Thursday, April 30, 2015

Proposed Amendments to Arbitration Law

[The following guest post is contributed by Shriya Jain, Fourth year student and Param Pandya, Fifth year student at the Gujarat National Law University, Gandhinagar, Gujarat. The authors can be contacted at shriyaj11@gnlu.ac.in and paramp10@gnlu.ac.in. respectively]

This post covers the developments which triggered the Law Commission of India to submit a Supplementary Report to the 246th Law Commission of India Report in February, 2015]

Section 34 of the Arbitration and Conciliation Act, 1996 ('Act') covers grounds of challenge for setting aside of an arbitral award. These include incapacity of a party, invalidity of an arbitration agreement under the law for the time being in force, failure to give proper notice for appointment of an arbitrator, the arbitral award dealing with a dispute which is not within the purview of the arbitration agreement, the composition of the tribunal or the procedure not being in accordance with the arbitration agreement, the subject-matter of dispute being incapable of settlement through arbitration in India or is against the public policy of India. Section 48 of the Act lays down similar grounds of challenge for foreign awards apart from the ground of the award being set aside by a competent authority of the foreign country.[1]

The debate over the term 'public policy' in the Indian context is rather protracted. The Supreme Court has called ‘public policy’ to be an 'unruly horse' and an 'untrustworthy guide'.[2] The Renusagar case interpreted the said term to include (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality.[3] Later, the pronouncement in Saw Pipes case further added the ground of 'patent illegality'[4] for challenge of an arbitral award and the Phulchand case[5] expanded the application of the same explanation to foreign awards as well under Section 48. However, in the Lal Mahal case the affirmation that Saw Pipes received in Phulchand was reversed and the original position of Renusagar was restored.[6] Thus, it excluded the application of 'patent illegality' as a ground for challenge of foreign awards.

In August, 2014 the Law Commission of India ('Law Commission') submitted its 246th Report to the Government of India. The Law Commission envisages India to emerge as a global arbitration hub and hence seeks to bring more objectivity to arbitration law in India. It recommended that no further grounds should be added to the term 'public policy' and the ratio of the Renusagar case should serve as the basis for challenging arbitral awards. It further recommended that the ground of 'patent illegality' subject to “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence" shall be restricted to domestic awards and not foreign awards.[7] Thus, the Law Commission distinguished between the treatment to domestic and foreign awards as visualized under the UNICITRAL Model Law. 

However, in September, 2014 the Supreme Court in ONGC v. Western Geco[8] went on to enlarge the contours of the 'public policy' debate in India. The Oil and Natural Gas Corporation (‘ONGC’) entered into a contract with the Respondent, Western Geco International Limited (‘Western Geco’) for technical upgradation of its seismic survey vessel, requiring “Geophone” Hydrophones (‘U.S. Hydrophones’). There was a delay in delivery of the said vessel due to certain approval issues which gave rise to the dispute and ONGC claimed liquidated damages from Western Geco. The Arbitral Tribunal did not allow the deduction claimed from the consideration to be paid by ONGC since a part of delay was caused due to approval pending from US authorities, of which ONGC was duly informed, and hence not attributable to Western Geco. Also, it held that the deductions by ONGC on account of change in Indian tax laws were not valid. ONGC filed a suit for setting aside the arbitral proceedings in the Bombay High Court under Section 34 of the Act. The petition was dismissed by a Single Judge of the High Court but was allowed in part by the division bench of the High Court to the extent of deleting pendente lite future interest from the award made by the Tribunal. Aggrieved by the decision, ONGC appealed to the Supreme Court.

The Apex Court brought back the Saw Pipes judgement and treated domestic and foreign awards at par in terms of challenge.[9] The Supreme Court enlisted three additional points under fundamental policy of India - principles of natural justice, judicial approach and Wednesbury unreasonableness[10] as fertile grounds for challenge of domestic as well foreign awards. It provides that an award may be cast away or modified depending on the severability of such a part and comments on the merits of the dispute. This approach is criticized as an excess of judicial intervention, frustrating the very object of alternative dispute resolution. Also it is against the international practice and courts in various jurisdictions have held it to be against the said position.[11]

The disquieting expansion of 'public policy' in ONGC v. Western Geco is detrimental to overall legal landscape and is likely to disincentivize parties from resorting to arbitration.[12] Further, the said judgement has been highlighted with added emphasis in the Associated Builders case.[13] Although in the said case the arbitral award has been maintained, the Court has made several passing remarks tracing the evolution of the 'public policy' debate opening avenues for future litigation. The Law Commission, sensing the later development, in February, 2015 submitted a Supplementary Report ('Report') to the Government of India.[14] The Report clearly states that the verdict in ONGC v. Western Geco "undermines the Law Commission's attempts to bring the Act in line with international practices and will discourage the possibility of international arbitration coming to, and the domestic arbitration staying in, India." Hence, an explanation to the Section 34(2)(b)(ii) is proposed which states that “to determine the contravention of fundamental policy of Indian law shall not entail a review of the merits of the dispute".

The Government of India in its quest for enhancing the ease of doing business in India has reacted to the Report declaring to amend the Act. However, the contents of the Arbitration & Conciliation (Amendment) Bill, 2015 are still awaited.[15]

- Shriya Jain & Param Pandya




[1] For detailed analysis of Section 34 & 48, See Avtar Singh, Law of Arbitration & Conciliation, Eastern Book Company, Lucknow, (9th eds., 2009) pp. 292-395, 457- 460.

[2] Justice Burroughs in Richardson v. Mellish, 2 Bing 229 (1824) at 303. Reiterated by Justice Subba Rao in Gherulal v. Mahadeodas, AIR 1959 SC 781.

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

[4] ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705.

[5] Phulchand Exports Limited v. OOO Patriot (2011) 10 SCC 300.

[6] Shri Lal Mahal Ltd. v. Progetto Grano Spa 2013 (4) CTC 636. For details, See Public Policy under section 48 of the Arbitration Act, IndiaCorpLaw Blog, (September 12, 2013).

[7] Prachi Narayan & Aditya Pal, Proposed Amendments to Arbitration Law, IndiaCorpLaw Blog, (August 22, 2014).  

[8] [2015] 54 taxmann.com 331 (SC).

[9] Economic Laws Practice, India: Public Policy In Arbitration Gets New Wings: Review of Indian Supreme Court Decisions In 2014, www.mondaq.com, (January 21, 2015).

[10]" It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the courts can interfere." Lord Green in  Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223.

[11] Government of the Republic of the Philippines v. Philippine International Air Terminals Co, Inc (Singapore High Court, 2007); Hall Street v Mattel (United States Supreme Court, 2008). These Judgements have clearly laid down that courts should not resort to reconsideration of the award on the merits.

[12] For detailed analysis of ONGC v. Western Geco, see Shriya Jain & Param Pandya, The Disquieting Expansion of Public Policy: ONGC v. Western Geco International Ltd, [2015] 32 CPT 616 - 620.

[13] Associate Builders v. Delhi Development Authority, 2014 SCC SC 937.

[14] Supplementary to the 246th Law Commission of India Report on Amendment to Arbitration & Reconciliation Act, 1996, Public Policy' Developments  post Report No. 246, http://lawcommissionofindia.nic.in/reports/ Supplementary _to_ Report_No._246.pdf (February, 2015).

[15] Prithvij Beniwal, The Arbitration and Conciliation (Amendment) Bill, 2015, Arbiter Dictum, (February 26, 2015).

1 comment:

vswami said...

“The debate over the term 'public policy' in the Indian context is rather protracted.”
REACTION: Not just in Indian context, but in today’s context, globally, nothing is regarded to be fit enough to pass muster without a debate; and a debate not simply protracted but endlessly procrastinated, often with no rhyme or reason , or sound logic at that. As independently perceived, the malady has to be traced to the fatal fallacy in trying and construing or misconstruing the two concepts, - ‘public’ and ‘policy’ themselves ; differently for different purposes/ in varying contexts, so much so many times going off unwittingly at a tangent. More so, individual perceptions, with lawyers and judiciary bent upon making own ‘valuable’ contribution, to keep the issues kicking and alive perennially to eternity.
Worthwhile looking back to know comments in the like vein posted previysly on the same topic.