign Exchange Management Act, 1999 and its notifications. The court upheld the expanded definition of public policy and further reiterated the applicability of the Part I of the Act. It further said that by not specifically providing that the provisions of Part I apply to international commercial arbitrations held out of India, the intention of the legislature appears to be to allow parties to provide by agreement that Part I or any provision therein will not apply. The Court’s decision in Venture Global case has broad implications. It appears as a part of a trend of Indian courts to subject arbitration awards to greater scrutiny and interference, even though the Arbitration Act was enacted to make awards more enforceable and to reduce the Court’s role.

Concern in the international arbitration community

The bulk of decisions have caused a wave of discontent in the international arbitration community, and there have been complaints that they run contrary to the tenets of the New York Convention. A cynic might suggest that in many cross border transactions the primary reason why International Arbitration is selected by parties is that it is "the least worst option" i.e. both the parties at a win-win situation. A basic tenet of Arbitration is that the International Arbitration Tribunal or Institution is neutral and most arbitration laws and most sets of Arbitral Rules promoted by the leading arbitral institutions along with their application have the trust and impetus of neutrality and independence in them.The traditional Litigation may affect the biasness of the court in such cases where one party to the dispute is an Indian party and other is a foreign party as a "home court" of one party in such cases may prove detrimental to the other party. Arbitral award might run contrary to the public policy of India but it might not be against the public policy at the International level and might be beneficial too to that party.

Over the last few years, the Supreme Court has delivered a series of judgments which amount to a serious inroad into arbitral autonomy. Indian district courts do not have the expertise to deal with complex commercial dealings, much less to sit in judgment over awards passed by international commercial experts, who the parties have chosen to repose their faith in. Not to mention that our courts are hopelessly overburdened with arrears and are hardly in a position to take on new challenges.

 These aforesaid judgments have adopt a strained interpretation of the Arbitration and Conciliation Act, 1996, and throw into grave doubt our commitment to international commercial arbitration. It is likely to affect pending and future transactions and impact India’s credibility in the international market. If such be the stance, it will redraw the contours of International Arbitration and the world community will spy the Indian Courts with a skeptical eye. This ruling could have disastrous consequences for international commercial agreements and foreign awards passed thereon by opening up the floodgates for challenge. The object of the Arbitration and Conciliation Act, 1996, which is based on the New York Convention, is to facilitate international commerce and business, to ensure finality of foreign awards and to minimize judicial interference, particularly when awards have been passed by international commercial experts. This judgment has the contrary effect. It is also somewhat ironical, in venture Global Engineering case that the award, having been upheld in the United States on the application of the Indian party, was reopened at the instance of an American party , who having failed in its own home country, managed to get an ex-parte injunction in an Indian District Court.  

It sounds illogical or unsustainable that an award of the body of stature of LCIA is being scrutinised or reviewed by way of filing a suit in a district court in India. This might deter foreign investors to do business in India and enter into commercial transactions with Indian parties.The ramification of this case is far-reaching as the Supreme Court has interpreted Part I of the Act to apply to international commercial arbitrations held outside the country, unless the parties, by agreement, exclude all or any of its provisions. Thus the expanding scope of public policy and the application of the act to the arbitrations taking place outside India, give the Indian courts more authority to review the merits under Indian law of any arbitration award issued in another country (thereby increasing the multiplicity of litigation which increases the expenses and the time for the entire dispute to be settled), thus making the enforceability of international arbitration awards in India more uncertain.

At a time when India is experiencing an unprecedented and ever high economic growth, the legal system must shake off that image and assist in inspiring global confidence in India by supporting and respecting an internationally accepted dispute resolution mechanism. Instead, given the recent judicial pronouncements, international arbitrations are going to be left to the mercy of district judges in India. 


May the tussle between the evangelists of arbitral finality and the advocates of Judicial review of International Arbitral awards continue, may the traditionalists yell on the uncertainty and illusion of the scrutiny of the arbitral awards and the may the reformists stand for the respect of International arbitral awards, one thing that stands clear on every footing is that the Supreme Court has extra-ordinary dimensions and role to make the International arbitral awards challengeable on the touchstone of ‘public policy’ and further giving a strained interpretation to the applicability clause of the Act thereby bringing the International arbitrations taking place outside India reviewable by the Indian courts.

I am not a sanitary inspector looking for garbage everywhere but, in the background of the legal position prevalent in India regarding International Commercial arbitration and challenging of ‘foreign awards’, I cannot ignore the cacophony of the unrest created in the global market and credibility of the Indian Courts regarding the judicial review of arbitral awards. I considered it to be my aesthetic obligation to analyze the limits of judicial review of the arbitral awards and the Arbitration and Conciliation Act, 1996 in terms of their applicability and viability. There need to be some barricades which the judiciary should not cross as they touch the domain of the international arbitration. The arbitral awards at the international level should be respected in particular where the parties by volition agreed upon the governing law and arbitrator.

Where the parties intend to choose an arbitrator, it shows there intention to avoid adversarial litigation system and prevent multiplicity of litigation. The challenging of International awards and their setting aside on the ground of them being against the public policy and by applicability of Part I of the Act posses a potential threat to the citadel of International Commercial Arbitration. The cynical and obnoxious applicability of Part I of the Act as interpreted by the apex court poses a grave threat to India’s commitment and respect for the International Commercial Arbitration. With judgments taking a stringent stance and such being the position of law, the one finds India’s commitment to the International arbitration on a sticky patch.

The international network of reciprocal enforcement treaties of universal disposition should be adopted by India to foster the respect for the International Arbitration. The Indian Judiciary ought to respect and support the globally accepted mechanism of dispute resolution on arbitration awards. The Indian courts’ continued attitude to not resist the temptation to intervene in arbitrations is harmful. Primarily for a legal system which is plagued by endemic delays, a pro-arbitration stance would reduce the pressure on courts. Arbitration is not merely an attractive and lucrative option for resolution of disputes, it is absolutely essential to maintain the integrity of the Indian legal system so that the trust in it is maintained and India should work to safe the citadel of International Commercial Arbitration.

Secondly, for a country seeking to attract foreign investment, it is crucial that its legal system provides proficient and predictable remedies to foreign investors and people seeking to enter into International transactions in India. When commercial parties enter into transactions, they factor into their bargain the potential legal costs of enforcing their rights. If a legal system does not hold the promise of speed or certainty, a stigma of certain “risk premium” is added to the cost of the transaction which, if excessive, may make the transaction commercially unviable. Foreign investors have typically preferred arbitration and shied away from Indian courts due to curse of prolonged delays in litigation system coupled with backlog of cases.

TANUJ HAZARI is a 5th year student pursuing B.A. LL.B (Hons) from National Law Institute University, Bhopal.

© 2007 India Law Journal   Permission and Rights | Disclaimer