June 14, 2018
What does “Public Policy” mean?
Justice Borroughs has described the term “public policy” as an unruly horse. “Public Policy” is an inclusive term which may include within its ambit a wide range of activities that can be termed as public policy. It has been remarked that public policy in its nature is so uncertain and fluctuating; varying with the habits and fashions of the day, with the growth of commerce and the usages of trade, that it is difficult to determine its limits with any degree of exactness. In the case of Murlidhar Agarwal & Anr. v.State of U.P. & Ors., the Supreme Court had remarked that public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time.
Section 34 of the Arbitration Act empowers the Court to set aside an Award if it is in conflict with the public policy gives unparalleled powers to the Courts and thereby invades upon the very essence of ADR i.e. limiting the scope of judicial intervention.
In plethora of judgments, the Indian Judiciary has time and again widened the purview of public policy and has pronounced conflicting views. In a recent verdict, the Delhi High Court while determining a petition filed under Section 34 for setting aside an arbitral award held that, the only ground besides the technical grounds enumerated in Section 34 on which the Court has been empowered to set aside an arbitral award, is the ground of the arbitral award being in conflict with the public policy of India. The expression “public policy of India” has been held to mean fundamental policy of Indian law, justice and morality.
Judicial dictums which aid in determining the concept of public policy in India are enumerated below:
Renusagar Power Co. Ltd. v. General Electric Co. – In this case the Supreme Court elaborately dealt with the concept of public policy and stated that 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.
ONGC v. Saw Pipes can be safely classified as one of the most celebrated cases determining the concept of ‘public policy’ under the Arbitration Act. The Court in the case held that the term ‘public policy’ could not be given a narrower meaning.
The Court’s observation in the case was that the phrase ‘Public Policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar’s case, it is required to be held that the award could be set aside if it is patently illegal. Result would be – award could be set aside if it is contrary to: –
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.
A similar observation was made by the Apex Court in the case of Phulchand Exports Ltd. v. OOO Patriot, wherein the Court stated that 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’.
However, the aforesaid verdict of the Supreme Court was overruled by a Three-Judge Bench of the Supreme Court in the case of Shri Lal Mahal Ltd. v. Progetto Grano SPA, wherein the Court held that the expression “public policy of India” must be given narrow meaning and the enforcement of foreign award would be refused on the ground that it is contrary to public policy of India if it is covered by one of the three categories enumerated in Renusagar case, i.e. (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.
ONGC v. Western Geco International Ltd. – The much deliberated topic of ‘public policy’ was once again taken up by the Supreme Court in this case in 2014, wherein a Three-Judge Bench of the Supreme Court widened the scope of ‘public policy’ and stated that the expression must include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country.
Hence, in view of the latest Supreme Court judgment the term “public policy” has been assigned a wide meaning which embraces within its purview all such fundamental principles for administration of justice and enforcement of law in India. The widened definition gives the Court unparalleled power to set aside an arbitral award if it is fetters with the administration of law and justice in the country.
Law Commission Report on Amendments to the Arbitration and Conciliation Act 1996
The Commission with the objective to reduce judicial intervention in foreign seated arbitrations in its Report No. 246 recommended the restriction of the scope of “public policy” in both sections 34 and 48 and bring the definition of public policy in line with the definition propounded by the Supreme Court in Renusagar Power Plant Co Ltd v General Electric Co, where the Supreme held that an award would be 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”.
The formulation proposed by the Commission was even more stringent and did not include the reference to “interests of India” as the term is vague and is capable of interpretational misuse, especially in the context of challenge to awards arising out of international commercial arbitrations. Thus, under the formulation of the Commission, an award can be set aside on public policy grounds only if it is opposed to the “fundamental policy of Indian law” or it is in conflict with “most basic notions of morality or justice”.
The Arbitration and Conciliation (Amendment) Act, 2015
The Law Commission’s recommendation was subsumed in the Arbitration and Conciliation (Amendment) Act, 2015 came into force on October, 2015 which eventually effected amendment to Section 34 of the Arbitration Act to include that an award is in conflict with the public policy of India, only if:
- The making of the award was induced or affected by fraud or corruption;
- It is in contravention with the fundamental policy of Indian law; or
- It is in conflict with the most basic notions of morality or justice.
Thus, the Arbitration Amendment Act of 2015 curtails the expanse of public policy and hence reduces the scope of judicial intervention which is precisely the essence of the UNCITRAL Model Law on International Commercial Arbitration. Article 5 of the Model Law envisages that no Court shall intervene in arbitration proceedings except where provided by Law.
 Richardson v. Mellish, 2 Bing.229
 3 Mich L.J. 308(1894) Public Policy
 [1974 (2) SCC 472]
 Setting aside of arbitral award
 Bharti Airtel Limited v. Union of India, 231 (2016) DLT 71
 AIR .2003 SC 2629
 (2011) 10 SCC 300
 (2014) 2 SCC 433
 (2014) SLT 564
 AIR 1994 SC 860