Public Policy & Setting Aside Patently Illegal Arbitral Awards

Public Policy and Setting Aside Patently Illegal Arbitral Awards in India

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PUBLIC POLICY AND SETTING ASIDE PATENTLY ILLEGAL AR BITRAL

AWARDS IN INDIA

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INTRODUCTION

The Indian legislature and judiciary have a fundamental choice to make – to respect

party autonomy and finality of arbitral awards as envisaged by the 1996 Act or impose

judicial supervision on arbitration and revert to the days of the 1940 Act. This choice will

shape the course of Indian arbitration for the next decade and beyond.

- Aloke Ray and Dipen Sabharwal1

Some judges appear to have thought [public policy, the unruly horse] more like a tiger,

and refused to mount it at all, perhaps because they feared the fate of the young lady of

Riga. Others have regarded it like Balaam's ass which would carry its rider nowhere. But

none, at any rate at the present day, has looked upon it as a Pegasus that might soar

beyond the momentary needs of the community.

- Percy H. Winfield2

The Arbitration and Conciliation Act, 1996 (“the Act”) was enacted for the purpose of

making the law of dispute resolution in tune with the international economic scenario.3 It was

felt that the existing law had become outdated4 and arbitration was becoming the chief

method of settlement of disputes in commercial matters, especially at the international level,

1 Aloke Ray and Dipen Sabharwal, What Next for Indian Arbitration?,

http://www.whitecase.com/files/Publication/cfee45a1-1484-4233-9a98-

21226c148e18/Presentation/PublicationAttachment/9ab9418b-755a-4639-9f75-

03a96723d26a/What_Next_for_Indian_Arbitration_Article2.pdf last visited on February 25, 2008. 2 Percy H. Winfield, Public Policy in the English Common Law 42 Harv. L. Rev. 76 (1928- 29) 3 The Act does not contain any Statement of Purpose but the Arbitration and Conciliation Bill, 1995 contained a

lengthy Statement of Purpose. See, O.P. MALHOTRA & INDU MALHOTRA, THE LAW AND PRACTICE

OF ARBITRATION AND CONCILIATION 42 (2006) 4 The Indian judiciary has expressed such concern on more than one occasion. Trustees of Port of Madras v.

Engineering Construction Corporation (1995) 5 SCC 531; Ramji Dayawala & Sons (P) Ltd v. Invest Import

(1981) 1 SCC 80: AIR 1981 SC 2085; M/s Guru Nanak Foundation v. M/s. Rattan Singh & Sons AIR 1981 SC

2075.


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and there was a felt need to bring the Act in consonance with the developments at the

international level. The Act was hence modelled on the basis of the UNCITRAL5 Model Law

on International Commercial Arbitration, 1985 (“Model Law”). The Model Law was drafted

precisely for the same purpose- for the individual States to adopt it “in their statutory

arbitration laws either in its entirety, or a substantial part of its provisions, or at least its

general shape and philosophy, so as to bring about a certain amount of uniformity amongst

national laws…”6 India adopted almost entirely, with certain small but significant changes,

the Model Law.

The Model Law was based on the philosophy of limited grounds for setting aside

arbitral awards at the legal seat of arbitration and the grounds are almost identical to those of

the New York Convention for refusal to recognise or enforce foreign awards.7 The same

philosophy was adopted in the Indian context under Section 34 of the Act. One of those

grounds is public policy, by virtue of which, any award rendered by the arbitral tribunal that

is contrary to the public policy of India could be set aside.

Initially, the courts in India interpreted this ground of public policy in a sumptuary

manner, in consonance with practice in various countries. Many nations created a distinction

between domestic and international commercial arbitrations and adopted a narrow approach

towards public policy in the latter cases as compared to the former. As regards international

commercial arbitration, numerous countries interpreted public policy, both for setting aside

and enforcement in a narrow manner.8 India virtually adopted the Model Law even for

governing domestic arbitrations.9 It can be presumed, as a matter of logical consequence, that

5 United Nations Commission on International Trade Law, a body created by the general Assembly of the

United Nations which aims at harmonising and unifying the law on international trade. 6 O.P. Malhotra, Preface to O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at xxv 7 Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,

1958. 8 Some examples are Parsons & Whittemore Overseas Co. v. RAKTA 508 F.2d 969 (2d. 1974); Karaha Bodas

Co. V. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara 364 F.3d 274 (2004); Slaney v. The

International Amateur Athletic Federation 244 F.3d 580 (2001), Westacre Investments Inc. v. Jugoimport-SPDR

Holding Co. Ltd. and Others [1999] 2 Lloyd’s Rep. 65 (CA). 9 Clause (3) of the Statement of Objects and Reasons to the Arbitration and Conciliation Bill, 1995, inter alia,

states: “Though the [UNCITRAL Model Law on International Commercial Arbitration, 1985 and the

UNCITRAL Conciliation Rules, 1980] are intended to deal with international commercial arbitration and


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the Indian Parliament created no distinction between domestic and international arbitration,

and instead adopted a uniform law for both domestic and international arbitrations based on

the philosophy of the Model Law. This would mean that India created no qualitative

distinction between public policy for domestic and international arbitrations but simply

adopted the UNCITRAL philosophy of restrictive reading of the public policy ground to set

aside arbitral awards. After the enactment of the 1996 Act, the courts and even the

commentators interpreted Section 34(2)(b(ii) in a narrow manner.

The Supreme Court, but in Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd.10

(“SAW Pipes”), broadly read the ground of public policy to the consternation of many

lawyers11 and stakeholders of the arbitral process.12 The reason for their anguish was that in

SAW Pipes, the Court held that an award could be set aside if it was patently illegal. This

meant that there were chances that substantive review of arbitral awards could take place in

the set aside proceedings, which reflected unjustified judicial mistrust and hostility towards

arbitration. The SAW Pipes decision has been criticised for subverting the arbitral process and

for being in contradiction to the policies contained in the Act, especially the policies of

finality of awards and minimum judicial intervention into the arbitral process. The

judgement, it has been argued, has struck at the heart of arbitration in India by potentially

exposing all awards to be questioned in courts and has made commercial dispute resolution a

time-consuming and expensive process, and has hindered foreign investment in India.13

However there are many who argue in support of SAW Pipes for expanding the notion of

public policy and specifically for reading patent illegality into public policy. The supporters

of the latter view argue that commercial arbitration cannot exist in the area of lawlessness and

the arbitral award should not be free from scrutiny.

conciliation, they could, with appropriate modifications, serve as a model for domestic arbitration and

conciliation.” 10 2003(2) Arb. LR 5 (SC): (2003) 5 SCC 705. 11 In an article in the Deccan Chronicle titled “Sore Pipes”, Vahanvati wrote, “[s]ore is how one would have to

describe the reaction of the arbitration community to [the SAW Pipes] judgement”. Vahanvati, Sore Pipes,

Deccan Chronicle, Hyderabad Edition, July 26, 2003. 12 The position of law prior to SAW Pipes was that public policy included only the fundamental policy of India,

interest of India and justice or morality. See, Renusagar v. General Electric Ltd 1994(2) Arb. LR 405 (SC): AIR

1994 SC 860, Para 59. 13 Arbitration delays hit investor mood, http://in.news.yahoo.com/071021/32/6m7z8.html, Last visited on

December 06, 2007.


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It is submitted that the legal fraternity has argued either for a broad notion of public

policy without giving due regard to the promptness of the arbitral process in dispensing

justice or for a swift arbitral process without due regard to the role of public policy in the

arbitral process. Placing this issue in the form of a dichotomy leads to the following

problems:

1. Primarily, it forecloses the inquiry into whether both notions- the notion of having a

broader conception of public policy and the notion of a speedy arbitral process- can be

reconciled. It constricts us and forces us to choose between a broader public policy

and a speedy arbitral process but not have both.

2. Secondly, such a construction undermines the role of the concept of public policy in

arbitration.

3. Finally, it undermines the importance of inexpensiveness and swiftness of arbitration

in resolving disputes, commercial or otherwise. In fact, one of the primary advantages

of arbitration is that it is a swift and economical mode of achieving justice.

The purposes of this paper, therefore, are:

• to find out what are the merits of having a broader notion of public policy in

connection with setting aside arbitral awards, as contemplated by SAW Pipes;

• to look into the possible problems that could crop up because of a SAW Pipes-type

reading of public policy in Section 34(2)(b)(ii) of the Act, especially the effect on the

finality of arbitral awards in an era of globalisation; and

• to find out if the problems created by a wide reading of the term public policy in

Section 34(2)(b)(ii) could be eliminated.

In pursuance of the above-stated goals, this paper is divided into five parts. Part I

introduces the subject. Part II, titled, “Public Policy and the Patent Illegality in India”, is

divided into three sections. Section A consists of the analysis of the meaning and content of

the concept of public policy. Through the use of semantics, it is argued therein that the

disagreement about the scope of public policy is essentially ideological. In the context of

private law, the debates on the scope of public policy have always been the debates as to the

extent to which State could interfere into “private” actions. In arbitration, as regards


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challenge of arbitral awards, the disagreement about public policy is not a disagreement about

its meaning but a disagreement about the permissible degree of court interference into the

arbitral award. Section B analyses the extent to which the Indian Courts have interfered into

the arbitral awards in the name of public policy. For this purpose, the section traces the

evolution of judicial review of substantive errors in domestic arbitral awards and how this has

been brought under the concept of public policy under the present Act.

Part III, titled, “Advantages and Fallouts of a Broader Reading of Public Policy”,

attempts to look at the diametrically opposite approaches espoused by the Parliament and the

Supreme Court on public policy in particular, and arbitration in general. The dominant

arguments with regard to the nature of reading the scope of public policy can be classified

into two. The two sections of this Part are devoted to assess the soundness of both the

perspectives. Section A of this Part describes the advantages of having a notion of public

policy that includes patent illegality. Here, the importance of supervision of arbitral awards in

ensuring a fair and just arbitral mechanism is discussed. Further, the role of appellate courts

in error correction and amplification of law are discussed. Section B describes the fallouts of

having such a broad conception of public policy. A broader reading of public policy would

result in the subversion of arbitral mechanism in India and would adversely affect Foreign

Direct Investment in India. It is also felt that such a conception of public policy is against the

letter and the spirit of the Arbitration and Conciliation Act, 1996.

Part IV, titled “Need for a Middle Path?” searches to find out if there are alternative

approaches that can be adopted. In its pursuit for alternatives, this Part initially compares the

jurisdictions of Hong Kong, UK and USA to find out how these legal systems have tried to

ensure speedy settlement of disputes even when the courts have had the power of setting

aside patently illegal awards. Section B of this Part critically evaluates the current approach

of the Supreme Court on public policy and suggests necessary reforms, such as designation of

apex arbitral institutions, better use of the remedy of remission whenever appropriate, use of

fee shifting mechanisms to discourage frivolous litigation, narrowing down the grounds on

which appeal on merits could be allowed, elimination of the fallouts of an inclusive reading

of public policy in Section 34(2)(b)(ii) of the 1996 Act. Part V concludes.

II

PUBLIC POLICY AND PATENT ILLEGALITY IN INDIA


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A. Meaning and Content of Public Policy

Shadows often obscure our knowledge which not only vary in intensity but are cast by

different obstacles to light. These cannot all be removed by the same methods and till the

precise character of our perplexity is determined we cannot tell what tools we shall need.

- H.L.A. Hart14

The term “public policy” has always been regarded as “vague”, “elusive”,

“ambiguous” and incapable of “precise definition”.15 The concept of public policy as used in

various spheres of law encompasses many forms of linguistic indeterminacy, including

ambiguity, vagueness and contestability.16 It is common argument that this inherent

vagueness of public policy allows courts to use it as a catch-all provision and invalidate

actions that are otherwise valid and legitimate and that the open texture of public policy is a

source of enormous disagreement.

14 H.L.A. Hart, Definition and Theory in Jurisprudence, 70 L.Q.R. 37 (1954) 15 For example, in Gherulal Pathak v. Mahadeodas Maiya AIR 1959 SC 781, the Supreme Court stated,

“[p]ublic policy is a vague and unsatisfactory term, and is calculated to lead to uncertainty and error, when

applied to determination of legal rights…” See, ONGC v. SAW Pipes Ltd. supra, note 10 and Central Inland

Water Transport Corporation Limited v. Brojo Nath Ganguly AIR 1986 SC 1571: (1986) 3 SCC 156: [1986] 2

SCR 278, Para 95, for comments on the inherent vagueness of the term “public policy”. Also see, W.S.M.

Knight, Public Policy in English Law 38 L.Q.R. 207, 213-214 (1922), for a survey of attempts by the English

courts to define public policy in the 18th and the 19th centuries; Winfield, supra, note 2, at 92, where Winfield

comments, “What does public policy mean? If we abandoned any attempt to define it, we should have the

excuse that some judges have thought it to be indefinable, that others have given descriptions not easily

reconcilable and that others again have made inconsistent statements in the self-same decision. There is nothing

remarkable in this because the topic is so elusive”; Homayoon Arfazadeh, In the Shadow of the Unruly Horse:

International Arbitration and the Public Policy Exception 13 Am. Rev. Int'l Arb. 43 (2002). 16 The concept of philosophical indeterminacy is different from that of legal indeterminacy. The latter refers to

the thesis that “the existing body of legal doctrines--statutes, administrative regulations, and court decisions--

permits a judge to justify any result she desires in any particular case”. Lawrence B. Solum, On the

Indeterminacy Crisis: Critiquing Critical Dogma, 54 U. Chi. L. Rev 462 (1987). Philosophical indeterminacy

refers to the assertion that a concept by itself does not have a precise meaning but its meaning can be explained

by reference to the context of its use.


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Here, a distinction must be drawn between indeterminacy of the concept in itself and

indeterminacy in its usage.17 Every word-concept is indeterminate-in-itself because a word-

concept does not have any concrete meaning in itself; rather it acquires meaning by the virtue

of its context. Ludwig Wittgenstein stated that “[f]or a large class of cases--though not for

all--in which we employ the word "meaning" it can be defined thus: the meaning of a word is

its use in the language”.18 Wittgenstein19 argued that a concept, by itself, has no content but

the concept is used as a label to signify many things. He stated that these things specified

have no objects in common and used the concept of “games” to explain his idea.20 He

explained that though our initial assumption is that there must be something in common with

those activities that are called as games we find that there is nothing common to all the

games. What we find here is “a complicated network of similarities overlapping and criss-

crossing: sometimes overall similarities, sometimes similarities of detail”.21 He called this

17 No concept has any meaning on its own. Therefore, a concept, by itself, has no meaning. This makes it

indeterminate-in-itself. This concept of philosophical indeterminacy is different from that of legal

indeterminacy. 18 Many attribute to Wittgenstein the latter part of the statement that “the meaning of a word is its use in the

language”, but they miss what he says in the second part of the aphorism: “And the meaning of a name is

sometimes explained by pointing to its bearer”. (italics in the original) 19 Academic literature refers to Wittgenstein as “early” and “later” Wittgenstein for the change of his position on

the theory of meaning from Tractatus Logico-Philosophicus (available at http://www.gutenberg.org/etext/5740)

to that of the Philosophical Investigations. LUDWIG WITTGENSTEIN, PHILOSOPHICAL

INVESTIGATIONS (1953), in, LUDWIG WITTGENSTEIN, THE COLLECTED WORKS OF LUDWIG

WITTGENSTEIN (1998). 20 LUDWIG WITTGENSTEIN, PHILOSOPHICAL INVESTIGATIONS, id., where Wittgenstein explains:

“Consider for example the proceedings that we call "games". I mean board-games, card-games, ball-games,

Olympic games, and so on. What is common to them all? [I]f you look at them you will not see something that

is common to all, but similarities, relationships, and a whole series of them at that... Look for example at board-

games, with their multifarious relationships. Now pass to card-games; here you find many correspondences with

the first group, but many common features drop out, and others appear. When we pass next to ball-games, much

that is common is retained, but much is lost.--Are they all 'amusing'? Compare chess with noughts and crosses.

Or is there always winning and losing, or competition between players? Think of patience. In ball games there is

winning and losing; but when a child throws his ball at the wall and catches it again, this feature has

disappeared. Look at the parts played by skill and luck; and at the difference between skill in chess and skill in

tennis. Think now of games like ring-a-ring-a-roses; here is the element of amusement, but how many other

characteristic features have disappeared! And we can go through the many, many other groups of games in the

same way; can see how similarities crop up and disappear.” Aphorism 66. 21 Id.


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phenomenon as “family resemblances”. This explanation applies to all concepts, including

public policy. Taken separately, an inquiry into the meaning of the word-concept public

policy will give an endless variety of “things” in which no golden thread would run in

common to all these things. Hence it is futile to ask ontological questions like “what is public

policy?”22 This idea that concepts by themselves had no essence or fundamental notion in

them was revolutionary because it was thought for more than two millennia that concepts

contained a core meaning on the basis of which usage is determined.

This is probably the reason why eminent jurists like H.L.A. Hart refused to begin their

conception of law by defining law. H.L.A. Hart, in one of his influential essays, pointed out

the inadequacy of the common per genus et differentiam method for elucidating legal

notions.23 Hart considered that defining a thing by specifying its genus and differentia unduly

complicated exposition of legal concepts instead of elucidating them. Hart argued that unlike

ordinary words, legal words were different, in that there existed no single principle behind its

usage in diverse contexts. He took the word “law” as an example and stated:

[C]ompared with most ordinary words, these legal words are in different ways

anomalous. Sometimes, as with the word ‘law” itself, one anomaly is that the range of

cases to which it is applied has a diversity which baffles the initial attempt to extract any

principle behind its application, yet we have the conviction that even here there is some

principle and not an arbitrary convention underlying the surface differences;24 so that

whereas it would be patently absurd to ask for the elucidation of the principle in

accordance with which different men are called Tom, it is not felt absurd to ask why,

within municipal law the immense variety of different types are called law, nor why

municipal law and international law, in spite of striking differences, are so called.25

22 Brian Bix discusses this idea in his essay, “Conceptual Questions and Jurisprudence”. See, Brian Bix,

Conceptual Questions and Jurisprudence, in, BRIAN BIX (ed.), PHILOSOPHY OF LAW: CRITICAL

CONCEPTS IN PHILOSOPHY (VOLUME I) 48- 62 (2006). 23 Hart, supra, note 18. 24 This “anomaly” is referred hereinafter as “no-essence characteristic” for brevity. The no-essence characteristic

is found in legal word-concepts as well as in other word-concepts as well. 25 HART, supra, note 18, at 38.


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In addition to this anomaly, legal words also suffered from another anomaly: non-

existence of counterparts of legal words in the real world, a luxury, according to him, enjoyed

by ordinary words. An ordinary word can be defined in terms of “kinds of persons, things,

qualities, events and processes” but a legal word cannot be because they are special and do

not come within ordinary categories.26 Hart was surprised about the fact that “innocent

requests for definitions of fundamental legal notions” had resulted in enormous disagreement

so much so that it gave rise to different schools of thought, which were answered questions

like “what is right?” etc. This made him conclude that these problems were the result of the

erroneous treatment of legal words like ordinary words.27

Though Hart is right in pointing out the anomalies of legal words, he seemed to have

erred in restricting his elucidation of the no-essence anomaly to legal word- concepts alone.

He failed to appreciate the fact that all concepts, legal and non-legal suffered from this

anomaly. It was Wittgenstein, as noted earlier, who explained that concepts by themselves

contained no meaning but acquired meaning by its use. This meant that any attempt to define

a concept, including a legal concept without specifying the context only created more

confusion.28

When a word-concept is indeterminate-in-itself, is it possible to determine its

meaning? Wittgenstein answered this question by stating that a word acquires meaning in

language.29 What this meant was instead of trying to find out the meaning of a word by

“staring at the words… then staring at the world, then staring at the words again”,30 it would

26 He explains this by citing the example of “right”, which cannot be reduced in terms of known categories such

as “expectation” or “power”. Hart, supra, note 18, at 39. 27 Id. 28 Brian Bix, Conceptual Questions and Jurisprudence, supra, note 26. The idea of explaining the meaning of

concepts in accordance with its context is not something that can be exclusively attributed to modern linguistic

philosophy or to Wittgenstein. Jeremy Bentham recommended a similar method for the purpose of expounding

legal concepts and called it “phraseoplerosis”. Hart, supra, note 18. 29 The same approach of understanding the meaning from the way in which it is used in language was adopted

by Jeremy Bentham in so far as legal notions were concerned. He called this technique as “phraseoplerosis”.

Hart, supra, note 18. 30 Supra note 2, at 510.


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be proper to find out how the word has been used in usage.31 But then, what is usage? Does it

mean merely the way in which conceptual words are used in specific contexts and garnering

their meaning from the language used, or context means something more than mere usage in

language?32 Context is not simply restricted to the mere usage of the word-concept in

language but refers to all the variables which are connected to the conceptual word, including

the social practices, normative, political, and institutional forces, etc.33 Where there are

several conceptions of a term, the context determines what the term’s meaning would be.34

Jeremy Waldron puts forth this point aptly: “We cannot know that a word is vague, unless we

know something about its use.”35 This is what the remaining portion of this section attempts

to achieve.

The concept of public policy has been used in several senses. In political science

literature, public policy has been defined to mean “purposeful decisions made by

authoritative actors in a political system which have the formal responsibility of making

31 H.L.A. Hart, Preface, in H.L.A. HART, CONCEPT OF LAW vi- vii (2nd ed. 2002); Brain Bix, Questions in

Legal Interpretations, in, ANDREI MARMOR (ED.), LAW AND INTERPRETATION: ESSAYS IN LEGAL

PHILOSOPHY (1997). Such an approach was adopted by H.L.A. Hart due to the influence of the ordinary

language philosophy movement, especially J.L. Austin, in Oxford University. J.L. Austin was the central figure

in the ordinary language philosophy movement in Oxford University during the 1950s. His influence on H.L.A.

Hart was the reason why Hart called his magnum opus, “The Concept of Law”, as “an essay in descriptive

sociology”. See, H.L.A. Hart, Preface, in H.L.A. HART, CONCEPT OF LAW vi, Oxford (2nd ed. 2002). The

idea was that a proper look at the way in which words were used would solve many vexing problems of

philosophy. THOMAS MAUTNER, THE PENGUIN DICTIONARY OF PHILOSOPHY 318, Penguin (2000). 32 H.L.A. Hart and Tony Honore tried, almost successfully, to use this thesis that usage in language immensely

helped in understanding the world in their book on the concept of causation, where, in faithfulness to J.L.

Austin’s injunction that a sharpened awareness of words led to sharpened perception of phenomena. NICOLA

LACEY, A LIFE OF H. L. A. HART THE NIGHTMARE AND THE NOBLE DREAM 214- 219 (2006) 33 Id. 34 See, Clark D. Cunningham & Charles J. Fillmore, Using Common Sense: A Linguistic Perspective on Judicial

Interpretations of “Use a Firearm”, 73 Wash. U. L.Q. 1159 (1995), where the authors analyse the use of the

verb “use” in a criminal statute and conclude that “in everyday English the meaning of the verb use is very

general and thus highly dependent on context”. Also see, Jeremy Waldron, Vagueness in Law and Language:

Some Philosophical Issues, 82 Cal. L. Rev. 509 (1994); Robert M. Cover, Violence and the Word, 95 Yale L.J.

1601 (1986), for the interconnection between legal interpretation and the ensuing imposition of violence. Here,

Cover concludes that legal interpretation is not the function of an understanding of the text or word alone. 35 Jeremy Waldron, id., at 511.


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binding choices among the societal goals”.36 This conception of public policy, then, would

include every governmental decision directed towards a particular purpose. Public policy has

also been used to denote something concerning public interest or public good.37 However,

some have defined public policy to mean the most fundamental principles of a state or a legal

system.38 Public policy has also been used to refer to those laws that are meant of the

protection of political, social and economic of organisation of a state such as embargoes,

foreign exchange control regulation, police regulations, tax laws etc. and these laws are

compulsorily applicable to the situation irrespective of the law applicable. Such a conception

of public policy has been called lois de police.39

These various conceptions of the concept of public policy lead us to the inference

that public policy has been applied differently in different contexts. To apply a single

conception in all places where reference to public policy is made would definitely lead us

astray.40 The difference of opinion in the realm of private law is centred on the debate about

the extent to which state could interfere into “private” actions. The desirability of state

intervention has determined the width of the scope of public policy. Hence the debates about

the scope of public policy in private law are debates about how much state intervention ought

to be allowed, which is essentially an ideological question. In Contract Law, for example, the

scope of public policy has depended upon the degree of interference of the state into the

freedom of contract.41

36 CHARLES L. COCHRAN & ELOISE F. MALONE, PUBLIC POLICY: PERSPECTIVE AND CHOICES

13 (2007) 37 Oil and Natural Gas Corporation Ltd. v. SAW Pipes supra, note 10. Central Inland Water Transport

Corporation Limited v. Brojo Nath Ganguly supra, note 19. 38 MAURO RUBINO-SAMMARTANO, INTERNATIONAL ARBITRATION: LAW AND PRACTICE 504

(2007); JEAN-FRANCOIS POUDRET & SEBASTIEN BESSON (TRANSL. STEPHEN V. BERTI &

ANNETTE PONTI), COMPARATIVE LAW OF INTERNATIONAL ARBITRATION 755 (2007); Kuwait

Airways Corporation v. Iraqi Airways Co [2002] 2 A.C. 883. 39 RUBINO- SAMMARTANO, id., at 505. 40 As early as in 19th century, Jhering condemned legal thought’s obsession towards concepts considered in

abstraction without reference to real life conditions and ignoring social and individual interests in the use of

legal concepts. H.L.A. HART, ESSAYS IN JURISPRUDENCE AND PHILOSOPHY (1983) 41 In Printing and Numerical Registering Co. v. Sampson (1875) L.R. 19 Eq. 462, Jessel M.R. stated: “[Y]ou are

not to extend arbitrarily those rules which say that a given contract is void as being against public policy,

because if there is one by which more than another public policy requires, it is that men of full age and


12

Perhaps the best reflection of the role of ideology42 in shaping the meaning of public

policy is the restraint of trade doctrine developed by the English Courts.43 The restraint of

trade doctrine is one of the earliest applications of the doctrine of public policy.44 The earliest

formulation of the doctrine was that all restraints were held to be against public policy and

were therefore void.45 Later, the scope of public policy as regards agreements on restraint of

trade lessened when the courts began to recognise that only general agreements in restraint of

trade were bad and partial restraints “made upon good and adequate consideration” were

valid.46 Presently it has been recognised that there is no distinction between partial and total

restraints47 and a restraint of trade would be valid if it is reasonable, in the interest of the

contracting parties and is in the interests of the public.48 It could be concluded that the scope

of public policy to make agreements on restraint of trade unenforceable diminished with the

changing economic conditions.

Similarly, the courts of several nations have assigned a minimal role to the concept of

public policy in the context of enforcement of foreign arbitral awards for economic reasons

and reasons of international comity and reciprocity.49 Thus, where ideology has impelled the

courts to interpret public policy in a narrow manner they have done so.

competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into

freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore you have this

public policy to consider that you are not likely to interfere with freedom of contract”. (Emphasis added). 42 The departure by the Courts from the function of enforcing contracts and refuse enforcement on the ground of

public policy, argues Friedmann, exposes some but not all ideological foundations of English Law. W.

FRIEDMANN, LEGAL THEORY 479 (1967) 43 See, J. BEATSON, ANSON’S LAW OF CONTRACT (2002): “The law concerning restraint of trade has also

changed from time to time, both in form and in spirit, in response to changes in conditions of trade”, at 367. 44 H.G. BEALE (GEN. ED.), CHITTY ON CONTRACTS 981 (2004) 45 Lord Herschell L.C. in Thorsten Nordenfelt v. The Maxim Nordenfelt Guns and Ammunition Company

[1894] A.C. 535, 541. 46 Claygate v. Batchelor 74 E.R. 961 (1602), cited in, RICHARD STONE & RALPH CUNNINGTON, TEXT

CASES AND MATERIALS ON CONTRACT LAW 860 (2007); Mitchell v. Reynolds 24 E.R. 347, 349

(1711). 47 H.G. BEALE, supra, note 48, at 369. 48 J. BEATSON, ANSON’S supra, note 47. 49 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614 (1985); Parsons & Whittemore

Overseas Co., Inc. v. Societe Generale De L'industrie Du Papier (RAKTA), and Bank of America 508 F.2d 969

(1974), where the Court held: “To read the public policy defense `as a parochial device protective of national


13

In the context of setting aside arbitral awards, the doctrines of party autonomy and

minimum judicial interference have restricted the scope public policy to certain narrow

standards. The disagreement about public policy is not a discord about its meaning but a

disagreement about the permissible degree of court interference into the arbitral award. While

intrusion by the courts into arbitral awards in the name of public policy for breach of

procedural justice is uncontroversial, interference for substantive errors of law through the

notion of public policy is hotly debated.

B. Patent Illegality of Domestic Awards and Public Policy

One of the challenges for arbitration law is to strike a fine balance between finality of

arbitral awards on the one hand, and fairness and justice through judicial review on the

other.50 India has tried to deal with this challenge but has not succeeded. The success of a

well structured framework of arbitration depends mainly on its relationship with the courts.

UNCITRAL explains:

[I]t will be one of the more delicate and complex problems of the preparation of a Model

Law to strike a balance between the interest of the parties to freely determine the

procedure to be followed and the interests of the legal system expected to give recognition

and effect thereto.51

political interests would seriously undermine the Convention's utility. This provision was not meant to enshrine

the vagaries of international politics under the rubric of ‘public policy.’ Rather, a circumscribed public policy

doctrine was contemplated by the Convention's framers and every indication is that the United States, in

acceding to the Convention, meant to subscribe to this supranational emphasis”; Renusagar v. General Electric

Ltd, supra, note 12 50 Fali S. Nariman states: “In arbitration, there is always the never-ending conflict between two irreconcilable

principles- the high principle that justice must be done though the heavens may fall and the low principle that

commends a quick resolution of all disputes. The high principle favours ample disputation and court review- the

other does not”. F.S. Nariman, Arbitration & ADR in India, in, P.C. RAO & WILLIAM SHEFFIELD (EDS.),

ALTERNATIVE DSIPUTE RESOLUTION: WHAT IT IS AND HOW IT WORKS (1997). Also see,

WILLIAM W. PARK, ARBITRATION OF INTERNATIONAL BUSINESS DISPUTES: STUDIES IN LAW

AND PRACTICE 204 (2006) 51 UNCITRAL, REPORT OF THE SECRETARY- GENERAL: POSSIBLE FEATURES OF A MODEL LAW

ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/207) (14 May 1981), Available at


14

The first substantive legislation in India exclusively on arbitration was the Arbitration

Act 1899, which was primarily based on the English Arbitration Act, 1889.52 But the Act did

not achieve the purposes for which it was enacted. Delay was the norm and complexity was

the law’s chief feature.53 The need was felt for replacing the existing law with a law that

would apply uniformly to the whole of India and establish a “workman-like system of

commercial arbitration”.54 Consequently, the Arbitration Act of 1940 (hereinafter, “1940

Act”) was enacted to comprehensively cover all forms of arbitration and also to curb the

delays in the arbitral process.

The 1940 Act contained two broad ways by which an arbitral award could be

interfered with by the courts:55

1. The court could, by virtue of Section 16(1) remit an award for the reconsideration of

the arbitrator56 or,

http://daccessdds.un.org/doc/UNDOC/GEN/NL8/102/47/PDF/NL810247.pdf?OpenElement Last visited on

March 08, 2008. 52 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 9. The 1899 Act applied was applicable to the

Moffusils while Schedule II of the Code of Civil procedure, 1908, governed arbitration in non- Moffusil areas. 53 See, Chapter XIII, REPORT OF CIVIL JUSTICE COMMITTEE 1924-25, available in, NARAYANA P.S.

(JUSTICE), THE ARBITRATION AND CONCILIATION ACT 1996 1382- 1392, ALT Publications (4th ed.

2007). 54 Id. Also see, Dinkar Rai Lakshmiprasad v. Yeshwantrai Hariprasad AIR 1930 Bom. 98 for criticisms on the

then existing law on arbitration. 55 Under S 13(b) of the 1940 Act, the arbitrator had the power to “state a special case for the opinion of the

Court on any question of law invoked, or state the award, wholly or in part, in the form of a special case of such

question for the opinion of the Court”. However, the court had no suo moto power to do the same. 56 S 16 of the 1940 Act: “.Power to remit award:- (1) The Court may from time to time remit the award or any

matter referred to arbitration to the arbitrators or umpire for reconsideration upon such terms as it thinks fit:

(a) where the award has left undetermined any of the matters referred to arbitration, or where it determines any

matter not referred to arbitration and such matter cannot be separated without affecting the determination of the

matters referred; or

(b) where the award is so indefinite as to be incapable of execution; or

(c) where an objection to the legality of the award is apparent upon the face of it.

(2) Where an award is remitted under sub-section (1) the Court shall fix the time within which the arbitrator or

umpire shall submit his decision to the Court:


15

2. The court could set aside an award on the satisfaction of any one of the grounds

mentioned in Section 30.57

Remittal of the award could be ordered by the court to the arbitral tribunal on

satisfaction of at least one of the grounds mentioned in Section 16(1). The grounds were as

follows:

1. Tribunal has left undetermined any matter referred to arbitration in its award or where

the award contains any matter referred to arbitration.

2. Award is incapable of execution due to its indefiniteness.

3. Illegality of the award is apparent on the face of the record.

Section 30 dealt with setting aside of arbitral awards and contained three grounds on

the basis of which alone an award could be set aside. Section 30 was regarded as exhaustive

and an award could not be set aside on grounds extraneous to those contained in it.58 But the

vice was that the grounds contained in the said section were construed so broadly that the

actual effect of exhaustiveness of grounds contained therein was rendered nugatory. Section

30(a) provided that an award could be set aside if the arbitrator or umpire had “misconducted

himself or the proceedings”.59 Courts interpreted misconduct extensively and set aside

Provided that any time so fixed may be extended by subsequent order to the Court:

(3) An award remitted under sub-section (1) shall become void on the failure of the arbitrator or umpire to

reconsider it and submit his decision within the time fixed.” 57 S 30 of the 1940 Act: “Grounds for setting aside award: An award shall not be set aside except on one or

more of the following grounds, namely:

(a) that an arbitrator or umpire has misconducted himself or the proceedings;

(b) that an award has been made after the issue of an order by the Court superseding the arbitration or after

arbitration proceedings have become invalid under section 35;

(c) that an award has been improperly procured or is otherwise invalid.” 58 S 30 began with the words, “[a]n award shall not be set aside except...” See, also, Nanak Chand v. Lala Panna

Lal AIR 1963 All 68; Mehta Teja Singh v. Food Corporation of India Ltd. AIR 1968 Del 188; Suresh Kumar

Jain v. union of India AIR 1998 Del 229; Naresh Kumar Gupta v. New Bharat Times Co-operative Housing

Group Society 1996(1) Arb. LR 227 (Del); State of Uttar Pradesh v. Allied Contractors (2003) 7 SCC 396; Ispat

Engineering & Foundry Works v. Steel Authority of India Ltd. (2001) 6 SCC 347; D.D. Sharma v. Union of

India (2004) 5 SCC 325. 59 Misconduct in the Act did not take the common meaning of an immoral act. This term has its origin in the

English Arbitration statutes. As Robert Merkin points out, arbitrators regarded the term as pejorative, even when

courts attempted to clarify, albeit unsuccessfully, that the term did not, per se, imply any moral judgement and


16

arbitral awards when (i) there was a defect in the procedure followed by him (ii) the arbitrator

committed breach and neglect of duty and responsibility (iii) the arbitrator acted contrary to

the principles of equity and good conscience (iv) acts beyond the reference (vi) the arbitrator

proceeds on extraneous circumstances (vii) ignores material documents (viii) the arbitrator

based the award on no evidence.60 Thus it can be seen that misconduct was construed in its

broadest sense, without due regard to the delays and the costs, reducing arbitration to an

alternative but inappropriate form of dispute resolution. Similarly, the expression “is

otherwise invalid” in Section 30(c) was given the widest possible meaning.61 The result of

such a wide reading of the grounds was that arbitration became only the first step in the chain

of appeals to various courts resulting in subversion of the arbitral process. Instead of ensuring

a cheap and swift dispute resolution mechanism, arbitration became an expensive affair.62 So

mostly it referred to the proceedings in which the principles of natural justice were not followed. See, Zermalt

Holdings SA -v- Nu-Life Upholstery Repairs Ltd [1985] 2 E.G.L.R. 14. The term was dropped in 1996 when

the English parliament chose to adopt a different approach under the rubric of “serious irregularity” in reviewing

arbitral awards under the Arbitration Act, 1996. ROBERT MERKIN, ARBITRATION LAW 858 (2004); the

same interpretation of the term (without any moral connotations) was adopted by the Indian Courts. K.P.

Poulose v. State of Kerala AIR 1975 SC 1259: (1975) 2 SCC 236. 60 State of Kerala v. K. Kurian P. Paul AIR 1992 Ker 180 61 Union of India v. Om Prakash AIR 1976 SC 1745; Om Prakash v. Union of India AIR 1963 All 242; Saha &

Co. v. Ishar Singh AIR 1956 Cal 321 62 The working of the dispute resolution mechanism contemplated under the 1940 Act can be clearly shown by

analysing the facts of the case Union of India v. Om Prakash AIR 1976 SC 1745. The contract was entered into

during the Second World War and subsequently, dispute arose between the parties. The court of the First Civil

Judge, Meerut appointed an arbitrator on February 13, 1950. The arbitrator was found to be incompetent and

was replaced February 13, 1951 by the Judge of the Small Cause Court, Meerut, acting under the directions of

the District Judge, Meerut, and the arbitrator was replaced by another. The respondent applied to the court on

March 8, 1951 for review of the Order appointing the arbitrator, and this issue was finally decided on May 12,

1951, after travelling through different courts as appeals. Meanwhile, on May 4, 1951, the arbitrator had passed

the award and was filed in the court. Subsequently, the respondent applied to the Small Cause Court to set aside

the award but the application was rejected by the Small Causes Court and a decree confirming the award was

passed on May 26, 1952. The respondent appealed to the High Court, which decided the case in his favour on

July 20,1962. An appeal was then filed by Union of India to the Supreme Court, and the award was nullified by

the Supreme Court on April 2, 1976. In all, it took more than twenty six years for the dispute to be finally

resolved. Also see, Trustees of Port of Madras v. Engineering Construction Corporation (1995) 5 SCC 531,

where the award was rendered by the arbitrator on October 30, 1965 and the Supreme Court finally decided on

the application to set aside the award on August 14, 1995.


17

deep was the discontent with the way in which the 1940 Act was worked that Desai J in Guru

Nanak Foundation v. Rattan Singh & Sons held:

Experience shows and law reports bear ample testimony that the proceedings under the

[1940] Act have become highly technical accompanied by unending prolixity, at every

stage providing a legal trap to the unwary. Informal forum chosen by the parties for

expeditious disposal of their disputes has by the decisions of the courts been clothed with

‘legalese’ of enforceable complexity.63

Foreign Arbitral Awards

The 1940 Act was intended to be a code in itself governing the whole law of

arbitration but enforcement of foreign arbitration agreements and awards were governed by

the Arbitration (Protocol and Convention) Act 1937 and Foreign Awards (Recognition &

Enforcement) Act, 1961 (hereinafter, FARE Act 1961, for brevity). India was a signatory to

the Geneva Protocol, 192364 and Convention, 192765, and also the New York Convention,

1958. To give effect to its obligations under the Geneva and the New York Conventions, the

Parliament passed the Arbitration (Protocol and Convention) Act in 1937 and the FARE Act

in 1961. Though the 1940 Act contained no ground of public policy for setting aside

arbitration, the FARE Act 1961, which was based on the New York Convention66, contained

a specific ground on the basis of which a foreign award could be refused enforcement for

being contrary to public policy.67 The Supreme Court of India was called upon to decide the

63 (1981) 4 SCC 634. See also, Ramji Dayawala & Sons (P) Ltd v. Invest Import (1981) 1 SCC 80: AIR 1981

SC 2085, where Desai, J. stated: “If expeditious, less expensive resolution of disputes by a judge of the choice

of the parties was the consummation devoutly to be wished through arbitration, experience shows and this case

illustrates that the hope is wholly belied because in the words of Edmond Davis, J. in Price v. Milner (1996) 1

W.L.R. 1235, these may be disastrous proceedings”; and see, Trustees of Port of Madras v. Engineering

Construction Corporation (1995) 5 SCC 531. 64 Geneva Protocol on Arbitration Clauses, 1923 65 Geneva Convention on the Execution of Foreign Arbitral Awards, 1927. 66 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 67 Section 7(1) A foreign award may not been forced under this Act-

(b) If the Court dealing with the case is satisfied that

(ii) The enforcement of the award will be contrary to public policy;


18

nature and scope of the ground of public policy in refusing enforcement of foreign awards in

Renusagar v. General Electric Ltd.68

In this case, one of the parties assailed the arbitral award on the ground that the award

of interest on interest was contrary to public policy and, consequently, unenforceable by

virtue of Section 7(1)(b)(ii) FARE Act 1961. The court held, after considering the objects of

the FARE Act 1961, the principles of private international law and the position of law in

France, USA and UK, held that the ground of public policy should be narrowly construed.

The court distinguished between Section 7(1)69 Arbitration (Protocol and Convention) Act,

1937, where enforcement of an award could be refused on the ground that the recognition or

enforcement of the award would be contrary to the public policy or to the law of India, and

Section 7(1)(b)(ii)70 of the FARE Act 1961, where a foreign award could be refused

enforcement for being “contrary to public policy”. The absence of the expression “the law of

India” in Section 7(1)(b)(ii) of the FARE Act 1961 meant that the FARE Act required

something more than mere breach of Indian law for the award to be refused enforcement. It

held:

Since the Foreign Awards Act is concerned with recognition and enforcement of foreign

awards which are governed by the principles of private international law, the expression

"public policy" in Section 7(1)(b)(ii) of the Foreign Awards Act must necessarily be

construed in the sense the doctrine of public policy is applied in the field of private

international law. 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.71

The 1996 Act

Meanwhile, it was felt that the 1940 Act was obsolete in the age of globalisation and

there was a need for a new mechanism that would satisfy the needs of trade and commerce.

68 Supra, note 12. 69 Section 7(1) Arbitration (Protocol and Convention) Act, 1937 corresponds to Article I(e) of the Geneva

Convention, 1927. 70 7(1)(b)(ii) of the FARE Act 1961 corresponds to Article V(2)(b) of the New York Convention, 1958 71 At Para 66.


19

Hence the Arbitration and Conciliation Act 1996 was passed on the basis of the UNCITRAL

Model Law on International Commercial Arbitration, 1985. The 1996 Act was aimed at, inter

alia, consolidating and amending the law on arbitration so that the Act comprehensively

covers the law on domestic and international commercial arbitration and conciliation.72 The

1996 Act is based on the policies of party autonomy, minimum judicial interference and

speedy and efficient settlement of disputes.73 The provision of law to challenge arbitral

awards, contained in Section 3474, is also based on the same policy goals.75

72 See, Long Title to the 1996 Act. 73 Centrotrade Minerals and Metal Inc. v. Hindustan Copper Limited 2006(3) Arb. LR 201(SC): (2006) 11 SCC

245, Para 12. 74 Section 34 of the Arbitration and Conciliation Act, 1996: Application for setting aside arbitral award- (1)

Recourse to a Court against an arbitral award may be made only by an application for setting aside such award

in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if-

(a) the party making the application furnishes proof that-

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any

indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of

the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the

submission to arbitration, or it contains decisions on matter beyond the scope of the submission to

arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so

submitted, only that part of the arbitral award which contains decisions on matters not submitted to

arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the

agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the

parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that-

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being

in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation.-Without prejudice to the generality of sub-clause (ii), it is hereby declared , for the avoidance of

any doubt, that an award is in conflict with the public policy of India if the making of the award was induced

of affected by fraud or corruption or was in violation of section 75 or section 81.


20

It has been contended that the broad use of the power to set aside arbitral awards

under the 1940 Act led to defeat of the purposes for which the Act was enacted.76 This was

the time when UNCITRAL came up with the Model Law on International Commercial

Arbitration that had simplified the procedure and restricted the grounds by which arbitral

awards could be set aside. India adopted the Model Law provisions and also its philosophy of

restricted grounds of challenge of arbitral awards.77

The 1996 Act brings different kinds of challenges to awards under a single

nomenclature- “setting aside” in Section 34. The grounds of challenge in Section 34, barring

Sections 13(5) and 16(6), are exhaustive and an award cannot be challenged otherwise than

the grounds of challenge specified in the Act.78 Further, the grounds contained in Section 34

(3) An application for setting aside may not be made after three months have elapsed from the date on which the

party making that application had received the arbitral award, or, if a request had been made under section 33,

from the date on which that request had been disposed of by the arbitral tribunal.

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the

application within the said period of three months if may entertain the application within a further period of

thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so

requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral

tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of

arbitral tribunal will eliminate the grounds for setting aside the arbitral award. 75 In Sundaram Finance Ltd. v. Respondent: M/s. NEPC India Ltd. AIR 1999 SC 565: 1999(1) Arb. LR 305

(SC): (1999) 2 SCC 479, Para 9, the Supreme Court held, “…the provisions of 1996 Act have to be interpreted

being uninfluenced by the principles underlying the 1940 Act. In order to get help in construing these provisions

it is more relevant to refer to the UNCITRAL Model Law rather than the 1940 Act”. [emphasis supplied]. 76 See, supra, note 4 77 DEPARTMENT RELATED PARLIAMENTARY STANDING COMMITTEE ON PERSONNEL, PUBLIC

GRIEVANCES, LAW AND JUSTICE, NINTH REPORT ON THE ARBITRATION AND CONCILIATION

(AMENDMENT) BILL, 2003, (August, 2005). Available at

http://rajyasabha.nic.in/book2/reports/personnel/9threport.htm#compo last visited on March 20, 2008. 78 Oil and Natural Gas Co. Ltd. V. SAW Pipes Ltd. 2003(2) Arb. LR 5, 42 (SC). Also see, Govt. of NCT v.

Khem Chand AIR 2003 Del 314, 317, where the Delhi High Court held, “[l]eaving aside the grounds arising

under Sections 13(5) and 16(6), which are de hors Section 34, the grounds for setting aside an arbitral award

stated in Section 34 are exhaustive and the Court can set aside an arbitral award only if one of the grounds

mentioned therein is found. Objections raised against the award, in the present case, fall short of making out any

of the grounds stated in Section 34”; Himalaya Construction v. Executive Engineer MANU/JK/0006/2000;

Kesar Enterprises v. D.C.M. Shriram Industries Ltd. & Anr. MANU/DE/0920/2000


21

are to be read in a narrow manner in consonance with the approach of the Model Law. In

consonance with this approach, the courts interpreted Section 34(2)(b)(ii) in a restrictive

manner and the courts followed Renusagar, though Renusagar was applicable only to foreign

awards.79 Thus, even error apparent on the face of the record was not a ground by which

arbitral awards could be set aside.80 In Rail India Technical and Economic Services Limited

v. Ravi Constructions and Anr., the Karnataka High Court held:

Under the old Act, the award could be challenged on the ground that there was an error

apparent on the face of the award or on the ground that the Arbitrator had misconducted

himself by giving inconsistent conclusions, or by ignoring the provisions of law or by

making an award in the absence of any evidence or by completely ignoring the material

evidence. But, those grounds for interference are not available under the 1996 Act. An

award can be challenged only on the grounds enumerated in Section 34 of the new Act…

It is, not permissible for the Court exercising power under Section 34 of the Act or this

Court in an appeal under Section 37 of the Act, to examine the correctness or validity of

the award on any ground other than what is specified in Section 34. Therefore, the

challenge to the award on the ground that it is erroneous, is liable to be rejected.81

However, in Oil and Natural Gas Co. Ltd. V. SAW Pipes Ltd.82, the Supreme Court

radically altered the position of law by holding that an award that is patently illegal could be

set aside by virtue of Section 34(2)(b)(ii).

SAW Pipes

79 National Thermal Power Corporation v. R.S. Avtar Singh & Co. and Anr. MANU/DE/0698/2002; Union of

India v. Hakam Chand & Co. MANU/DE/1241/2002; Municipal Corporation of Greater Mumbai v. Prestress

Products 2003(2) Arb. LR 624 (Bom); Municipal Corporation of Greater Mumbai v. Jyoti Consturctions

2003(3) Arb. LR 489 (Bom) 80 SARAF & JHUNJHUNUWALA, LAW OF ARBITRATION AND CONCILIATION 355 (2001), where the

authors state: “Under Section 34 of the Act, an arbitral award is not susceptible to challenge if an erroneous

proposition of law is stated in the award which is made as a basis thereof though it was so under the Act of

1940. Under the [1996] Act, arbitral award will be invulnerable notwithstanding error of law on the face of the

award unless some ground of jurisdictional error can be established”. 81 MANU/KA/0560/2001: 2002 (1) Kar. L.J. 419 82 Supra, note 10


22

SAW Pipes drastically changed the landscape of arbitration in India. The verdict did

two things to Indian arbitration. One, it brought back the practice under the 1940 Act of

setting aside arbitral awards on the basis of patent illegality and, two, it brought back, as a

consequence the apprehension that the arbitral process would become merely a first step in

the long march towards remedy.

The facts of SAW Pipes are as follows. SAW Pipes entered into a contract with Oil

and Natural Gas Co Ltd. (ONGC) for the supply of casing pipes on a particular date, time

being essence of the contract. SAW Pipes, the supplier in the contract, attempted to procure

raw materials from an Italian firm but couldn’t do so in time because of a general strike of the

steel mill workers all over Europe. Therefore, respondent by its letter dated 28th October,

1996 conveyed to the appellant that Italian suppliers had faced labour problems and was

unable to deliver the material as per agreed schedule. SAW Pipes asked for an extension to

ONGC, which was granted with a specific stipulation, in accordance with the terms of the

contract, that the amount equivalent to liquidated damages for delay in supply of pipes would

be recovered from the SAW Pipes. ONGC deducted US $ 3,04,970.20 and Rs.15,75,559/- as

liquidated damages for the delay. The respondent contested it and consequently arbitration

proceedings were initiated. Arbitral Tribunal concluded that strikes in Europe did not come

within the ambit of 'Force Majeure' in the contract between the parties and therefore ONGC

was right in deducting the damages. It was also contended by SAW pipes that delay was due

to customs duty also but contention rejected by the tribunal. However, the arbitral tribunal

held that it was for ONGC to prove the quantum of damages suffered because of delay in

supply of goods under the contract, which ONGC failed to establish. Therefore the tribunal

concluded that ONGC had wrongfully withheld the said amount while making its payments

to SAW Pipes and the tribunal also held that SAW Pipes was entitled to recover an interest at

the rate of 12 per cent per annum from1st April 1997 till the date of the filing of statement of

claim and 18 per cent per annum interest pendente lite till the date of payment is made.

ONGC challenged the award on the ground, inter alia, that the award was, on the face of it,

illegal. The Supreme Court had to decide the validity of the award and more importantly, it

had to decide whether an arbitral award could, in the first place, be challenged on the ground

of patent illegality or error apparent on the face of the record.


23

The Supreme Court widened the scope of challenge of arbitral awards by broadly

reading Section 34(2)(a)(v)83 and 34(2)(b)(ii) of the 1996 Act. As regards Section

34(2)(b)(ii), it held that the term “public policy” is capable of being interpreted in a narrow or

a broad manner depending upon the context in which it is used.84 The court found that there

was no necessity to construe the term narrowly and also felt that such a construction would

render certain provisions of the Act, like Section 28, nugatory. It reasoned that an award

passed in contravention of Sections 24, 28 or 31 and challenges under Sections 13(5) or 16(6)

could be brought under Section 34 only by reading “public policy” broadly.85 Hence, it

concluded that an award could be set aside if it was contrary to (a) fundamental policy of

Indian law, or (b) the interest of India or (c) justice or morality, or if the award was patently

illegal. However, the court cautioned:

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

83 The Court held that for an award to be set aside under Section 34(2)(a)(v), the composition of arbitral tribunal

or its procedure should not be in accordance with the agreement of the parties. In the absence of such an

agreement, the award can be set aside if the tribunal has acted in contravention of the procedure prescribed in

the Part-I of the Act i.e. Sections 2 to 43. The court broadly construed the term “arbitral procedure” in Section

34(2)(a)(v) to include even those provisions which provide (and regulate) the powers of the arbitral tribunal. It

held: “[Sections 18 to 31] prescribe the procedure to be followed by the arbitral tribunal coupled with its

powers. Power and procedure are synonymous in the present case. By prescribing the procedure, the arbitral

tribunal is empowered and is required to decide the dispute in accordance with the provisions of the Act, that is

to say, the jurisdiction of the tribunal to decide the dispute is prescribed. In these sections there is no distinction

between the jurisdiction/power and the procedure.” Thus, where the arbitral tribunal digresses from the

mandatory provisions of the Act prescribing procedure, it would mean that the arbitral tribunal has acted in

breach of procedure and therefore, the award is liable to be set aside by virtue of Section 34(2)(a)(v).

“Mandatory Procedures” would mean that an arbitral tribunal has to decide in accordance with the provisions of

the Act including Section 28(1) which provides that the arbitral tribunal shall decide the dispute in accordance

with substantive law of India (provided the place of arbitration is India). Thus an award that is contrary to the

substantive law of India, including the Indian Contract Act, the Transfer of Property Act etc., would be violative

of the mandatory procedures of the Act. Such an award “would be patently illegal [and] could be interfered

under Section 34. However, such failure of procedure should be patent affecting the rights of the parties.” See,

para15 of the SAW Pipes decision. 84 Supra, note 10, at Para 16. 85 Id, Para 28.


24

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.86

Post-SAW Pipes

The SAW Pipes decision that an award which is contradictory to the substantive law

of India could be challenged under Section 34(2)(1)(v) provided the violation is patently

illegal and at the same time, any patently illegal award could be set aside by virtue of Section

34(2)(b)(ii). The courts, after SAW Pipes, have followed the same path and have set aside

patently illegal awards under Section 34(2)(b)(ii).87 The consequence being breach of

substantive law has been brought under the purview of Section 34(2)(a)(v), which one may

argue is not intended by the Act.88

86 Id, Para 31 87 See, for example, Mcdermott International Inc. v. Burn Standard Co. Ltd. and Ors. 2006(2) Arb. LR 498

(SC): (2006) 11 SCC 181; Chief Signal and Telecommunication Engineer (Projects), South Central Railway v.

Hytronics Enterprises and Ors. 2006(2) Arb. LR 343 (AP), at Para 41; Hindustan Zinc Ltd.

v. Friends Coal Carbonisation 2006(2) Arb. LR 20 (SC): (2006) 4 SCC 445; Hindustan Petroleum Corporation

Limited v. Batliboi Environmental Engineers Ltd. MANU/MH/0891/2007;; Narendra Kumar Jain v. Swastic

Trading Agency MANU/DE/8572/2007; Oil and Natural Gas Corporation Ltd. v. Schlumberger Asia Services

Ltd. 2006(3) Arb. LR 610 (Delhi); Union of India v. Satyanarayana Construction Co. 2005(2) Arb. LR 496

(AP). 88 Supra, note 32. It is interesting to note that Section 34(2)(a)(v) speaks about composition or procedure of the

arbitral tribunal but the Supreme Court, in SAW Pipes, has construed “arbitral procedure” as covering even the

substantive law of India.


25

III

VIRTUES OF THE EXISTING APPROACHES UNDER SECTION 34(2)(b)(ii) OF

THE ACT TOWARDS PATENTLY ILLEGAL AWARDS

If the arbitrator whom you choose makes a mistake in law, that is your look-out for

choosing the wrong arbitrator; if you choose to go to Caesar you take Caesar’s

judgement.

- Scrutton L.J.89

[Public policy] should be available for attacking awards that are fundamentally flawed.

To allow such awards to stand uncorrected would undermine confidence in the integrity

of the arbitral process… [P]arties do not bargain for a perverse and manifest error that

calls out for correction. To ignore such errors would be to accept that the arbitral

process can condone miscarriages of justice.

- Michael Hwang & Amy Lai90

Lawyers and commercial industry alike have criticised the broadening of the scope of

public policy in Section 34(2)(b)(ii) by the SAW Pipes court. The Indian Parliament made a

bold attempt in 1996 and enacted an investor friendly Arbitration & Conciliation Act leaving

behind the archaic 1940 Act and related judicially developed principles. One may argue that,

through repeated misinterpretation by the Indian Courts, the 1996 Act has become as obsolete

as the 1940 Act. It would seem that the Supreme Court of India has not appreciated the

importance of speedy, inexpensive, and effective settlement of disputes. At the same time, it

would also seem that the Indian Parliament, in order to woo investors, has enacted the 1996

Act without taking into consideration the effects of having an uncontrolled dispute resolution

mechanism, free from legitimate supervision.91

This chapter attempts to look at the diametrically opposite approaches espoused by

the Parliament and the Supreme Court on public policy in particular, and arbitration in

89 African & Eastern (Malaya) Ltd. v. White, Palmer & Co Ltd. (1930) 36 Ll. L. Rep. 113, 114. 90 Michael Hwang & Amy Lai, Do Egregious Errors Amount to a Breach of Public Policy?, 71 Arbitration 1

(2005). 91 S.K. Dholakia, Arbitration and the Supreme Court, in, KUSUM VERMA (ED.), FIFTY YEARS OF THE

SUPREME COURT OF INDIA: ITS GRASP AND REACH, 756 (2000)


26

general. Part A describes the advantages of having a notion of public policy that includes

patent illegality and Part B of the chapter describes the fallouts of having such a broad

conception of public policy.

A. Patent Illegality in Public Policy

The Supreme Court in SAW Pipes held that public policy was concerned with public

good and public interest. According to the court, an award which is, on the face of it,

patently in violation of statutory provisions cannot be said to be in public interest as it

adversely affects the administration of justice and is therefore liable to be set aside as

violative of public policy. The justifications for setting aside patently illegal awards under

Section 34(2)(b)(ii) are discussed below.

1. Need for Judicial Supervision of Arbitral Awards

Several scholars have, of late, shown concern about the arbitration subsisting in

lawlessness. They have begun questioning the ability of private dispute resolution systems to

render speedy and efficient justice92 and have usually argued for some kind of review of

arbitral awards for substantial legal errors contained therein. One of the most frequent

complaints against arbitration is its moorings in the area of lawlessness. Carrie Menkel-

Meadow comments:

As we move to private systems of informal and private decision-making some have

questioned whether settlements are entered into coercively and secretly without the

protections of the rule of law, public accountability for decision-making and equalization

of economic and psychological or social power imbalances... [O]ur flexible, adaptive and 92 See, for example, Carrie Menkel-Meadow, Ethics in Alternative Dispute Resolution: New Issues, No Answers

From the Adversary Conception of Lawyers' Responsibilities 38 S. Tex. L. Rev. 407 (1997); Cameron L. Sabin,

The Adjudicatory Boat without a Keel: Private Arbitration and the Need for Public Oversight of Arbitrators, 87

Iowa L. Rev. 1337 (2002); William H. Knull III & Noah D. Rubins, Betting the Farm on International

Arbitration: Is it Time to Offer an Appeal Option? 11 Am. Rev. Int'l Arb. 531 (2000); Edward Brunet,

Questioning the Quality of Alternate Dispute Resolution 62 Tul. L. Rev. 1 (1987-1988); Paul F. Kirgis, Judicial

Review and the Limits of Arbitral Authority: Lessons From the Law of Contract 81 St. John's L. Rev. 99 (2007);

Richard C. Reuben, Democracy and Dispute Resolution: The Problem Of Arbitration, 67 Law & Contemp.

Probs. 279 (2004); Steven E. Bizar & Paul D. Weiner, ADR: Arbitration is not Always Quick, The National Law

Journal November 17, 2003.


27

creative processes, “alternatives” to litigation and court have produced their own abuses

and we are here today because some urge a return to the formalism and “rigidity” of

clearly established rules, norms and standards of conduct. Our “informal” system is in

need of “policing” and ethical sanctions (as well as other internal regulation) may be

necessary in order to maintain public confidence and legitimacy.93

This feeling for the “need of policing” stems from the fact that arbitration does not

include appeal to another judicial forum. Arbitral awards are regarded as final and binding

between the parties and there are no possibilities of re-opening the arbitral award on the

ground that the arbitrator had erred in the application of law or had ignored the law. Further,

at times parties are forced to arbitrate even when there is no valid arbitration agreement by

the virtue of the doctrines of severability and competence expressed in Section 16 of the

Indian Act.94 In other words, the decision as to whether there is an arbitration agreement and

whether it is valid or not is determined by the arbitral tribunal.95 Also, the arbitrators have

been accused of often disregarding express terms in the contract but since review of awards

93 Carrie Menkel-Meadow, supra, note 128, at 419-420. 94 Section 16 of the 1996 Act declares: Competence of arbitral tribunal to rule on its juri sdiction.- (1) The

arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence

or validity of the arbitration agreement, and for that purpose,

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other

terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of

the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the

statement of defence; however, a party shall not be precluded from raising such a plea merely because that he

has appointed , or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall he raised as soon as the matter

alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later

plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the

arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral

award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award

in accordance with section 34. 95 Cameron L. Sabin, supra, note 128, at 1341-1342.


28

on their merit is not possible courts have not been able to set aside in spite of the injustice

done to one party.96 This aspect has been highlighted by Rubino- Sammartano:

[D]isregarding the manifest meaning of the contractual documents is not in line with the

diligence of a ‘good father’ [i.e., bonus pater familias]. It is submitted that in such a

situation an award should be set aside not because it is wrong but for breach of the duty

of diligence.97

The arbitral tribunals have even been charged with disregarding express provisions of

law98 and for not giving due attention to substantive norms. The tribunal, it is observed, often

does not give due regard to the substantive legal principles that have been statutorily

recognised or developed by the courts over a period of time. The consequences of

disregarding substantive norms, according to Brunet are four-fold:

1. Substantive legal norms are created on the basis of effective policy reasons or by

evolution through common law. If substantive legal norms are disregarded, it would

lead to frustration the intent behind those substantive norms.

2. Such disregard might injure third parties who are not representing as dispute

participants.

3. It would cause existing substantive norms to atrophy and become inefficacious

4. Elevate procedural over substantive norms.99

It is chiefly through substantive law that the society implements its goals. If the

arbitrator disregards the substantive law and decides a dispute in accordance with his whim-

and-fancy, it would lead to defeat of these goals. The Courts, by turning their face away from

such faux pas would be miserably failing in its duty to prevent subversion of societal goals

and endangering public good.100 In fact, where the arbitral tribunal has rendered a decision

96 See, RUBINO- SAMMARTANO, supra, note 42, at 898-899, for a critique of the French system which does

not allow setting aside arbitral awards on the ground of disregard of contractual terms (Denaturation). 97 Id, at 899. 98 Mark A. Sponseller, Redefining Arbitral Immunity: A Proposed Qualified Immunity Statute for Arbitrators, 44

Hastings L.J. 421, 435 (1993) 99 Brunet, supra, note 128, at 8 100 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 1185.


29

that is contrary to law, it would mean that the tribunal has decided against party autonomy.

This is because when parties agree to arbitrate in India, they also automatically agree that the

substance of the dispute must be governed by the law of India. The response of the U.K.

Departmental Advisory Committee reflects such a thought when they say that:

[w]e are not persuaded that we should recommend that the right of appeal should be

abolished... [M]any arbitration agreements contain an express choice of the law to

govern the rights and obligations arising out of the bargain made subject to that

agreement. It can be said with force that in such circumstances, that parties have agreed

that the law will be properly applied by the arbitral tribunal, with the consequence that if

the tribunal fail to do this, it is not reaching the result contemplated by the arbitration

agreement.101

The same issue can be looked at from a different angle also. Posner argues that the

purpose of legal rules, that is to increase economic efficiency, would be frustrated if

substantive legal rules are not properly applied by the Court. Judicial error, for him, was a

source of social costs which was to be removed by the procedural system.102 Scholars,

especially from the Law and Economics movement, have been in favour of the need for

appeal processes.103 It is their argument that appellate courts harness the information about

erroneous decisions from the litigants and correct those erroneous decisions at low cost.

101 DEPARTMENTAL ADVISORY COMMITTEE, DEPARTMENTAL ADVISORY COMMITTEE ON

ARBITRATION LAW: REPORT ON THE ARBITRATION BILL, Para 285 (February 1996). 102 Richard Posner, An Economic Approach to legal Procedure and Judicial Administration, 2 J. Legal Stud.

399- 458 (1973) 103 See, for example, Steven Shavell, Appeal Process as a Means for Error Correction, 24 J. Legal Stud. 379

(1995); David P. Leaonard, The Correctness Function of Appellate Decision- Making: Judical Obligation in an

Era of Fragmentation, 17 Loy. L. A. L. Rev. 299 (1984); Charles M. Cameron and Lewis A. Kornhauser,

Decision Rules in a Judicial Hierarchy, available at http://ssrn.com/abstract=628522 last visited on February 5,

2008, STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 450- 456 (2004);

ROBERT COOTER & THOMAS ULEN, LAW & ECONOMICS (2004). For a survey of Law and Economics

literature on appeals, see, BOUDEWIJN BOUCKAERT & GERRIT DE GEEST (EDS.), ENCYCLOPEDIA

OF LAW AND ECONOMICS (VOLUME V: THE ECONOMICS OF CRIME AND LITIGATION) (2000).


30

Shavell, in his paper on appeal processes104, argues that it is cheaper to correct, and

thereby avoid, error than to enhance the quality of the trial courts. His argument his that

instead of spending the societal investment on ensuring accuracy in all the cases at the trial

court level, it would be cheaper to correct error in a subset of cases in which the trial courts

might have probably erred.105 This function of the appellate court to correct errors has been

called as the “error correction”106 function or the “review for correction function”107 of the

courts. Apart from the fact that appeal process is cheaper in ensuring adjudicatory accuracy, it

is contended by Leonard that the chief function of an appellate court is to minimise

adjudicatory errors and thereby “serve as an instrument of accountability of those who make

the basic decisions in the trial courts”.108 Ensuring correctness in adjudication is not a

technical matter and involves the basic right of fair allocation of rights and obligations by the

adjudicatory body.109 The virtues that make judicial accuracy valuable for the litigants as well

as for the society are the following110:

a. Greater accuracy in the imposition of liability on guilty parties leads to an expectation

that sanctions will be imposed on the parties. This expectation would lead to greater

incentive to obey law.

b. Greater accuracy also leads to the higher probability that the innocent parties would

be exonerated from wrongful imposition of liability. This would enhance the

deterrence value of judicial accuracy because it would further widen the gap between

the expected sanction for the violation of law and the expected sanction for obeying

the law.111

104 Shavell, id. 105 Id, at 381. 106 Id. 107 Leaonard, supra, note 139, at 304 108 P. CARRINGTON ET AL, JUSTICE ON APPEAL 2 (1976), quoted with approval in, Leaonard, supra, note

139, at 304. 109 The Preamble to the Indian Constitution mentions Justice as one of its core commitments. 110 STEVEN SHAVELL, supra, note, 139, at 450- 456, Belknap Press of Harvard University Press (2004) 111 Id. Shavell explains this with a numerical example:

If, the expected sanction suffered by an innocent party due to error = 20, and

the expected sanction experienced by the guilty = 60, then


31

c. By improved accuracy, parties would not be undesirably discouraged from engaging

in a behaviour that might impose liability on them mistakenly. Similarly, increased

accuracy would not prevent wrongful parties from going guiltless and this would

mean that such parties would be discouraged from engaging in wrongful behaviour.

d. Accurate decision making would also result in proper assessment of sanctions, and in

the context of arbitration, proper assessment of damages. Such precision would help

the parties in taking steps to prevent harm from occurring.

e. Increased accuracy of the decision-making process would make the law more certain

and thereby facilitate the parties to predict the outcome of the dispute in a

straightforward manner. This would, consequently, increase the frequency of

settlement and thus save the parties, and the society, of the costs of litigation.

Though the above conclusions by the scholars of Law and Economics are on the

general aspect of the appeal process in ordinary litigation112, the same rationale would equally

apply to arbitration.113 The difference between arbitration and litigation is more functional

than structural, that is, arbitration has been differentiated from the litigation on the basis of

informality, swiftness and private character of the arbitral process, which are the perceived

advantages of arbitration over litigation. In both cases, however, the structural character

remains the same- a third person is made to sit as a neutral decision-maker (who is called as

arbitrator in arbitration, though his ultimate function is to find the truth and apply the law,

which is the same as an adjudicator) and the decision-maker gives a final decision which is to

be enforced in a court of law. The arbitrator, like the judge, applies the law to facts found by

the effective sanction for a violation would be = 40. Now, if the expected sanction suffered by the innocent

party due to error is reduced to 10, the effective sanction for a violation would be 50. 112 Many scholars use different terms to refer to court-based adjudication. Several accomplished writers have

used the term adjudication to refer to court-based adjudication but this researcher uses the term litigation to refer

to court-based adjudication as the function of adjudication (from “judge” and “adjudge”) is common to both a

judge under the court-based system and an arbitrator. 113 Shavell does not seem to apply his “Appeal as Error Correction” doctrine to arbitration though his reasons

for non-applicability are far from convincing. Shavell, supra, note 139.


32

him and decides the dispute.114 Hence, he is prone to the errors that a judge is likely to

commit.

A legal system has to foster an error-free arbitration mechanism so that the values of

an accurate dispute resolution mechanism could be attained. One way of achieving such an

end is by allowing the courts to correct errors in the arbitral awards. Thus, from the vantage

points of justice and efficiency, it can be seen that there is exists a necessity of substantive

review of arbitral awards on merits.

2. Guidance Function of Law

Lon Fuller characterised clarity of laws as one of the most essential ingredients of

legality115 and regarded contradiction of laws as a vice.116 It is not only the legislature that

plays an important role in the clarity or coherence of law; the judiciary performs the task of

making the law functional. The law is “worked” by courts to resolve the defects and meet the

exigencies. This function of amplification of law117 is a task that is usually assigned to the

appellate courts. The hierarchy of courts in any legal system is based on the clear division of

functions between the trial courts, which is considered as the masters of fact, and the

appellate courts which find whether the application of law to those facts found were

appropriate or not.118 While doing this, the appellate courts perform two functions- corrects

legal errors (and thereby resolve disputes) and amplifies law.

114 See, for example, HALSBURY’S LAWS OF ENGLAND (VOL II) 255 (1973) which defines arbitration as

follows: “An arbitration is the reference of a dispute or difference between not less than two parties for

determination, after hearing both sides in a judicial manner, by a person or persons other than a court of

competent jurisdiction.” (Emphasis supplied); LEW ET AL, COMPARATIVE INTERNATIONAL

ARBITRATION 3 (2003) quote Domke, who defines arbitration as “a process by which parties voluntarily refer

their disputes to an impartial third person, an arbitrator selected by them for a decision based on the evidence

and arguments to be presented before the tribunal. The parties agree in advance that the arbitrator’s

determination, the award, will be accepted as final and binding among them.” 115 LON L. FULLER, THE MORALITY OF LAW 65 (2000) 116 Id. 117 Amplification of law refers to the judiciary’s function of filling the gaps that the statute leaves, making the

law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into

consideration the latest developments. 118 In this regard, from an American vantage-point, Landes & Posner note: “The two judicial functions [of

dispute resolution and rule formulation] are in principle severable and in practice often are severed. Jury verdicts


33

Landes and Posner note that the Judiciary performs two types of functions: dispute

resolution and rule formulation. Through the function of precedent, the courts provide

information regarding the likely outcome of similar disputes in the future. The theory of

precedent has played an important role in establishing the predictability of law. The doctrine

has played an important function of making the law reliable, predictable, equitable and

efficient.119 The doctrine is also an acknowledgement by the legal system that the judicial

process is not ad hoc but is in accordance with rules. Following are, according to Lloyd, the

advantages of such a judicial process:

1. Such a judicial system guides the behaviour of those to whom the law applies. It

enables them “channel their behaviour” to keep themselves within the limits imposed

by law.120

2. When the law is certain, there are chances that the parties would settle the dispute

rather than litigate it might be possible to predict the probable result of the dispute.121

3. Such predictability and certainty helps the litigants and their advisors participate in

the adjudicatory process in a meaningful way as it enables the parties to determine the

type of arguments and evidence to put forth.122

resolve disputes but do not create precedents. Legislatures create rules of law but do not resolve disputes. In the

Anglo-American legal system rule formulation is a function shared by Legislatures and (especially appellate)

courts; elsewhere judicial law making tends to be less important”. William M. Landes & Richard A. Posner,

Adjudication as Private Good, 8 J. Legal Stud. 236 (1979) 119 Earl Maltz, The Nature of Precedent, 66 N.C. L. Rev. 367 (1988); Frederick Schauer, Precedents, 39 Stan. L.

Rev. 571 (1987) 120 Note that both, error correction and the rule formulation functions help in guiding the behaviour of those on

whom the law applies. For example, there were controversies regarding the applicability of Part I of the 1996

Act to international commercial arbitrations held abroad. The High Courts differed in their opinion as to whether

Part I would apply to such arbitrations or not. The Supreme Court in Bhatia authoritatively declared the law

which helps in guiding the conduct of those not arbitrating in India to modify their requirements to the needs of

the Indian courts. Here, the Supreme Court corrected the “error” of the lower courts and at the same time

clarified the law as to whether Part I would apply to international commercial arbitrations held outside India. 121 See, Shavell, supra, note 139 122 M.D.A. FREEMAN, LLOYD’S INTRODUCTION TO JURISPRUDENCE (2005)


34

On the function of the appellate court in creating precedents and amplifying law,

Spann points out:

[t]he exposition of law that occurs during the process of adjudication serves an important

governmental function, which should be viewed as the primary function of courts rather

than as a mere incident to the resolution of disputes. By explaining how legal principles

produce particular results in particular factual contexts, courts give operational meaning

to principles that would otherwise remain abstract, rhetorical and elusive.123

Amplification of law does not only help in creating new law in the absence of any law

but also aids the Legislature in making its laws work at a practical level. Spann argues that

since the Legislature operates at the policy level statutes are general and this generality might

not prove a solution to the problems that arise in the future. Thus the role of the appellate

courts is to apply these general policies to such particular problems.

This function of amplification of law is not shared in private arbitration. In private

arbitration, there are no incentives for the arbitral tribunal to produce precedents as there

exists difficulty in establishing property rights over them.124 There is no need for the private

judges to act in a precedent-creating manner as they are paid by the parties for rendering an

impartial decision and not for amplifying law to guide future conduct. Also, creation of

precedents by the private judge would mean that a future judge would free-ride on the

previous judge who created the precedent in the first place without compensating his action

of creating the precedent.125 The second problem with private arbitration is that the absence

of review on merits of the award may lead to the production of inconsistent decisions on the

same question of law leading to uncertainty of law. This would mean that parties would never

predict outcomes of disputes and this would discourage settlement of disputes. The law in

123 Girardeau A. Spann, Expository Justice, 131 U. Pa. L. Rev. 585 (1983); Also see, Daniel A. Farber, The Rule

of Law and the Law Of Precedents, 90 Minn. L. Rev. 1173 (2006), who argues that reasoning of previous

decisions could “provide guidance for the future...[and thereby articulate] standards that are binding for the

future”, and through this “courts can offer some semblance of what has been called the “law of rules,” which is

one aspect of the rule of law.” At 1179. 124 Landes & Posner, supra, note 154, at 238. 125 Id, 248


35

such a situation will be indeterminate and inaccurate.126 Landes & Posner ask how requisite

standardisation of law could be achieved in the absence of a single source for precedent

production.127 In his opinion, private arbitration is strongly biased against the creation of

precise rules. On the other hand, even if it could be predicted that an arbitrator will decide in

a particular manner, the same would also prove to be problematic. Such an arbitrator, whose

position on issues is known, will not be approached due to the factor of predictability. As a

consequence, private judges would apply vague standards in resolving disputes so that the

parties to a dispute cannot predict the way he determines an issue and would choose him to

resolve it.128

This guidance function of the Courts in arbitration is clearly reflected in the case of

CMA CGM SA v. Beteiligungs-Kommanditgesellschaft MS Northern Pioneer

Schiffahrtgesellschaft MBH & Co (“Northern Pioneer”)129, where the Court of Appeal had to

interpret the War Cancellation Clause of a standard form charter party.130

The court had to decide whether participation by Germany in the military operation at

Kosovo amounted to war, thereby entitling the charterers to terminate the charter party. The

majority of the arbitral tribunal had held that the events in Kosovo did not amount to “war”

and therefore termination of the charter parties was wrongful. The interpretation of this clause

was of public importance because almost all standard form charter parties contained this

clause and the Court of Appeal had to decide whether the facts came within the scope of

126 Posner makes an identical point when he notes the justification for appeal courts. He says that if the appeal

courts gave deference to the trial courts on legal questions, law would be unpredictable as the trial court judges

would disagree a lot, notwithstanding their quality. See, RICHARD A. POSNER, ECONOMIC ANALYSIS OF

LAW 643-644 (1998) Posner’s reasoning would apply in cases where arbitral tribunals are made to resolve

disputes in the absence of substantive review of their decisions. 127 Landes & Posner, Supra, note 154, at 239 128 Id, 240 129 [2002] EWCA Civ 1878 130 The War Cancellation Clause provided: “In the event of the outbreak of war (whether there be a declaration

of war or not) between any two or more of the following countries: The United States of America, the United

Kingdom, France, Russia, the People's Republic of China, Federal Republic of Germany and any country of the

EEC or in the event of the nation under whose flag the vessel sails becoming involved in war (whether there be

a declaration of war or not), either the Owners or the charterers may cancel this charter.”


36

“war”. The Court held that the facts of this case demonstrated that changing circumstances131

could raise issues of general public importance in relation to such clauses that were not

covered by judicial decision. Dundas argues that the Northern Pioneer has reiterated the

continuing validity of the provision on appeal from the award of an arbitral tribunal on point

of law contained in Section 69132 in authoritatively explaining and settling the law.133 The

decision has evoked responses from various quarters and a solicitor’s in-house newsletter

observes on the Northern Pioneer that:

[s]o few arbitrated disputes now reach the courts that one wonders how English

commercial law will develop, all appealed awards being private matters. This is

particularly worrying in the context of some of our key markets, such as ship chartering

and, of course, reinsurance, where standard form contracts or clauses are widely used,

the effect of which impacts on many of our clients. In light of that, the decision of the

Court of Appeal in [Northern Pioneer] was welcome.134

Thus, giving the courts the power to review errors made by the arbitrators would help

in correcting arbitrator errors and also ensure, through the doctrine of precedents, that law is

stable, uniform, coherent, consistent and up-to-date.

3. Reduction of Bias and Corruption

The 1996 Act reflects the Model Law commitment towards an impartial, bias free

arbitration. The question but is whether the mechanisms under the Act are enough to ensure

such an impartial, incorrupt, bias free arbitration.

131 The Court held that the changing circumstance in this case was in the nature of international conflicts and

concluded that the arbitrators were wrong in holding that the military operation in Kosovo was not war as from a

businessman’s perspective the military operation amounted to “war”. However, the Court dismissed the appeal

on other grounds. 132 Infra, note 322 133 Hew R. Dundas, Appeals on Question of Law: Section 69 Revitalised, 69 Arbitration 172 (2003). 134 Id. (Emphasis added)


37

Section 18 of the 1996 Act declares that the parties shall be treated by the arbitral

tribunal with equality and full opportunity shall be given to each party to present his case.135

This entails that the arbitral tribunal shall not treat one of the parties in a more advantageous

fashion than the other and that each party is given the opportunity of being heard. In simple,

the arbitral tribunal shall be impartial and fair.136 To ensure an impartial decision-making by

the tribunal, the 1996 Act devices the mechanism of challenge of the arbitrator’s

independence or impartiality under Sections 12 and 13 of the Act. The Act, by virtue of

Section 12(1), imposes an obligation on the arbitrator to disclose to parties the circumstances

which are “likely to give rise to justifiable doubts as to his independence or impartiality”.137

Section 12(3) of the Act provides that an arbitrator could be challenged where there exists

circumstances that give rise to justifiable doubts as to the arbitrator’s independence or

impartiality. Parties are given the discretion, under Section 13(1), to adopt procedures for

challenging the arbitrator.138 However, in the absence of such a procedure, the said Section

135 This provision has been drawn from Article 18 of the Model Law which echoes the same commitment.

Though the Model Law was primarily aimed at removing the hurdles to international commercial arbitration, the

principles of fairness and equality in the conduct of arbitration was regarded by the UNCITRAL as

“fundamental principles” which “are to be followed in all procedural contexts…” See, UNCITRAL, supra, note

96. 136 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 684. 137 Section 12 of the 1996 Act: “Grounds for challenge- (1) When a person is approached in connection with

his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to

justifiable doubts as to his independence or impartiality.

(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay,

disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been

informed of them by him.

(3) An arbitrator may be challenged only if-

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for

reasons of which he becomes aware after the appointment has been made. 138 Section 13 of the 1996 Act: Challenge procedure- (1) Subject to sub-section (4), the parties are free to

agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall,

within fifteen days becoming aware of the constitution of the arbitral tribunal or after becoming aware of any

circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the

challenge to the arbitral tribunal.


38

provides, inter alia, that the challenge is to be made before the arbitral tribunal. Where such

challenge fails, the Section 13 provides that the tribunal should continue the proceedings and

give an award which the aggrieved party might challenge under Section 34 of the Act.139

Section 34 does not contain any express ground by which a party could challenge the

award for being rendered by an arbitral tribunal that treated a party unequally. Also, since the

grounds under Section 34 are usually restrictively read, it is questionable as to whether there

is any remedy under Section 34 for the party to correct the injustice done to it. The closest

grounds that might probably cover a biased award are 34(2)(b)(ii), 34(2)(a)(v) and

34(2)(a)(iii). To include bias within these grounds would require justification from the courts.

Recently a Single Bench of the Delhi High Court has held that in such cases challenges could

be made under Section 14. However the Supreme Court has clearly held in that Ace Pipeline

Contracts Private Limited v. Bharat Petroleum Corporation Limited:

Once a party has entered into an agreement with eyes wide open it cannot wriggle out of

the situation [by contending] that if any person of the respondent… is appointed as

arbitrator he will not be impartial or objective. However, if the appellant feels that the

arbitrator has not acted independently or impartially, or he has suffered from any bias, it

(3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to

the challenge, the arbitral tribunal shall decide on the challenge.

(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is

not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an

application for setting aside such an arbitral award in accordance with section 34.

(6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as

to whether the arbitrator who is challenged is entitled to any fees. 139 The Model Law provides under Article 13 that where a party challenges the arbitrator for the reasons

specified in Article 12 and the arbitral tribunal rejects the challenge, the challenging party could go to the court

within 30 days and challenge the arbitrator before the Court. The Indian Act diverges from the Model Law in

this regard. To enhance the speed of the arbitral proceedings, Section 13 states that on rejection of challenge by

the arbitral tribunal, the challenging party should wait till the award is passed and then challenge the award

under Section 34. For a critique of the Indian position, see, Sunil Gupta, No Power to Remove a Biased

Arbitrator under the New Arbitration Act of India, (2000) 3 SCC (J) 1.


39

will always be open to the party to make an application under Section 34 of the Act to set

aside the award on the ground that arbitrator acted with bias or malice in law or fact.140

For a party to impute bias on the arbitral tribunal, two conditions ought to be satisfied:

1. Where the party imputing bias had knowledge of the fact that led him believe that the

arbitrator was biased even before the appointment of the arbitrator, the party cannot

later challenge such an arbitrator before the court. The court would treat such

knowledge as waiver of the party’s right to challenge. 141

2. The party alleging bias when applying for setting aside the award must first bring the

factum of challenge to the notice of the arbitrator.142

Whatever may be the remedy available to a party who suspects that the tribunal was

biased, the standards of bias determination have been, to an extent, consistent. Section 12

states that the arbitrator may be challenged if circumstances that give rise to justifiable doubts

as to independence or impartiality of the arbitrator exist. Though Section 12 uses the words of

the Model Law, the courts have not interpreted the said provision by distinguishing between

independence and impartiality. It would not be an exaggeration to say that the courts have

laid down their own standards which have less obvious connection to the words used in the

statute. Dependence means the existence of a relationship between the arbitrator and one of

the parties and partiality refers to bias of the arbitrator either in favour of one of the parties or

in relation to the issues of the dispute.143 However the Indian courts have not clearly

delineated the scope of these two concepts in their decisions; rather, they have mostly

followed the law laid down by courts in UK on the issue of bias.144 The Supreme Court so far

140 AIR 2007 SC 1764: 2007(2) Arb. LR 49 (SC): (2007) 5 SCC 304 141 Alcove Industries Ltd. V. Oriental Structural Engineers Ltd. MANU/DE/9056/2007 142 Section 13(2). Section 13(1) provides that the parties may agree to follow their own challenge procedures. 143 SARAF & JHUNJHUNUWALA, supra, note 84, at 205. 144 The practice of the Indian courts on the issue is to simply make few general statements on bias, either from

previous views of the courts, and then lay down their own standards, which closely corresponds to the English

law. See, for example, Alcove Industries Ltd. V. Oriental Structural Engineers Ltd. MANU/DE/9056/2007;

Kumaon Mandal Vikas Nigam Ltd v. Girija Shankar Pant (2001) 1 SCC 187; Saurabh Kalani v. Tata Finance

Ltd. 2003(3) Arb. LR 345 (Bom); Murlidhar Roongta v. S. Jagannath Tibrewala 2005(1) Arb. LR 103 (Bom)


40

has not given any authoritative decision on the point and therefore the law as to the

determination of bias under Section 12 remain vague.

In Murlidhar Roongta v. S. Jagannath Tibrewala145 (hereinafter, “Muralidhar

Roongta”), the Bombay High Court has adopted the test of determination of bias as laid down

by the Supreme Court Ranjit Thakur v. Union of India146 (hereinafter, “Ranjit Thakur”) in

relation to Military Tribunals. The Supreme Court, in Ranjit Thakur, laid down that there

should be a real likelihood of bias to strike down a tribunal’s decision. According to the

Court:

The test of real likelihood of bias is whether a reasonable person, in possession of

relevant information, would have thought that bias was likely and is whether [the

tribunal] was likely to be disposed to decide the matter only in a particular way.147

After quoting Ranjit Thakur, the Bombay High Court held that the basis for

determining the existence of justifiable doubts as to the independence or impartiality of an

arbitrator was to find out if “the party to the dispute would have reasonable apprehension in

his mind about the independence of the Arbitrator and not whether the Arbitrator thinks that

he is capable of being impartial”.148 It would seem that the Bombay High Court has

interpreted the expression “justifiable doubts as to his independence or impartiality” in

Section 12(3) to mean merely a reasonable apprehension in the mind of the party about the

independence of the Arbitrator and there is no need to prove partiality of the arbitrator, thus

rendering the word “impartial” in Section 12 redundant. Two years before Muralidhar

Roongta the same Bombay High Court in Saurabh Kalani v. Tata Finance Ltd., (“Saurabh

Kalani”) held:

[I]t is abundantly clear that in considering the question as to whether a Judge or an

arbitrator, is liable to be disqualified in the facts of a given case on the ground of bias the

test to be applied is whether the circumstances are such as would lead a fair minded and

145 2005(1) Arb. LR 103 (Bom) 146 AIR 1987 SC 2386: (1987) 4 SCC 611 147 Id. Para 6 148 Id. Para 13. (Emphasis added)


41

informed observer to conclude that there was a real possibility that the Judge or Tribunal

was biased.149

Thus, the Bombay High Court had previously applied a stricter test to assess bias, that

is, from a real possibility of bias from a fair minded and informed observer’s point of view.

This test is definitely far stricter than the one contemplated by the later Bombay High Court

decision. Curiously, Muralidhar Roongta does not even refer to Saurabh Kalani. In the

absence of proper parameters, let alone precise guidelines, it is questionable whether a proper

inquiry can be done by the court in a petition for setting aside an arbitral award on the ground

of bias of the arbitrator.

Bias is an issue which has attracted the interest of administrative law scholars also. In

the context of administrative decisions, the Supreme Court has held:

[T]he conclusion is otherwise inescapable that there is existing a real danger of bias, the

administrative action cannot be sustained: If on the other hand, the allegations pertaining

to bias is rather fanciful and otherwise to avoid a particular court, tribunal or authority,

question of declaring them to be unsustainable would not arise. The requirement is

availability of positive and cogent evidence and it is in this context that we do record our

concurrence with the view expressed by the Court of Appeal in Locabail case.150

Analysis of the above quote shows that where on positive and cogent evidence, if the

arbitrator is found to be partial, a real danger of bias would exist. In case, the allegation of

bias is fanciful, naturally, there is no such danger. The problem with this test is what if there

is no “positive and cogent evidence” of arbitrator bias? Obviously, an arbitrator who would

like to favour a party would not openly state that he is biased towards that party.151 Another

149 2003(3) Arb. LR 345 (Bom). Para 8 150 Kumaon Mandal Vikas Nigam Ltd. v. Girija Shankar Pant (2001) 1 SCC 187 (hereinafeter “Kumaon

Mandal”). This decision was quoted by the Bombay High Court in Saurabh Kalani. 151 Bernard Hanotiau, Misdeeds, Wrongful Conduct and Illegality in Arbitral Proceedings, in, ALBERT JAN

VAN DEN BERG, INTERNATIONAL COMMERCIAL ARBITRATION: IMPORTANT CONTEMPORARY

QUESTIONS: ICCA INTERNATIONAL ARBITRATION CONGRESS SERIES NO. 11 262-263 (2003). In

Locabail (infra), the Court of Appeal held (Para 3): “The proof of actual bias is very difficult, because the law

does not countenance the questioning of a judge about extraneous influences affecting his mind; and the policy


42

issue is what the court would do if there is neither a real danger of bias nor a fanciful

allegation of bias, but the facts indicate a likelihood of bias. Kumaon Mandal does not seem

to solve this problem.

The English Courts have considerably differed changed positions on laying down the

standards for the determination of bias. The Kumaon Mandal Court pointed out that the

English Courts have applied stricter standards for the determination of bias in the last three

decades.152 There seems to be a shift in the attitude of the English Courts in the determination

of bias as can be clearly seen from the different approaches adopted in the landmark cases of

Franklin v. Minister of Town and Country Planning153, Metropolitan Properties Co. (F.G.C.)

Ltd. v. Lannon and Others154, Locabail (U.K.) Ltd. v. Bayfield Properties Ltd.155, and Porter

v. Magill.156 In Franklin, Lord Thankerton of the House of Lords held that those who occupy

a judicial office or a quasi-judicial office, including an arbitrator, should decide a dispute

with an independent mind and without any bias towards any of the parties.157 The test for bias

in Franklin was independence of the adjudicator. The test adopted by Lord Denning in

Metropolitan Properties was whether a reasonable man would think on the basis of the

existing circumstances that he is likely to be prejudiced, a slightly stringent test than the one

adopted in Franklin.158 However, in Locabail, the Court of Appeal held that the most

effective protection of the right to be tried by an impartial tribunal is setting aside the

decision of a judge where, on examination of all the relevant facts, it can be concluded that of the common law is to protect litigants who can discharge the lesser burden of showing a real danger of bias

without requiring them to show that such bias actually exists.” [Note: The Locabail court used the judge to “to

embrace every judicial decision-maker, whether judge, lay justice or juror”]. 152 The Court in Kumaon Mandal held: “Recently however, the English Courts have sounded a different note,

though may not be substantial but the automatic disqualification theory rule stands to some extent diluted. The

affirmation of this dilution however is dependent upon the facts and circumstances of the matter in issue.” 153 [1948] A.C. 87 (H.L.) 154 [1968] EWCA Civ 5: [1968] 3 All E.R. 304: [1968] 3 W.L.R. 694 155 1999] EWCA Civ 3004: [2000] 1 All E.R. 65: [2000] 2 W.L.R. 870 156 [2002] 1 All ER 465 157 [1948] A.C. 87, 98 (H.L.) 158 In this regard, Lord Denning followed Lord Devlin, who, considerably limited the applicability of the

principle laid down by Lord Hewart, C.J., in Rex v. Sussex Justices [1924] 1 K.B. 256that “justice should not be

done, but should manifestly and undoubtedly be seen to be done” in the case of Regina v. Barnsley Licensing

Justices [1960] 2 Q.B. 187 and instead applied the real likelihood of bias test. See, Metropolitan Properties Co.

(F.G.C.) Ltd. v. Lannon and Others [1968] EWCA Civ 5: [1968] 3 All E.R. 304: [1968] 3 W.L.R. 694


43

there was a “real danger (or possibility) of bias”.159 The “real danger” test was criticised by

the High Court of Australia for not placing enough emphasis on the public perception of the

facts alleging bias and for emphasising the Court’s view of the facts.160 In Magill v. Porter161,

the House of Lords held that the Gough standard of real danger, applied in Locabail, had not

commanded universal approval and was also inconsistent with the jurisprudence on bias

developed by the European Court of Human Rights. Therefore, the House of Lords

suggested, quoting the opinion of the Court of Appeal in In re Medicaments and Related

Classes of Goods (No 2)162 stated:

I respectfully suggest that your Lordships should now approve the modest adjustment of

the test in R v Gough set out in that paragraph. I would… delete from [the Gough test]

the reference to "a real danger". Those words no longer serve a useful purpose here, and

they are not used in the jurisprudence of the Strasbourg court. The question is whether

the fair-minded and informed observer, having considered the facts, would conclude that

there was a real possibility that the tribunal was biased.163

In the Indian context, it is difficult to understand why, in the first place, the English

standards for determination of impartiality should be applied. The Departmental Advisory

Committee (DAC) that was given the task of building a modern arbitration framework for

UK, decided not to use the Model Law test of independence and impartiality as the standard

for determination of bias of the arbitral tribunal. Article 12 of the Model Law adopts the

standard of “justifiable doubts as to independence or impartiality”. The DAC concluded that

there was no point in adopting the Model Law standard of independence, unless such lack of

independence leads to justifiable doubts about the impartiality of the arbitrator.164 The DAC

159 Here, the Court of Appeal seems to have concurred with the view of the House of Lords in R v. Gough that it

is unnecessary to have recourse to a test based reasonable suspicion of bias. 160 The Scottish High Court of Justiciary, in Bradford v McLeod 1986 SLT 244, did not follow the Gough test

and instead adopted the test as to whether there was suspicion of bias through the eyes of the reasonable man

who was aware of the circumstances. See, Magill v. Porter [2001] UKHL 67, Para 100. 161 Id. 162 [2001] 1 W.L.R. 700 163 Para 103. The change in position from Gough was warranted due to the .English Courts’ adherence to the

decisions of the European Court of Human Rights at Strasbourg. Hence the reference in Magill to “Strasbourg

Jurisprudence” 164 DEPARTMENTAL ADVISORY COMMITTEE, supra, note 137, Para 101- 102


44

stated that there was no reason to include independence that would not lead to impartiality of

the arbitrator. Secondly, it opined that if independence is included, it would lead to

questioning even the remotest connection between the arbitrator and one of the parties. Such

inclusion, the DAC feared, might discourage the parties from choosing an expert arbitrator

even at the cost of sacrificing independence. There seems to be no such “fear” in the Indian

context.

Secondly, the English Courts could comfortably afford to exclude independence and

adopt a stricter approach on challenges of arbitrator for determining impartiality because

there are chances that the courts could substantively review the awards under Section 69

(under tightly regulated circumstances and subject to the will of the parties to exclude such

review).165 Thus, even if the arbitrator was biased in reaching his decision, the award could

be appealed against under Section 69 on substantive grounds provided such review was not

excluded by the parties. The English Act is more effective in ensuring a bias- free tribunal as

it contemplates both substantive as well as procedural protection. Such a scheme has not been

contemplated under the Indian Act. In the absence of substantive review of arbitral awards-

whether on patent or latent errors, it is doubtful whether the Indian Act could do complete

justice to the parties’ wishes of ensuring a bias free tribunal. On this issue, Goolam Vahanvati

contends that there have been several complaints about arbitration being a corrupt affair and

that the Apex Court’s opinion in SAW Pipes was a reaction against these corrupt practises.166

Situations might arise that a party aggrieved by an award might not be aware that the

arbitrator was biased towards one party. In such circumstance, the aggrieved party might

question the award if substantive review of arbitral awards for error exists. A substantive

review would ensure that the biased arbitrator’s award is in accordance with law and not on

the basis of perverse considerations and partiality.

165 See Chapter V for a discussion on Section 69 of the English Act. It is pertinent to note that Section through

Section 68(2)(a), a party might challenge the arbitral award for not being impartial, which is one of the

mandatory duties of an arbitral tribunal under Section 33. But this ground is available if the irregularity is

serious, causing substantial injustice to the parties. 166 Vahanvati, supra, note 11.


45

R.A. Sharma argues that the 1996 Act gives very limited scope for challenging

arbitral awards.167 This, he states, has important implications as regards government

contracts, because majority of contractual disputes have their source in government contracts.

While private parties have adequate incentives to safeguard their interests against vested

interests or bias on the part of the arbitral tribunal, where government is a party to the

contract, there are no mechanisms by which collusion between arbitrator and the private party

is avoided. He argues that arbitration has become a lucrative business for some contractors,

who by hook or crook, try to exempt themselves from contractual liability by turning to the

arbitration mechanism. He mentions the example of an arbitration between the Government

of Andhra Pradesh (AP) and a contractor where the contractor finished 50 % of the

contracted work and instigated a dispute. The matter was referred to arbitration, where the

initial claim was for 7.99 lakhs but raised it to 80.94 lakhs. After the award and the decision

before the Supreme Court, the Government of AP had to pay a total of Rs 81 Lakhs. Such

large scale corruption, argues RA Sharma, is rampant in the arbitration industry.168 Arijit

Pasayat J, in a speech delivered off the Bench, mentions a case in which dispute arose on a

contract worth Rs 2.5 Lakhs and was referred to arbitration. The claimant claimed Rs 1 crore

for the mental tension but the arbitrator unjustly awarded Rs 25 Lakhs.169

The 1996 Act provides no mechanism for preventing such massive frauds on the

public exchequer. The unholy collusions between the arbitrators and the parties could be

reduced if the courts are allowed to review the arbitral awards on merits.170

167 R.A. Sharma, Case of ONGC vs. Saw Pipes Ltd., 2003(2) Arb. LR 5 (SC)- No Need for Reconsideration,

2007(1) Arb. LR 9, 11-16 (J) 168 Id. 169 Arijit Pasayat, A Journey across the Legal History of Arbitration Laws in India, in, CRITICAL ISSUES IN

INTERNATIONAL COMMERCIAL ARBITRATION: INTERNATIONAL JUDICIAL COLLOQUIUM ON

ARBITRATION AND COURTS: HARMONY OVER DISHARMONY (2007). A summary of the papers

presented in the conference is available at http://www.ficci.com/icanet/report/IFCAI.zip 170 In Union of India v. Ajit Mehta and Associates 1990(1) Arb. LR 166 (Bom)(DB), the Bombay High Court

held: “Before we part with these proceedings, we may observe that these matters have assumed some

importance because they reveal a large scale fraud practised on the public exchequer. The fraud involves crores

of rupees and is being practised regularly in a very sophisticated way. One does not know how long these

malpractices have been going on and in how many departments of the Central and State Governments. The

officers of more than one department at different levels at different levels are involved in them. The modus

operandi is very simple. The contractors submit their final bills and no claim certificates without reservations,


46

B. Public Policy sans Patent Illegality

Several scholars have contended that the 1996 Act never allowed for a judicial

interference into the arbitral award on the basis of patent illegality and that SAW Pipes was

wrong in reading patent illegality into public policy under Section 34(2)(b)(ii). The fallouts of

reading public policy in a broad manner as was done in SAW Pipes, are analysed in this

section.

1. Policy and Scheme of the 1996 Act

Act’s commitment to the philosophies of the Model Law: Part I of the 1996 Act is a virtual

adoption of the UNCITRAL Model Law.171 This shows India’s commitment to the

UNCITRAL’s philosophies of party autonomy, judicial minimalism and fair & efficient

arbitral procedure. In Konkan Railway Corporation Ltd. v. Mehul Construction Co172, the

Supreme Court held:

To attract the confidence of International Mercantile community and the growing volume

of India’s trade and commercial relationship with the rest of the world after the new

liberalisation policy of the Government, Indian Parliament was persuaded to enact the

Arbitration and Conciliation Act of 1996 in [the lines of the UNCITRAL Model] and,

therefore, in interpreting any provisions of the 1996 Act Courts must not ignore the

pass receipts in full and final settlement of their bills and get their bank guarantees released. After some months,

they prefer fresh claims and in spite of the provisions to the contrary in the contract, get arbitrators appointed

under Section 8 of the Act from the list submitted by themselves. A sham fight is put up in the courts to resist

the proceedings. The list consists of obliging individuals, almost all of whom are the former officers of the

contracting department. Finding that the business is lucrative, some of them have taken even a premature

retirement and have been practising as arbitrators. The awards are mostly made ex parte or else the arbitration

proceedings are resisted poorly. Even in courts, the most obvious defences are deliberately omitted and decrees

running into lacs and crores of rupees are passed routinely... Several similar matters are at present pending at

different levels, and their fate depends upon what we have held in these proceedings. It is for the government to

investigate the matter and safeguard the public funds.” 171 Preamble to the 1996 Act declares, inter alia, “it is expedient to make law respecting arbitration and

conciliation, taking into account the aforesaid Model Law”. (Emphasis supplied) 172 Per Constitutional Bench of the Supreme Court in Konkan Railway Corporation Ltd. v. Mehul Constructions

Co. (2000) 7 SCC 201


47

objects and purpose of the enactment of 1996. A bare comparison of different provisions

of the Arbitration Act of 1940 with the provisions of the Arbitration and Conciliation Act

1996 would unequivocally indicate that 1996 Act limits intervention of Court with an

arbitral process to the minimum and it is certainly not the legislative intent that each and

every order passed by an authority under the Act would be a subject matter of judicial

scrutiny of a Court of Law.173

A glance into the history of drafting of the Model Law would clearly help in

understanding why the UNCITRAL chose to adopt the policies it did in the Model Law.

In the twelfth session of the UNCITRAL, two documents- the Report of the

Secretary- General on the Interpretation and the Application of the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards174 (hereinafter “the New York

Convention”), and a note by the Secretariat on future work in respect of international

commercial arbitration- were laid before the UNCITRAL for its consideration.175 The note by

the Secretariat suggested that the UNCITRAL draft a model law on arbitral procedure which

would help to overcome most of the problems identified in the above-stated report of the

Secretary- General and to reduce the legal obstacles to arbitration.176 This decision to prepare

a model law as the solution to the problems concerning arbitration was, in fact, reached in a

1978 meeting in which the UNCITRAL secretariat, the Asian- African Legal Consultative

Committee (“AALCC”), the International Council for Commercial Arbitration (“ICCA”) and

the International Chamber of Commerce (“ICC”) “were of the unanimous view that it would

be in the interest of international commercial arbitration if UNCITRAL would initiate steps

leading to the establishment of uniform standards of arbitration procedure”.177 The Secretarial

Note178 identified the reasons as to why such a proposal was agreed upon. One of the reasons

173 Id. Para 4. 174 A/CN.9/168. Available at http://daccess-ods.un.org/access.nsf/Get?Open&JN=NL790227 last visited on 11

November 2007. 175 A/CN.9/169. Available at http://daccess-ods.un.org/access.nsf/Get?Open&JN=NL790228 last visited on 11

November 2007. 176 UNCITRAL, REPORT OF THE SECRETARY- GENERAL: POSSIBLE FEATURES OF A MODEL LAW

ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/207) (14 May 1981), supra, note 54. 177 Id. 178 A/CN.9/169, supra, note 211


48

was that “the elimination of certain local particularities in national laws would consequently

limit the reasons for setting aside awards to the grounds for refusing recognition and

enforcement specified in Article V of the New York Convention.”179

After considering the above-said documents, the UNCITRAL decided to request the

Secretary- General of the United Nations, inter alia, to “prepare, in consultation with the

interested international organizations… a preliminary draft of a model law on arbitral

procedure…”180 Finally, a Model Law was adopted on June 21, 1985. The goal of the Model

Law was to provide a system of draft rules, which States could adopt either in its entirety or

in substance, thereby facilitating uniformity of law181 and of certain policies concerning

arbitration.

The Model Law is based upon the triple pillars182 of party autonomy, minimum

judicial intervention and fair & efficient arbitral procedure.183 Numerous states adopted the

179 Id. The other reasons were as follows:

1. Most national laws at that time were based on the requirements of domestic arbitrations and needed

revision. The Model Law could set a benchmark for a new, revised law, which could take into account

the specific requirements of international commercial arbitration and modern arbitration practice.

2. There was a need for uniformity of national laws on arbitration.

3. There was a great divergence between the rules employed in arbitration and the national laws. There

was a lag in the evolution of the national laws on arbitration as compared to the arbitral rules. 180 Id. 181 “The aim of [the UNCITRAL] Model Law was that individual States would adopt it in their statutory

arbitration laws either in its entirety, or a substantial part of its provisions, or atleast its general shape and

philosophy, so as to bring about a certain amount of uniformity amongst national laws, so that external law of

an arbitration would no longer depend exclusively on the choice of the venue”. (Emphasis supplied) O.P.

Malhotra, Preface to O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at xxv. Some of the

jurisdictions that adopted Model Law are: Australia, Azerbaijan, Bahrain, Bangladesh, Bulgaria, Canada (at the

federal level), Certain Canadian states like Alberta, British Columbia, Manitoba, Ontario, Quebec, etc., Croatia,

Cyprus, Egypt, Germany, Greece, Guatemala, Hong Kong, Hungary, Iran, Ireland, Japan, Jordan, Kenya,

Lithuania, Macau, Madagascar, Malta, Mexico, New Zealand, Nigeria, Oman, Paraguay, Peru, Russian

Federation, Scotland, Singapore, Spain, Sri Lanka, Thailand, Tunisia, Ukraine, certain states of the USA such as

California, Connecticut, Illinois, Oregon, Texas, Zambia and Zimbabwe. PETER BINDER, INTERNATIONAL

COMMERCIAL ARBITRATION AND CONCILIATION IN UNCITRAL MODEL LAW 15 (2005) 182 BINDER, id., at 12 183 LEW ET AL, supra̧ note 150, at 28, Para 2-41. Also see, Melissa Gerardi, Jumpstarting APEC in the race to

Open Regionalism: A proposal for the Multilateral Adoption of UNCITRAL'S Model Law on International


49

Model Law to signal their commitment towards facilitating trade and commerce through

speedy resolution of disputes.184 India also felt that the adoption of the Model Law would

result in India becoming an attractive destination for Alternative Dispute Resolution

Mechanisms185 and in better flow of investment into India.186 Thus, the 1996 Act was enacted

by adopting the Model Law, but not in its entirety. The pillars of the Model Law- party

autonomy, judicial minimalism and fair and speedy arbitral procedures- were left

unaltered.187

Party autonomy is, perhaps, the most important significant feature of the Model Law.

The report submitted by the Secretary General, titled, “Possible Features of a Model Law on

International Commercial Arbitration”188, identified party autonomy as the “probably the

most important principle on which the model law should be based”.189 The principle of party

autonomy has been stated in express language as Article 19(1) of the Model Law.190

Commercial Arbitration, 15 Nw. J. Int'l L. & Bus. 668, 686 (1995); Saturnino E. Lucio, The UNCITRAL Model

Law on International Commercial Arbitration, 17 U. Miami Inter-Am. L. Rev. 313 (1986) 184 According to Peter Binder, “[a]part from saving an enacting state the strenuous and time consuming task of

drafting its own law, the use of Model Law has another distinct advantage: by propagating that it has enacted a

‘safe and approved’ United Nations model law, the enacting state is commonly able to attract foreign business to

its shores”. BINDER, supra, note 217, at 12. 185 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at xxxi. 186 See, Session II, XI LOK SABHA DEBATES, Thursday, August 1, 1996, where Iswar Prasanna Hazarika

(Member of parliament) argued: “Today we are faced with a situation where we have introduced far-reaching

economic reforms. We have adopted, we have decided to pursue the path of globalisation of our economy. It is,

therefore, necessary to appropriate that the law governing arbitration is changed consistent with the concept of

globalisation. This is also a need of the times, the crying need of the time”. Also see, Sandeep S. Sood, Finding

Harmony with UNCITRAL Model Law: Contemporary Issues in International Commercial Arbitration in India

After the Arbitration and Conciliation Act of 1996, available at http://works.bepress.com/sandeep_sood/1/ last

visited on February 11, 2008; Tracy S. Work, India Satisfies its Jones for Arbitration: New Arbitration Law in

India, 10 Transnat'l Law. 217 (1997). 187 DEPARTMENT RELATED PARLIAMENTARY STANDING COMMITTEE ON PERSONNEL, PUBLIC

GRIEVANCES, LAW AND JUSTICE, supra, note 81. 188 UNCITRAL, supra, note 54 189 BINDER, supra, note 217, at 185. 190 Article 19(1) of the Model Law: “Subject to the provisions of this Law, the parties are free to agree on the

procedure to be followed by the arbitral tribunal in conducting the proceedings.” (Emphasis added)


50

Articles 18 and 19 were regarded by the UNCITRAL as the Magna Carta of arbitral

procedure.191 Article 18192 reflects the Model Law’s commitment to just and fair arbitral

procedure despite the fact that it supports the notion of minimum judicial interference and

party autonomy.

Section 18 of the 1996 Act has adopted the same words that are found in Article 18 of

the Model Law. This reflects the similarity between the Model Law and the 1996 Act. As

regards minimal judicial interference, the Indian Law is more unequivocal than the Model

Law193 when the former provides:

Notwithstanding anything contained in any other law for the time being in force, in

matters governed by this Part, no judicial authority shall intervene except when so

provided in this Part.194

The Model Law states that the court shall not intervene except when provided by it.

One of the important aims of the Model Law in adopting this article was to prevent recourse

to the courts to slow down and frustrate the arbitral process.195 One of the significant ways in

which the Model Law targeted frequent judicial intervention was by adopting narrow grounds

for the challenge of arbitral awards in the seat of arbitration based on the grounds of the New

York Convention.196 This decision to adopt the grounds contained in the New York

191 Articles 18 and 19, were placed in a single Article (under Article 19) but later since Equal opportunity and

fairness was a fundamental principle, the UNCITRAL decided the principle needed a separate Article. See,

BINDER, supra, note 217. Also, see, OP MALHOTRA & INDU MALHOTRA, supra, note 3, at 682. 192 Article 18 of the Model Law states: “The parties shall be treated with equality and each party shall be given

a full opportunity of presenting his case”. The text of Article 18 has been adopted from Article 15(1) of the

UNCITRAL Arbitration Rules, 1976 193 Article 5: Extent of Court Intervention : In matter governed by this Law, no court shall intervene except

when provided in this Law. 194 Section 5 of the 1996 Act. 195 According to Binder, “[i]n addition to the great advantage of providing clarity of law… Article 5 also

functions to accelerate the arbitral process in allowing less of a chance for delay caused by intentional and

dilatory court proceedings.” BINDER, supra, note 217, at 51. 196 The New York Convention was aimed at increasing the efficiency of international commercial arbitration by

ensuring that international arbitration agreements and awards are duly enforced. One of the noteworthy features

of the New York Convention is that it contained restricted grounds on which alone a foreign arbitral award


51

Convention had two policy reasons. One, the UNCITRAL conducted an extensive survey of

the grounds for attacking the arbitral award and found out that the grounds in the New York

Convention were most “appropriate in the context of setting aside awards in international

commercial arbitration.197 Two, it was felt that there was a need for conformity with the

grounds contained in Article 36.198 The need was consistent with the policy of the model law

to reduce the impact of the place of arbitration. Another advantage of having identical

grounds for Articles 34 and 36 of the Model Law was to prevent or avoid relative validity of

arbitral awards, i.e., awards which are void in the country of origin but valid and enforceable

abroad.199 Further this would also prevent ‘double control of arbitral awards- control at the

seat of the award and control at the place of enforcement.200

It is pertinent to note that Section 34(2) of the 1996 Act, which contains the grounds

for setting aside arbitral awards, is almost identical to that of the grounds for setting aside in

Article 34(2) Model Law. Absent any compelling feature in the Act that would show

otherwise, it can be safely assumed that the Indian Parliament, by not altering the text of the

grounds in the Model Law, conveyed its collective intent that the Act contemplated challenge

of arbitral awards only to the extent conceived by the UNCITRAL. This is relevant in the

context of invoking public policy in setting aside awards. On public policy, the UNCITRAL

elaborated that public policy was something more than merely the political stance or

could be refused recognition or enforcement. It enumerated seven grounds on the basis of which alone could

recognition and enforcement be refused. The grounds for refusal to recognise and enforce awards were meant to

be read in a restrictive manner. [A.J. VAN DEN BERG, THE NEW YORK CONVENTION OF 1958 267- 268,

Kluwer Law and Taxation Publishers (1981)]. Though there have been divergences in the application of the

New York Convention, jurists have been satisfied by the working of the Convention. After a survey of over a

hundred reported decisions on the New York Convention, the UNCITRAL, in 1979, concluded that “the [New

York] Convention has satisfactorily met the general purpose for which it was adopted…”[REDFERN &

HUNTER, ALAN REDFERN & MARTIN HUNTER WITH NIGEL BLACKABY & CONSTANTINE

PARTASIDES, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 446

(2004)].Since the provisions of the New York Convention proved to be a success it was decided way back in

1978 that the grounds for setting aside arbitral awards in the model law should the same as the grounds

contained in the New York Convention for the refusal of recognition and enforcement of awards. 197 UNCITRAL, supra, note 96. 198 Article 36 of the Model Law contains provisions on “Grounds for Recognition and Enforcement of Arbitral

Awards”, which basically contained the same grounds as that of the New York Convention. 199 UNCITRAL, supra, note 96 200 Id.


52

international policies of a State- it comprised the fundamental notions and principles of

justice. The UNCITRAL referred specifically to the interpretation of public policy in the New

York Convention and concluded that public policy not only covered the French notion of

ordre public which consisted of principles of procedural justice but also principles of law and

justice in a substantive sense, instances being corruption, bribery, and fraud.201

The same text has been adopted in the 1996 Act with an additional explanation that

basically concurs with the view of the UNCITRAL. Adopting the Model Law shows that the

Act did not contemplate a return to the previous law wherein review of the award on merits

was allowed, which is the consequence of the SAW Pipes judgement. Justice D.R. Dhanuka

comments on the exclusion of patent illegality as a ground for setting aside awards in the

1996 Act:

It is of considerable significance that [SAW Pipes] enlarges the scope of challenge to the

awards much beyond the availability of grounds of challenge under the Arbitration Act

1940 even though it is clear from the scheme of Section 34 of the Act that the grounds

available under the Act are intended to be very much restricted and several grounds of

challenge set out in Section 30 of the Act of 1940 are deliberately omitted from Section

34 of the Act of 1996.202

Further, Section 34(2) contains the term “only”, like the analogous provision in the

Model Law, which goes to show that the grounds of setting aside are limited only to those

found in the said section and that they are meant to be read in a restrictive manner. Expanding

the scope of public policy to include patent illegality would render the term “only” redundant

and would result in subverting the policy of limited grounds of challenge of awards.203

201 UNCITRAL, REPORT OF THE UNCITRAL ON THE WORKING OF ITS EIGHTEENTH SESSION (3-

21 June 1985) (A/40/17) http://www.uncitral.org/pdf/english/yearbooks/yb-1985-e/vol16-p3-46-e.pdf Last

visited on 27 January 2008. 202 D. R. Dhanuka, A Critical Analysis of the Judgement ONGC Ltd vs. SAW Pipes Limited, 2003(2) Arb. LR 5

(SC), 2003(2) Arb. LR 9 (J); 203 Sunil Gupta, Challenge to Arbitral Awards on the Ground of ‘Public Policy’, 2003(3) Arb. LR 193 (J); Javed

Gaya, Judicial Ambush of Arbitration in India, 120 L. Q. R. 571 (2004)


53

Section 34(2)(b)(ii) Compared with Sections 48(2)(b) and 57(1)(e): The 1996 Act is

divided into four parts; Part II deals with the enforcement of foreign awards that are made in

pursuance of the New York and the Geneva Conventions. Chapter I of Part II of the Act deals

with provisions on the enforcement of New York Convention awards and Chapter II deals

with provisions on the enforcement of Geneva Convention awards. As regards foreign

awards, the 1996 Act is more or less as a consolidating statute as it re-enacts the provisions of

the Foreign Awards (Recognition & Enforcement) Act, 1961, and the Arbitration (Protocol &

Convention) Act, 1937.204 The 1961 Act is based on the New York Convention and the 1937

Act is based on the Geneva Protocol205 and Convention.206 One of the conditions to be

satisfied for the enforcement of foreign awards under the Geneva Convention was that the

award must not be contrary to the public policy or to the principles of the law of the country

where the award is sought to be recognised or enforced.207 The same rule is contained in

Section 7 of the 1937 Act, which has been re-enacted as Section 57(1)(e).208 On the other

hand, Article V(2)(b) of the New York Convention states that recognition and enforcement

may be refused if it is against the public policy of the country where recognition and

enforcement is sought. The same was adopted in Section 7(1)(b)209 and has been re-enacted

204 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 1330. 205 Geneva Protocol on Arbitration Clauses, 1923 206 Geneva Convention on the Execution of Foreign Arbitral Awards, 1927, signed under the auspices of the

League of Nations. 207 Article I(e) of the Geneva Convention: “…To obtain such recognition or enforcement, it shall, further, be

necessary:-

(e) That the recognition or enforcement of the award is not contrary to the public policy or to the principles of

the law of the country in which it is sought to be relied upon. (Emphasis Supplied) 208 Section 57(1)(e) of the 1996 Act: “(1) In order hat a foreign award may be enforceable under this Chapter, it

shall be necessary that-

(e) the enforcement of the award is not contrary to the public policy or the law of India.” (Emphasis

Added) 209 Section 7(1)(b) of the 1961 Act states that a foreign award may not be refused under the 1961 Act if “the

enforcement of the award will be contradictory to public policy”. It is to be noted that there is no expression

mention that the award can be refused enforcement for being contradictory to the public policy of India. A

question arose as to whether “public policy” meant the public policy of India in Renusagar v. General Electric,

supra, note 12. The Supreme Court cleared the doubt holding 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. Para 66.


54

as Section 48, which states that enforcement of an arbitral award may be refused if it is

contrary to the public policy of India.

Thus it is clear from the analysis of Sections 48(2)(b) and 57(1)(e) that the 1996 Act

itself makes a distinction between public policy and error of law-whether manifest or non-

obvious. When such clear distinction is made by the Parliament, the decision of the Supreme

Court in SAW Pipes ignoring the distinction could be said to be incorrect.210 Therefore

construing public policy in Section 34(2)(b)(ii) to include patent illegality would be to ignore

the clear distinction made under the Act.

2. Subversion of Arbitral Mechanism in India

The 1940 Act made arbitral procedures highly technical and the awards were

frequently challenged before the courts. Therefore the arbitral mechanism suffered from the

triple excesses of costs (costs due to excessive litigation before, during and after the arbitral

process) delay and complexity.211 After being pressurised by the trade and commerce

industry and after the Supreme Court criticised the way in which the courts interpreted the

Act, the Parliament’s aim was to enact a new law on arbitration in India that would be

consistent with the international economic scenario. The Parliament of India decided to

replace the existing framework with a new one that would reflect best international practices

in arbitration and enacted the 1996 Act. Under the 1940 Act, the courts frequently used the

ground of patent illegality to nullify awards and this was one of the primary reasons for the

failure of the 1940 Act.212 In the 1996 Act, there was no express provision for setting aside

arbitral award on the ground of patent illegality.213 The rationale for excluding this ground is

not difficult to seek. It was obvious that the then existing arbitral mechanism was sabotaged

due to frequent intervention by the courts using the ground of patent illegality or error

apparent on the face of the record. In fact, arbitration was reduced to a first round of dispute

210 Gupta, supra, note 239; Dhanuka, supra, note 238; Nadia Darwazeh & Rita F. Linnane, Set-Aside and

Enforcement Proceedings: The 1996 Indian Arbitration Act under Threat, 7 Int. A.L.R. 81 (2004), 211 The expression “triple excesses of costs, delay and complexity” was used by Lord Woolf MR in Patel v.

Patel [1999] 3 W.L.R. 322 to refer to the basic principles of access to the civil justice system. Quoted in, Robert

Morgan, Hong Kong Arbitration: A Decade of Progress – But Where to Next? Available at http://www.hk-

lawyer.com/1999-10/Oct99-65.htm Last visited on 28 January 2008. 212 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 1178. 213 Id, at 1181.


55

resolution followed by several rounds of litigation in the courts. To avoid such a

consequence, the Legislature chose not to include the ground of patent illegality in Section 34

of the Act.214

It has been apprehended that the SAW Pipes decision has brought back the position of

arbitration as it existed under the 1940 Act. This would frustrate the growth of arbitration as

the most suitable mechanism for resolution of contractual disputes, which is in fact the norm

in many other countries. Sarah Hilmer remarks on the return to the age of judicial hostility to

arbitration and arbitral awards:

Unfortunately, in Saw Pipes the Supreme Court has opened the floodgates to arbitral

litigation. That means, once more that the "lawyers will laugh and legal philosophers

weep.215

3. Disturbance to the Framework of International Commercial Arbitration

It has been previously noted that the 1996 Act does not differentiate between

international commercial arbitrations held in India and domestic arbitration for the purpose of

judicial review of awards.216 International Commercial Arbitration has no standards-

establishing bodies such as the World Trade Organisation for Trade Law and the United

Nations for International Law. People and institutions do not set standards in International

Commercial Arbitration; rather, it is the commercial practices, International instruments like

the UNCITRAL Model Law, the New York Convention and a host of doctrines created by

the municipal courts that set the standards. In a strict sense, international arbitration is not

“international” at all. Dr FA Mann observes:

In the legal sense, no international commercial arbitration exists. Just as,

notwithstanding its notoriously misleading name, every system of private international

law is a system of national law, every arbitration is a national arbitration, that is to say,

subject to a specific system of national law. It may well be that in some countries

214 See, Section B of Chapter II on the problems in arbitration under the 1940 Act mechanism. 215 Sarah E. Hilmer, Did Arbitration Fail India or did India Fail Arbitration, 10 Int. A.L.R. 2007 33, 34 (2007) 216 The Supreme Court has, after Bhatia and Venture Global, has arguably derailed the scheme contemplated in

the Act.


56

arbitrations displaying an international character of some sort are governed by special

rules, though they may be common to those in other States.217

Even so, a distinction is made between purely domestic arbitration and arbitration

with international character. Such a differentiation is justified because international

arbitrations, usually take place in a state where the parties to the arbitration have no

connection and therefore states could be more lenient on those arbitrations. Also, such a

distinction is appropriate in arbitrations where the state or its entities may enter into

arbitration agreements with individuals or entities from different nationalities. Further,

different parties from different cultures, backgrounds, legal systems come together and

structure their own dispute resolution mechanism without a standard-setting or standard-

enforcing agency at the international level to set the rules and procedures applicable. In such

circumstances, certain principles and practices emerge as standards or values218 and these get

legitimised over a span of time.219 In the absence of international norm-setting institutions,

these principles play a significant role in running the international arbitration machinery.

Examples of such principles are the doctrines of party autonomy, fair and just procedure,

competence-competence, severability of arbitration agreements, finality of arbitral awards,

minimum judicial interference, supervision at the seat of arbitration etc. Party autonomy is

considered as most significant among the principles.220 In the international context party

autonomy acquires significance because it is the parties who lay down the structure of the

arbitration (apart from the mandatory provisions and the default provisions which fill gaps in

the arbitration agreement), including the laws to be applied by the tribunal.221 Party

217 Dr FA Mann: Lex Facit Arbitrum, International Arbitration Liber Amicorum for Martin Domke. However,

there are arbitrations that are of true international character, like the ICSID arbitration, arbitration in W.T.O.,

perhaps, the W.I.P.O., domain name arbitration etc. See, REDFERN & HUNTER, supra, note 232, at 12. 218 Peter Binder uses the terms “pillars”, “Magna Carta”, “the most important principle”, “fundamental

principle” etc to explain the significance of such standards in the UNCITRAL Model Law. BINDER, supra,

note 217, at 12, 143, 182, 185. 219 The emergence of such values is not universal in the absolute sense and it is not that all international

arbitrations must comply with these values. The fact that they are not universal makes international commercial

arbitration flexible and therefore attractive for the parties who can “tailor-make” arbitration to suit their needs.

REDFERN & HUNTER, supra, note 253, at 71. 220 Id., at 265. 221 Lew et al describe party autonomy as the most prominent and widely accept international conflict of laws

rule. For them, party autonomy has a special transnational or universal character and has binding effect because


57

Autonomy in international commercial arbitration, in simple, refers to the ability of the

parties to control the process of resolving a particular dispute that arises between them. Once

parties have decided, at the time of the arbitration agreement, that the dispute shall be

resolved by arbitration, then the dispute shall be resolved so. According to Lord Cooke, the

pre-1996 English position (which is similar to the present Indian position on awards and

patent illegality) was that the common law jurisdiction to set aside awards for error of law on

its face was capable of being exploited to defeat the party intentions in submitting to

arbitration. Lord Cooke felt that it was easy to convert into an arguable point of law some

statement by the arbitrators that in truth amounted to no more than their appreciation of the

realities of a situation.222 According to him, a lavish interpretation of what amounts to error

of law was less satisfactory when used to subvert party autonomy in consensual

arbitrations.223 The doctrine of party autonomy in choosing the law applicable to the dispute-

curial or substantive- is derived from the parties’ choice to arbitrate, in the first place.224

The role of party autonomy in international arbitration is more strategic because the

foreign entities could, through the use of international arbitration, bypass the local courts, the

restrictive local substantive and procedural laws and also the extended scope for judicial

review of arbitral awards by the local courts, and instead, settle the dispute through

appointing their own tribunal and selecting their own laws.225 The problem with frequent

it has been accepted by the parties themselves. LEW ET AL, Supra. note 150, at 414. Also see, Elizabeth

Shackelford, Party Autonomy and Regional Harmonization of Rules in International Commercial Arbitration,

67 U. Pitt. L. Rev. 897 (2006); Thomas E. Carbonneau, The Exercise of Contract Freedom in the Making of

Arbitration Agreements, 36 Vand. J. Transnat'l L. 1189 (2003). 222 Lecture delivered by The Lord Cooke of Thorndon, K.B.E. at the Conference on Dispute Resolution held by

ICADR in 1998 223 Id. 224 Shackelford, supra, note 257. 225 Cindy Noles made the same point, albeit in a more diplomatic fashion, when she noted the importance of

choice-of-forum clauses in the international contract regime: “Contractual freedom in the area of choice-of-

forum would benefit business entitites operating within developing countries. Foreign enterprises seeking

predictability and certainty of litigation may rely on a choice-of-law clause as a means of decreasing the risk

inherent in a contract transcending national boundaries. However, a choice-of-law clause may not be totally

effective in controlling the law applied to the contract. There is always a chance that the foreign court may elect

not to apply the chosen law, or that it may be difficult or expensive to prove the law stipulated in the contract.

Therefore, the company inserts both choice-of-law and choice-of-forum clauses to protect the risk of litigation

in courts of developing countries”. (Emphasis supplied) Cindy Noles, Enforcement of Forum Selection


58

judicial intervention into international arbitration awards is that it forces the parties not to

arbitrate in India. A market-oriented pro-arbitration scheme of arbitration law would have not

made it necessary for the parties to select a forum outside India provided there were less

frequent intervention from the courts into the arbitral process. This would have reduced the

costly process of approaching neutral states for arbitration. Perhaps, the drafters of the 1996

Act had these aspects in mind and therefore adopted a market-friendly scheme for the judicial

review of arbitral awards by not including substantive review of awards and also by not

providing any scope for interim measures for foreign arbitrations.226 This would have made

the parties to arbitrate in India though one of the parties to the contract was an Indian.227

Judicial hostility towards arbitration by striking down arbitral awards for legal error

takes away the finality of arbitral awards and lets the party aggrieved by the award to litigate

in the courts. This diminishes the favourable advantages of least interference from the local

courts and the non-applicability of local legal particularities offered by party autonomy

doctrine to international commercial arbitration. The upshot of reading patent illegality into

public policy under Section 34 is that there are no incentives for the parties to arbitrate in

India;228 rather, parties to international contracts would choose forums like Singapore or

Hong Kong in Asia for resolving their disputes or go to traditional venues like London or

Paris.

Agreements in Contracts between unequal Parties, 11 Ga. J. Int’l & Comp. L 693 (1981). An eminent

commentary points out the same: “A party to an international contract which does not contain an agreement to

arbitrate is likely to find, if the dispute arises, that it is obliged to commence proceedings in a foreign court, to

employ lawyers other than those who are accustomed to its business and to embark upon the time-consuming

and expensive task of translating the contract, correspondence between the parties and other relevant documents

into the language of the courts. REDFERN & HUNTER, supra, note 253, at 22. 226 Patent illegality and the power of the Indian Courts to grant interim measures for international commercial

arbitrations not held in India have been read into the statute by the court when the 1996 Act is least indicative of

the existence of such powers of the Courts. 227 The advantage for an Indian party to arbitrate in India would be costs and familiarity with the local laws and

the legal profession. On costs involved in international commercial arbitration, see, REDFERN & HUNTER,

supra, note 253, at, 396. 228 On the tendency of some nations to be hostile towards arbitration, Carbonneau notes: “Protectionism and

parochialism, however, are short-sighted and are likely to be counterproductive in the long run. They foster an

isolationism based upon fear and insecurity and prevent the state of origin and outside countries from

developing any real confidence in the local culture and its legal and economic institutions.” Carbonneau, supra,

note 257.


59

The benefits of a strong mechanism that is supportive of international arbitration are

three-fold.229 First, an efficient arbitration mechanism would leave no reason for the foreign

party contracting with the Indian party to bargain for a neutral seat of arbitration. Where a

dispute arises, the Indian party need not, for example, go to London or Hong Kong to resolve

the dispute; instead India can be chosen as the seat for arbitration. This would prove

inexpensive for the Indian entity. Two, encouraging foreign parties to arbitrate in India would

give way for the creation of arbitration industry in India. It would create demand for a strong

secretarial staff like translators, clerical staff etc and also for quality arbitrators. Three, the

influx of parties from abroad and quality foreign arbitrators could lead to improvement in

domestic arbitration standards.

Thus, the argument is that it would be in the interests of the participants of the dispute

resolution process to have a limited role of public policy sans patent illegality in setting aside

patently illegal awards.

4. Contract Enforcement, Foreign Direct Investment and Economic Development

One of the fundamental reasons for the passing of the 1996 Act was to provide for a

market-friendly dispute resolution statute through which settled contractual expectations are

enforced in an efficient manner and thereby promote economic development.230 In 1991,

India adopted the New Industrial Policy by which India strove to achieve economic

development through the adoption of market friendly practices including allowing Foreign

Direct Investment (“FDI”) in India and the abandoning of anti-private sector policies.231 It

was felt that the then existing system of commercial dispute resolution was riddled with

enormous delays and unpredictability232 and therefore, there was a need for making a new

market friendly law on dispute resolution. India decided to adopt the UNCITRAL policy of

minimum judicial interference in the arbitral process, including especially, the absence of

229 An apt illustration of a mechanism in Asia that is pro-arbitration is Hong Kong 230 Statement of Objects and Purpose to the Arbitration & Conciliation Bill, inter alia, declares: “It is also

recognised that our economic reforms may not become fully effective if the law dealing with settlement of

domestic and international commercial disputes remain out of tune with such reforms.” 231 Sood, supra, note 222. The New Industrial Policy is available at http://siadipp.nic.in/publicat/nip0791.htm

last visited on March 23, 2008. 232 Id


60

substantive review of arbitral awards. Therefore India enacted an arbitration law without any

scope for setting it side on the ground of error of law- patent or otherwise. Reading in patent

illegality as a ground for setting aside arbitral awards would, therefore discourage FDI and

would be a hindrance to economic development.

A proper arbitration mechanism would act as an efficient alternative to the courts of

law in India where delay and unpredictability are the norms. Hence an effective arbitration

scheme would create an alternative dispute resolution process by which the vices of delay and

unpredictability of the courts can be avoided and instead, and at the same time, the coercive

power of the state can be tapped to enforce the awards. Such a system would ensure that the

contractual expectations of the parties are enforced by state and disputes concerning such

expectations are easily resolved. This would give fillip to commercial transactions- both

domestic and international. If parties are allowed to challenge awards on substantive aspects

of the award, it will lead to delay and defeat of contractual expectations of the parties.233

Proper working of the legal institutions is necessary for economic development. The World

Development Report, 2005, of the World Bank states:

To be an effective backstop, the law must not give the loser in an arbitration proceeding

a long period or numerous ways to challenge the award. The United Nations

Commission on International Trade Law recommends that courts should be permitted to

set aside awards only in limited and precisely defined situations. Otherwise, as happened

in India, litigation over the validity of awards can spiral out of control as the losing side

seeks to win in court what it lost at the arbitration table.234

The connection between liberalism (that is, market friendliness), economic

development and law was clearly made out even in the seventies.235 David Trubek argued

that law was essential to economic development because it provided elements that were

233 Such was the case with the 1940 Act. See, Port Trustees Case and Om Prakash case, , supra, note 66. 234 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/ WORLD BANK,

WORLD DEVELOPMENT REPORT 2005: A BETTER INVESTMENT CLIMATE FOR EVERYONE 88

(2005). Emphasis not in the original. 235 See, for example, Kenneth L. Karst, Law in Developing Countries, 60 Law Libr. J. 13 (1967); David M.

Trubek, Toward a Social Theory of Law: An Essay on the Study of Law and Development 82 Yale L.J. 1 (1972)


61

indispensable for the functioning of the market system.236 The elements, referred to as “ideal

paradigms” 237, included a set of universal rules applied uniformly and predictably, a regime

of property law that protects future labour and, more importantly, a regime of contract law

that secures future expectations of the parties.238 The absence of effective and inexpensive

contract enforcement mechanisms has been regarded as one of the reasons for the stagnation

in economic development in developing countries.239 Clague, Keefer, Knack, and Olson

devised a mechanism to find a link between contract enforcement, investment and economic

development. They found a positive relation between Contract Intensive Money (CIM) and

gains from trade. Contract Intensive Money according, to them, was the ratio of the non-

currency money to the total supply of money.240 They argued that higher CIM showed that

the legal regime secured contract and property rights and was investment friendly. A regime,

which contained proper third party enforcement mechanisms, encouraged the use of non-

currency money and more non-simultaneous transactions where, for example, parties could

buy or sell goods and services postponing payment to the future. This decreased the risk of

non-performance of contracts and this in turn encouraged investment. Therefore countries

with a low CIM count could look improve its law to ensure proper enforcement of contractual

obligation as a part of their path to increased economic development. There have been similar

236 Id. 237 Amanda Perry, An Ideal Legal System for Attracting Foreign Direct Investment? Some Theory and Reality,

15 Am. U. Int'l L. Rev. 1627 (2000). 238 Richard Bilder & Brian Z. Tamanaha, Literature Survey of Law and Development, 89 Am. J. Int'l L. 470

(1995) 239 Trubek, supra, note 271; DOUGLASS C. NORTH, UNDERSTANDING THE PROCESS OF ECONOMIC

CHANGE 158-159, Academic Foundation (Indian Edition. 2006); In the Indian context, see, N.R. Madhava

Menon & Bibek Debroy, Introduction xii-xiii, in, N.R. MADHAVA MENON & BIBEK DEBROY, L EGAL

DIMENSIONS OF ECONOMIC REFORMS (1997), where they authors point out the dysfunctionality of the

Indian legal system vis-a-vis the economic system, especially in the area dispute resolution. Douglass North

pointed out that in traditional societies bargaining was personal and repetitive and therefore self-enforcement

was enough in securing the contractual parties’ expectations. In the modern society in the absence of personal

bargaining and absence of repeat dealings, it became necessary to develop new mechanisms like peer pressure,

threat of reputational loss etc to ensure contract performance. However, these informal mechanisms were

inadequate as they failed to provide low cost and credible enforcement mechanisms. A need was felt for a

formal, credible and low cost enforcement mechanism and this vacuum was filled by using the coercive power

of the state. See, Michael Trebilcock & Jing Leng, The Role of Formal Contract Law and Enforcement in

Economic Development, 92 Va. L. Rev. 1517 (2006) 240 Trebilcock & Leng, id., at, 1525


62

studies in the Law and Finance literature on the need for proper formal contract enforcement

mechanisms for the development of financial markets and consequent economic

development.241 The World Bank has, for several years studied the relation between formal

contract enforcement, rule of law and economic development and has concluded that good

governance, including rule of law, matters for economic development.242

The last two decades of the twentieth century witnessed developing countries’ urge

for rapid economic development through the adoption of market-based economies. Such

countries saw FDI as one of the most important means of rapid economic development.243 On

the prominence of this opinion among scholars, Amanda Perry notes:

It is now generally theorized first, that foreign investors are attracted to legal systems

which are predictable and efficient; and second, that it is possible to identify a uniform

set of characteristics which render any legal system predictable and efficient.244

The legal regimes of developing and transition economies have consciously adopted

the policy of encouraging FDI into their economies and have chosen to adopt, for that

purpose, the World Bank’s recommendation of building efficient formal contract enforcing

241 According to Trebilcock and Leng, the connection between contract enforcement and financial markets is as

follows: “Financial markets are particularly dependent on law and state contract enforcement institutions...

[because] financial contracts tend to be highly technical and complex and usually involve large amounts of

financial assets. Therefore, financial contracting usually entails considerable transaction risks and requires stable

and predictable contract protection and compliance assurance. Such assurance is presumably best provided by

effective formal contract law and related legal institutions. Viewing finance as a set of contracts, the broad law

and finance literature suggests, on the basis of extensive empirical testing, that a country's contract, company,

bankruptcy, and securities laws, combined with effective enforcement of these laws, fundamentally determine

the rights of securities holders and the performance of financial systems.” Id, at 1528. 242 See, for example, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/

WORLD BANK, A DECADE OF MEASURING THE QUALITY OF GOVERNANCE: GOVERNANCE

MATTERS 2006: WORLDWIDE GOVERNANCE INDICATORS, (2006); INTERNATIONAL BANK FOR

RECONSTRUCTION AND DEVELOPMENT/ WORLD BANK, WORLD DEVELOPMENT REPORT:

FROM PLAN TO MARKET 87, (1996); 243 The two wealth creating activities in capitalist economies are investment and exchange. Kevin E. Davis,

What Can The Rule of Law Variable Tell Us About Rule of Law Reforms?, 26 Mich. J. Int'l L. 141, 142 (2004); 244 Amanda Perry, supra, at 273.


63

mechanisms.245 For a long time, the World Bank has been stressing that FDI is a significant

means of economic development. India has adopted the same policy and has opened up

several sectors. As Douglass North pointed out, in a system of repeated, simultaneous

exchanges246 informal means of enforcement was possible; but in the absence or

ineffectiveness of such informal means, formal enforcement is necessary. This is to make the

law certain and stable so as to reduce transaction costs. Instead of reforming the court system,

which would prove extremely expensive, establishment of an alternative but effective dispute

resolution system was considered economical. Thus, the decision of the Indian policy makers

to make the arbitration statute more market-friendly is not surprising. Gaya remarks:

The state of Indian arbitration is cited by many as a definite negative point in relation to

the attempt by successive Indian Governments from 1991 to portray India as a

investment-friendly jurisdiction. This negativity largely outweighed the perceived benefits

of an English-speaking, common law based judicial system which is, in general, free of

political interference.247

The necessary connection between commercial development and the arbitration

mechanism has been identified as early as 1920’s by the Civil Justice Committee. The

Committee opined that postponing of judgement by the debtor by attacking the validity of

arbitral awards in the delay-infested Courts not only leads to injustice but is also a general

source or risk to the traders. According to the Committee, an effective arbitration system has

effect on the prices of goods. On the contrary, where the enforcement of contracts is

uncertain, dilatory and expensive, there is a risk incurred by the seller and this risk in terms of

increased costs is transferred to the buyer. Therefore, the Committee concluded that it was in

the interest of the consumers and persons engaged in commerce that Indian trade should have

an efficient system of commercial arbitration.248

The World Development Report, 2005, points out that in India those whose contracts

have been breached or who have suffered other injury must either accept a sharply discounted

245 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/ WORLD BANK,

WORLD DEVELOPMENT REPORT: FROM PLAN TO MARKET (1996), supra, note 278, at 87. 246 NORTH, supra, note 275. 247 Gaya, supra, note 239 248 Supra, note 57.


64

settlement or wait years, if not decades, to have their case resolved in court.249 The Report

states that well performing courts are important for a sound investment climate and cited the

examples of Mexico where it was found that larger, more efficient firms are found in states

with better court systems and that better courts reduce the risks that firms face, and thereby

increase the firms’ willingness to invest more.250

The objective of this Chapter was to find out what are the merits of having broader

conceptions of public policy that is inclusive of patent illegality and the fallouts of reading

public policy in such a wide manner. Part A of this chapter dealt with the advantages of

having an arbitral mechanism with patent illegality as a component of public policy. It

argued, firstly, that there was a need for supervision of arbitral awards to ensure that

arbitration is not conducted in lawlessness and the policy behind substantive legal norms are

not frustrated. It pointed out the importance of appeal processes as an inexpensive means of

error correction and the role of such error correction in the legal system. Thirdly, it pointed

out the role of courts in the exposition or amplification of law in a legal system and the

inability of the arbitral system to fulfil this function of the courts. Specifically, it pointed out

the inability of the arbitral machinery in performing the function of making the law stable,

uniform, coherent and consistent. Finally, it highlighted the inability of the existing

mechanism in ensuring an impartial arbitral tribunal and the need for substantive review to

complement the existing mechanism of ensuring fair and impartial arbitral tribunals.

Part B of this chapter dealt with the negative effects of a broader reading of public

policy. It explained, firstly, the nature and scheme of 1996 Act and its faithfulness to the

Model Law philosophies of party autonomy, party autonomy, judicial minimalism and fair

and efficient arbitral procedure, and pointed out that Saw Pipes goes against the statute and

its rationale in this regard. Secondly, it argued that striking down awards on the ground of

patent illegality would subvert the arbitral mechanism in India because it would bring back

the problems of repeated challenge of awards, delays and extensive technicalities into the

arbitral process that was the norm under the 1940 Act. It was also argued that including

249 Amanda Perry (Kessaris) argues that empirical evidence against the necessary connection between FDI and

legal systems is definitely lacking. See, Amanda Perry-Kessaris, Finding and Facing Facts about Legal Systems

and FDI in South Asia, 23 Legal Stud. 649 (2003) 250 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/ WORLD BANK, supra,

note 270, at 86.


65

patent illegality in public policy under Section 34(2)(b)(ii) would be inconsistent with the

international framework on arbitration and would discourage parties from arbitrating in India.

Fourthly, it was argued that the 1996 Act was enacted to support India’s acceptance of the

free-market ideology and the contention was that the Act was intended to create a climate for

foreign investment in India. SAW pipes, it was stated, has made the Act not conducive to FDI

in India.


66

IV

NEED FOR A MIDDLE PATH?

The previous Part noted the merits and adverse effects of construing public policy

inclusive and exclusive of public policy (hereinafter, “inclusive public policy” and “exclusive

public policy” respectively). One of the arguments was that exclusive public policy that is of

patent illegality would be beneficial because of finality of arbitral awards and consequent

swift, efficient and inexpensive dispute resolution. On the other hand, the notion of public

policy that is inclusive of patent illegality will result in a legal system with minimum errors,

rule-formulation and amplification and would also ensure the relatively impartial arbitral

tribunal. Several scholars and judges have chosen either of these two approaches. Some have

chosen the inclusive version of public policy without due regard to the promptness of the

arbitral process in dispensing justice and some, the exclusive version without considering the

necessity of an impartial tribunal which bases its decisions not on extraneous considerations

but on rule of law.251 . Sabin aptly describes this dichotomy:

Some past attempts to reduce arbitrator misconduct and error, while increasing

arbitrator accountability, have relied on simplistic changes to the current system, while

others have suggested more serious regulation. Almost inevitably, however, these

propositions for reform, while logically derived from arbitration's similarity to the

judicial process, undermine the very purposes of arbitration. In other words, although

these reformers would not destroy arbitration, their proposals would effectively eliminate

it by undermining its feasibility.252

Reducing this issue in the form of a bivalent debate is problematic because it unduly

limits the role of public policy in arbitration. More importantly, it forecloses the inquiry into

whether the values of both the notions can be reconciled. Such an approach constricts us and

forces us to choose between a broader public policy and a speedy arbitral process but not to

have both.

251 Sabin, supra, note 128, at 1358- 1359 (2002) 252 Id.


67

This is not to say that both the notions are without problems. Apart from the apparent

problem that each of the notions seeks to achieve some values and exclude the values which

the other seeks to achieve, there are several problems with regard to both notions. For

example, the goal of the UNCITRAL in drafting the Model Law was to ensure proper

facilitation and working of international commercial arbitration.253 It is questionable whether

such a system would be conducive for a municipal system which might have values that are

incongruent or more important then the goals envisaged by the Model Law. Also, the need

for preventing subversion of the arbitral system to achieve economic goals should not be the

reason to promote injustice and evasion of law.

This chapter attempts to find out if there are alternative approaches that can be

adopted.

A. Search for Alternatives

There is a need for India to look at alternatives approaches whereby the values of an

inclusive as well as an exclusive notion of public policy, especially, supervision of arbitration

and efficient resolution of disputes, can be reconciled. This chapter, inter alia, attempts to

find out such avenues. In furtherance of this objective, this section studies the way in which

other jurisdictions have attempted to square these extreme positions. According to Zweigert

and Kotz, “[o]ften it is the feeling of dissatisfaction with the solution in one’s own system

which drives one to inquire whether perhaps other legal systems may not have produced

something better”.254 The effort is to venture into the exercise of comparison for the same

purpose- to identify whether other legal systems have produced a better answer to the

problem in discussion in the absence of an appropriate answer from the Indian Legislature

and the Courts. Specifically, the objective of comparison is to find out if other legal systems

have tried to ensure speedy settlement of disputes even when the courts have had the power

of setting aside patently illegal awards.

253 UNCITRAL, REPORT OF THE SECRETARY- GENERAL: POSSIBLE FEATURES OF A MODEL LAW

ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/207) (14 May 1981), supra, note 224. 254 K. ZWEIGERT & H. KOTZ (TRANSL. TONY WIER), AN INTRODUCTION TO COMPARATIVE LAW

34 (1998).


68

Almost all legal systems that have given a place for arbitration as an important means

of dispute resolution face this apparently irreconcilable dichotomy. There are several systems

that have faced such a dichotomy and shown their loyalty to either of these notions. But there

are certain jurisdictions which have tried, and to an extent succeeded, in balancing the need

for supervision of arbitral awards with the requirement of speedy disposal of disputes. Three

jurisdictions stand out in this regard- UK, USA and Hong Kong.

Hong Kong

The law on arbitration in Hong Kong is governed by the Arbitration Ordinance, which

originally came into force in 1963 and was substantially amended in 1996.255 Hong Kong has

different regimes for domestic and international arbitrations and the regime for international

arbitration is primarily based on the UNCITRAL Model Law.256 Hong Kong has been

regarded as one of the prominent centres for arbitration in the world. Its journey to eminence

began with the publication of the Report on the Adoption of the UNCITRAL Model Law of

Arbitration by the Hong Kong Commission on Law Reforms in 1987. The Report suggested,

inter alia, that the adoption of the Model Law with some minor changes would make it

known to the international business community about Hong Kong’s commitment towards

ensuring international standards in its arbitration law and this would help in reinforcing Hong

Kong’s claim as a leading destination for international arbitration.257 The recommendations

of the Commission were accepted and the Arbitration Ordinance was amended in 1989 and

1990 but the law on domestic arbitration was left unaltered. A Committee was constituted to

consider the need for amendments to the Ordinance. The Committee’s recommendations

were adopted as Arbitration (Amendment) Ordinance 1996 (75 of 1996). The 1996

255 The original 1963 Ordinance was based on the English Arbitration Act, 1950. The Ordinance was amended

from time to time following the developments in arbitration law in the UK. However the amendment to the

ordinance in 1982 was a clear departure from the UK law on arbitration. 256 Gu Weixia, Recourse against Arbitral Awards: How Far Can a Court Go? Supportive and Supervisory Role

of Hong Kong Courts as Lessons to Mainland China Arbitration, 4 Chinese J. Int'l L. 481 (2005) 257 HONG KONG COMMISSION ON LAW REFORMS, REPORT ON THE ADOPTION OF THE

UNCITRAL MODEL LAW OF ARBITRATION BY THE HONG KONG COMMISSION ON LAW

REFORMS. Para 1.8 and 1.9 (1987). Available at www.hkreform.gov.hk/en/docs/runcitral p-e.pdf last visited

on March 24, 2008.


69

Ordinance targeted the Domestic Arbitration regime and at the problems concerning

arbitration agreement and the appointment of arbitrators.

Judicial Review of Arbitral Awards: One of the reasons why Hong Kong has become the

prominent centre for arbitration in the world is because of the deference by the courts to

arbitral awards. As Section 2AA of the Ordinance declares, object of the Ordinance is to

“facilitate the fair and speedy resolution of disputes by arbitration without unnecessary

expense.”

The grounds for judicial review of arbitral awards in domestic arbitration are

contained in Sections 23 to 25 of the Ordinance. Section 23 contains the grounds on which

appeal could lie against an award. The conditions that are to be satisfied for an appeal to lie

under Section 23 are as follows:

1. Appeal could lie only on a question of law arising out of an award.

2. Appeal could be brought by either of the parties provided

a. Consent of all the parties to the reference is taken, or

b. Leave of the court is taken.

3. The court could grant leave only:

a. after taking into consideration all the surrounding circumstances, and

b. if the determination of the question of law concerned could substantially affect

the rights of one or more of the parties to the arbitration agreement.

4. The court could also impose conditions while granting leave for appeal.

The courts have allowed appeals against arbitral awards in which the award was one

which any reasonable arbitrator could not have reached or the arbitrator has misdirected

himself in law.258 However this does not mean that the courts have been lenient in allowing

appeals from arbitral awards frequently. The courts have followed the directions given by

258 See, Kwan Lee Construction Co. Ltd v. Elevator Parts Engineering Co. Ltd (Court of Appeal. 1997)

available at http://www.hklii.org/hk/jud/en/hkca/1996/CACV000127_1996.html last visited on February 20,

2008. Also see, Gary Soo, Challenging Arbitration Awards in Hong Kong, 2 Int. A.L.R. 111 (1999); Weixia,

supra, note 292.


70

Lord Diplock in The Nema on the factors to be considered by the appellate court when

deciding whether to grant leave to grant appeal against arbitral awards.259

Section 24 gives power to the courts to remit arbitral awards for reconsideration by

the arbitral tribunal. Remission is usually not ordered for when there is serious miscarriage of

justice.260 The courts in Hong Kong have distinguished between technical and legal

misconduct and have remitted the awards whenever technical misconduct261 occurred and

have set aside the award for legal misconduct.

The law on setting aside awards is contained in Section 25(2) of the Ordinance262,

which provides for setting aside of an arbitral award if the arbitrator misconducted himself or

the proceedings or the award was improperly procured. The ground of misconduct covered

the following situations:

1. Lack of probity and judicial capacity, failure to act or appear to act fairly.

2. Honest but misguided attempts by the arbitrator to conduct the arbitration in the way

he thinks best.

3. Having an interest in the subject-matter of the dispute.

4. Outright corruption, e.g. accepting a bribe.263

259 Pioneer Shipping Ltd v. BTP Tioxide Ltd, The Nema [1982] A.C. 724: [1981] 2 All E.R. 1030 (H.L.) 260 Soo, supra, note 294, at 116 261 The courts cannot remit an award where error of fact or law is involved. Soo, Id. The grounds on which

awards have been remitted are: (a) failure to award interests; or

(b) deciding an unreferred or unpleaded issue; or

(c) inconsistent finding of the award; or

(d) failure by the tribunal to hear a party in relation to documentary evidence requested from him; or

(e) purported alterations to the award after the arbitrator became functus officio, etc. Weixia, supra, note 292, at

483. 262 Section 25 of the Ordinance: Removal to arbitrator and setting aside of award: (1) Where an arbitrator

or umpire has misconducted himself or the proceedings, the Court may remove him.

(2) Where an arbitrator or umpire has misconducted himself or the proceedings, or an arbitration or award

has been improperly procured, the Court may set the award aside.

(3) Where an application is made to set aside an award, the Court may order that any money made payable

by the award shall be brought into court or otherwise secured pending the determination of the application. 263 Weixia, supra, note 292, at 486.


71

It is to be noted that the grounds contained in Section25(2) do not provide for setting

aside arbitral awards for error of law; rather, the grounds are based on the character of the

arbitral tribunal, its fairness, independence and the capacity of the arbitrator to arbitrate.

In the context of international arbitrations, the grounds for setting aside arbitral

awards reflect the grounds of setting aside as contained in Article 34 of the Model Law.264

The Courts in Hong Kong have shown deference to the arbitral awards and have been

hesitant in setting them aside. One of the grounds under which an international award could

be set aside is the ground of public policy. Since Hong Kong adopts the Model Law

provisions for international arbitrations, there is no provision for appeal on the merits of the

award, whether it substantially affected rights of the parties or not. However, the position is

not that courts are absolutely precluded from reviewing the merits of the award. In Hebei

Import and Export Corp v. Polytek Engineering Co. Ltd.265, the Court of Final Appeal held in

the context of enforcement of awards:

[T]here must be compelling reasons before enforcement of a convention award can be

refused on public policy grounds. This is not to say that the reasons must be so extreme

that the award falls to be cursed by bell, book and candle. But the reasons must go

beyond the minimum which would justify setting aside a domestic judgment or award.266

Again, in the context of enforcement proceedings, Court of Appeal held, in Karaha

Bodas Co v. Persusahaan Pertambangan Minydak Dan Gas Bumi Negara267, that public

policy to be given narrow construction to prevent excessive intervention by the courts so as to

give fillip to “the recognition and enforcement of commercial arbitration agreements in

international contracts and to unify the standards by which agreements to arbitrate are

observed and arbitral awards are enforced”.268 In Qinhuangdo Tongda Enterprise

264 Section 34C of the Ordinance provides that Chapters I to VII of the UNCITRAL Model Law would apply to

international arbitration agreements and arbitration. 265 [1999] 1 HKLRD 665 266 Id, at 674. 267 [2007] 4 HKLRD 1002 268 Id, at Para 22. Also see, Werner A. Bock K.G v. The N's Co., Ltd Available at http://www.hklii.org/cgi-

hklii/disp.pl/hk/jud/eng/hkcfi/1977/HCMP000664%5f1977%2d25632.html?query=%7e+werner (last visited on

February 20, 2008).


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Development Co v. Million Basic Co Ltd269, the High Court, after citing Werner A Bock270,

held that the purpose of the enforcement provisions in the ordinance was to uphold the New

York Convention awards except when “complaints of substance can be made good”.271

The same rationale that applied to enforcement of awards would also be applicable for

setting aside arbitral awards.272

United Kingdom

For several centuries, UK has been the vanguard of commerce and arbitration. It has a

rich tradition of encouraging the settlement of mercantile disputes through the mechanism of

arbitration.273 The earliest parliamentary legislation on the subject was in 1698.274 From

there, UK has come a long way in updating its law in meeting the needs of the mercantile

community. The present statute, the Arbitration Act 1996, was enacted in furtherance of such

an objective.

Like any other legal system, UK too faced problems in ascertaining the exact scope of

substantive review of arbitral awards. The courts have adopted different approaches for

determining the scope of review of arbitral awards. In Matthew v. Ollerton275, the court

refused to set aside an arbitral award made by the arbitrator, who was one of the parties to the

dispute.276 It was considered that the award by the arbitrator was final and could not be

challenged in any court of law. In Morris v. Reynolds277, the court found the award

‘abominable’ for the breach of natural justice principle of hearing. Even then awards could be

challenged on the limited ground non-observance of natural justice by the arbitrator.

Subsequently, however, awards that were patently erroneous were set aside. In Anderson v.

269 [1993] 1 H.K.L.R. 173 270 Supra, note 304 271 Weixia, supra, note 292 272 Michael Hwang & Amy Lai, supra, note 126, at 16. 273 For a historical overview of English arbitration, see TWEEDDALE & TWEEDDALE, supra, note 15, at

477- 489; MERKIN, supra, note 63, at 3- 6. 274 9 & 10 Will c 15. 275 (1693) 4 Mod 226 276 TWEEDDALE & TWEEDDALE, supra, note 15, at 483 277 (1703) 2 Ld Raym 857


73

Coxeter278, for example, the Court of the King’s Bench held that the justice and

reasonableness of arbitral awards cannot be enquired into but where there was manifest

corruption in the arbitrators, an award could be set aside. In Coreneforth v. Geer279, the court

decided that an award that was upon a plain mistake of fact or of law, and that error appeared

in the body of the award, it was liable to be set aside. It can be seen that the problem of

substantive review of arbitral awards has always been a thorny one.

Under the Arbitration Act, 1950, an award could be set aside for error apparent on the

face of record. The rules that determined what constituted error apparent on the face of record

were intricate and highly technical. There was a general dissatisfaction as to the lack of

acceptance of the principle of finality of awards in UK and this seriously threatened the

position of UK as a prominent centre for international arbitration. Hence the Arbitration Act,

1979, was passed and the jurisdiction to review awards on the ground of error apparent on the

face of record was abolished and instead parties could appeal on narrow points of law.280 But

after States began adopting the UNICTRAL Model Law, it was felt that the position of UK as

the popular forum for international arbitration was seriously threatened, especially because

the Model Law did not provide for substantive review of arbitral awards. Also, the existing

law was too interventionist and less user friendly. The Departmental Advisory Committee

(“DAC”) deliberated on whether to adopt the Model Law but decided against it; instead, it

decided that there was a need for making a new law on arbitration which would serve the

needs of the mercantile community.

The Arbitration Act, 1996 (“English Act”) was the result of that decision. The English

Act was an attempt to streamline and take further the reforms of the 1979 Act as regards

substantive review of awards. It provides for challenge of awards under three broad

categories:

1. Challenge of the award for want of substantive jurisdiction281 of the tribunal.282

278 (1720) 1 Str 301 279 (1715) 2 Vern 705 280 Section 1 of the English Arbitration Act of 1979. 281 Section 82 of the English Act defines substantive jurisdiction: "substantive jurisdiction, in relation to an

arbitral tribunal, refers to the matters specified in section 30(1)(a) to (c), and references to the tribunal exceeding

its substantive jurisdiction shall be construed accordingly.


74

2. Challenge for serious irregularity in the procedure or in the award283, and

282 Section 67 of the English Act: “(1) A party to arbitral proceedings may (upon notice to the other parties and

to the tribunal) apply to the court

(a) challenging any award of the arbitral tribunal as to its substantive jurisdiction; or

(b) for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part,

because the tribunal did not have substantive jurisdiction.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section

70(2) and (3).

(2) The arbitral tribunal may continue the arbitral proceedings and make a further award while an application to

the court under this section is pending in relation to an award as to jurisdiction.

(3) On an application under this section challenging an award of the arbitral tribunal as to its substantive

jurisdiction, the court may by order-

(a) confirm the award,

(b) vary the award, or

(c) set aside the award in whole or in part.

(4) The leave of the court is required for any appeal from a decision of the court under this section. 283 Section 68 of the English Act: (1) A party to arbitral proceedings may (upon notice to the other parties and to

the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity

affecting the tribunal, the proceedings or the award.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section

70(2) and (3).

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers

has caused or will cause substantial injustice to the applicant-

(a) failure by the tribunal to comply with section 33 (general duty of tribunal);

(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction: see section

67);

(c) failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the

parties;

(d) failure by the tribunal to deal with all the issues that were put to it;

(e) any arbitral or other institution or person vested by the parties with powers in relation to the proceedings

or the award exceeding its powers;

(f) uncertainty or ambiguity as to the effect of the award;

(g) the award being obtained by fraud or the award or the way in which it was procured being contrary to

public policy;

(h) failure to comply with the requirements as to the form of the award; or

(i) any irregularity in the conduct of the proceedings or in the award which is admitted by the tribunal or by

any arbitral or other institution or person vested by the parties with powers in relation to the proceedings or

the award.


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3. Appeal on point of law.284

Several suggestions were given to the effect that there should be no right to appeal or

challenge the award for error of law, in line with the Model Law. But the DAC rejected these

suggestions and decided in 1989, inter alia, that the English courts should retain the power to

correct errors of law. The 1996 Report of the DAC states the rationale for retaining the

restricted right to appeal:

[A] limited right to appeal is consistent with the fact that the parties have chosen to

arbitrate rather than litigate. For example, many arbitration agreements contain an

express choice of law clause to govern the rights and obligations arising out of the

bargain made subject to that agreement. It can be said with force that in such

circumstances, the parties have agreed that the law will be applied properly applied by

the arbitral tribunal, with the consequence that if the tribunal fail to do this, it is not

reaching the result contemplated by the arbitration agreement.285

Section 69 deals with appeal from the arbitral tribunal on a question of law.286

Following are the conditions on which an appeal might be brought under the English Act:

(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court

may-

(a) remit the award to the tribunal, in whole or in part, for reconsideration,

(b) set the award aside in whole or in part, or

(c) declare the award to be of no effect, in whole or in part.

The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part,

unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for

reconsideration.

(4) The leave of the court is required for any appeal from a decision of the court under this section. 284 Infra, note 322 285 DEPARTMENTAL ADVISORY COMMITTEE, supra, note 137, Para 285 286 Section 69 of the UK Arbitration Act 1996: (1) Unless otherwise agreed by the parties, a party to arbitral

proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law

arising out of an award made in the proceedings. An agreement to dispense with reasons for the tribunal's award

shall be considered an agreement to exclude the court's jurisdiction under this section.

(2) An appeal shall not be brought under this section except-

(a) with the agreement of all the other parties to the proceedings, or

(b) with the leave of the court.


76

1. Section 69, unlike Sections 67 & 68, is non-mandatory. An agreement which does not

make it necessary for the arbitrators to provide reasons would be construed by the

court as an agreement excluding Section 69.

2. Appeal can either be consensual or by leave of the court. Where it is consensual, it

must be express and it cannot be contended that the parties have impliedly agreed.287

3. The appeal must be question of law arising out of an award and not against an

interlocutory order.288

The right to appeal is also subject to the restrictions in section 70(2) and (3).

(3) Leave to appeal shall be given only if the court is satisfied-

(a) that the determination of the question will substantially affect the rights of one or more of the parties,

(b) that the question is one which the tribunal was asked to determine,

(c) that, on the basis of the findings of fact in the award-

(i) the decision of the tribunal on the question is obviously wrong, or

(ii) the question is one of general public importance and the decision of the tribunal is at least open to

serious doubt, and

(d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all

the circumstances for the court to determine the question.

(4) An application for leave to appeal under this section shall identify the question of law to be determined and

state the grounds on which it is alleged that leave to appeal should be granted.

(5) The court shall determine an application for leave to appeal under this section without a hearing unless it

appears to the court that a hearing is required.

(6) The leave of the court is required for any appeal from a decision of the court under this section to grant or

refuse leave to appeal.

(7) On an appeal under this section the court may by order-

(a) confirm the award,

(b) vary the award,

(c) remit the award to the tribunal, in whole or in part, for reconsideration in the light of the court's

determination, or

(d) set aside the award in whole or in part.

The court shall not exercise its power to set aside an award, in whole or in part, unless it is satisfied that it would

be inappropriate to remit the matters in question to the tribunal for reconsideration.

(8) The decision of the court on an appeal under this section shall be treated as a judgment of the court for the

purposes of a further appeal. But no such appeal lies without the leave of the court which shall not be given

unless the court considers that the question is one of general importance or is one which for some other special

reason should be considered by the Court of Appeal. 287 National Rumour Co SA v. Lloyd- Linra Navegacao SA [1982] 1 Lloyd’s Rep. 472; BMBF (No. 12) Ltd v.

Harland & Wolff Shipbuilding & Heavy Industries Ltd [2004] EWCA Civ. 862 288 Urban Small Place Ltd. V. Burford Investment Co [1990] 28 EG 116


77

4. Determination of the question will substantially affect the rights of one or more

parties to the dispute. The use of the expression “Substantially affect” excluded

appeals on trivial points of law, such as appeal on a hypothetical point or an appeal on

point of law that forms a part of the wider matter. Where the reasoning of the

arbitrator is vital to his decision, an appeal on such point would come within the scope

of Section 69(3)(a) and the court could grant leave for the same..

5. The question of law should be one which the tribunal was asked to determine.

Accordingly, it would not be possible to take help from Section 69 where the question

to be appealed against is not the one which was raised before the arbitrators. There

has been disagreement as to the extent to which the point of law to be appealed

against must be raised before the arbitral tribunal. In Gbangbola v. Smith and Sheriff

Ltd289. Lloyd J. explained that there was no need for the issue of law to be argued

specifically before the arbitral tribunal as long as the question of law complied with

the “substantially affect” requirement of Section 69(3)(a).290

6. On the basis of finding of facts by the tribunal, the law applied by the tribunal was

obviously wrong or the question was of general public importance and the decision of

the tribunal is at least open to serious doubt. In Pioneer Shipping Ltd v. BTP Tioxide

Ltd, The Nema291 (Popularly known as “The Nema”) the Court of Appeal attempted to

regulate the number of appeals from arbitral awards by giving certain guidelines for

granting leave for such appeals. These guidelines were recommended by the DAC and

were ensconced into the English Act.292 In The Nema, Lord Diplock made a

distinction between issues regarding the construction of “one-off” contract clauses

and issues regarding construction of standard form clauses. As regards the former he

laid down that leave for appeal should not be granted in the former cases unless it is

apparent for the judge without the help of any adversarial argument that the meaning

ascribed to the clause was obviously wrong. But if the judge thinks that an argument

might persuade him to decide contrary to the arbitrator, the judge shouldn’t grant

289 [1998] 3 All ER 730 290 Lloyd J. opined that if Section 69(3)(c) was taken in a literal sense, the parties would then try to raise

innumerable issues of law on the facts which the arbitrator had to consider or he would be obliged to invite

parties for arguments on those issues if he considers that such point might help him come to a decision. Either

way, this would lead to unnecessary delay and expense to the parties. Id. 291 [1982] A.C. 724: [1981] 3 W.L.R. 292: [1980] 3 All E.R. 1030 292 DEPARTMENTAL ADVISORY COMMITTEE, supra, note 137, at Para 286(iv)


78

leave and “the parties should be left to accept, for better or worse, the decision of the

tribunal that they had chosen to decide the matter in the first instance”.293

A slightly different test was suggested by Lord Diplock for cases involving the

question of interpretation of standard contract clauses.294 According to him, a less

strict criterion was needed in case of appeal on misinterpretation by the tribunal of

standard form clauses because of the need for legal certainty of the interpretation of

standard form clauses:

That there should be as high a degree of legal certainty as it is practicable to

obtain as to how such terms apply upon the occurrence of events of a kind that it

is not unlikely may reproduce themselves in similar transactions between other

parties engaged in the same trade, is a public interest that is recognised by the Act

particularly in section 4. So, if the decision of the question of construction in the

circumstances of the particular case would add significantly to the clarity and

certainty of English commercial law it would be proper to give leave in a case

sufficiently substantial to escape the ban imposed by the first part of section 1(4)

bearing in mind always that a superabundance of citable judicial decisions

arising out of slightly different facts is calculated to hinder rather than to promote

clarity in settled principles of commercial law.295

Lord Diplock cautioned, firstly, that even in such cases the party appealing should

make out a strong prima facie case against the arbitrator’s construction of the contract,

and secondly, that where events to which the standard form clause applied were rare

(“one-off”), the former test should be applied. However it has been argued that

Section 69(3)(c)(ii) is broader than the corresponding guideline by Lord Diplock in

The Nema that the party appealing should make out a strong prima facie case against

the arbitrator’s construction of the clauses of standard form contracts.296 On this, Lord

Philips stated:

293 [1982] A.C. 724, 743. 294 A question on the interpretation of a contract is a question of law. See Nema, supra, note 295 [1982] A.C. 724, 744. 296 CMA CGM SA v Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH &

Co [2002] EWCA Civ 1878; Taner Dedezade, Are You In? Or Are You Out? An analysis of Section 69 of the


79

The criterion for granting permission to appeal in section 69(3)(c)(ii) is that the

question should be one of general public importance and that the decision of the

arbitrators should be at least open to serious doubt. These words impose a test

which is broader than Lord Diplock's requirement [in The Nema] that permission

to appeal should not be given 'unless the judge considered that a strong prima

facie case had been made out that the arbitrator had been wrong in his

construction'.297 (Emphasis in the original)

English Arbitration Act 1996 - Appeals on a Question of Law, 9 Int. A.L.R. 56, 64 (2006). In Antaios Compania

v. Salen AB [1985] A.C. 191, three years after The Nema, there was a disagreement between Lord Donaldson

M.R. and Lord Diplock as to what amounted to “serious doubt” Lord Diplock explained what he meant by

making out “a strong prima facie case against the arbitrator’s construction” in the following manner: “[I]n a case

that turns on the construction of a standard term, "leave should not be given … unless the judge considered that

a strong prima facie case had been made out that the arbitrator had been wrong in his construction". This applies

even though there may be dicta in other reported judgements of Courts of First Instance which suggest that upon

some question of the construction of that standard term there may among commercial judges be two schools of

thought. I am confining myself to conflicting dicta not decisions. If there are conflicting decisions, the judge

should give leave to appeal to the High Court, and whatever judge hears the appeal should in accordance with

the decision that he favours give leave to appeal from his decision to the Court of Appeal with the appropriate

certificate ... as to the general public importance of the question to which it relates;” Lord Donaldson M.R. held

that if the judges themselves were divided as to their opinions, and the Court of Appeal, given the chance, might

support either of these opinions, such a case is in the category of “serious doubt” and would be a proper case for

the grant of leave to appeal to the High Court, provided other conditions are satisfied. Lord Diplock, countering

Lord Donaldson M.R. argued that where there are only conflicting dicta (not conflicting decisions) on the

meaning of words or phrases of standard form commercial contracts that have been in common usage, “rival

meanings” attached to such words or phrases would not justify the cost of litigating the matter, as from the

commercial point of view, the existence of conflicting dicta would be inconsequential or that the commercial

community shared a common understanding as to meaning of those particular words and phrases. Further Lord

Diplock also held that in the exercise of discretionary power (inside the limits of Wednesbury reasonableness) a

judge may decide in a particular way which another judge, exercising the same power, might decide differently.

This, however, would not necessitate departure from the The Nema guidelines when there was conflicting dicta

and not conflicting decisions. 297 CMA CGM SA v Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH &

Co [2002] EWCA Civ 1878, at Para 60. Lord Philips stated that Section 69(3)(c)(ii) adopts the approach

favoured by Lord Donaldson M.R. in Antaios Compania v. Salen AB [1985] A.C. 191. Lord Philips concluded

that Lord Donaldson’s approach was more favourable because Lord Diplock’s approach placed a severe

restraint on the role of the Commercial and higher courts in resolving issues of commercial law of general


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7. Despite the existence of an agreement to arbitrate, it is just and proper in all the

circumstances for the court to determine the question. Simply by satisfying the

criteria for appeal, leave cannot be granted. The party appealing has to show that it

was just and proper under the circumstances to grant leave for appeal. In this regard,

the DAC recommended that in considering the question as to whether it was just and

proper under the circumstances for the appellate court to determine the question of

law, “[t]he court should be satisfied that justice dictates that there should be an

appeal; and in considering what justice requires, the fact that the parties have agreed

to arbitrate rather than litigate is an important and powerful factor”.298

8. Procedural Requirements: Following are the procedural requirements that are to be

satisfied for appealing under Section 69:

a) The application for leave to appeal should identify the question of law and

should state the grounds on which the application is based.299 On the form of

documentation required300, the Court of Appeal held:

[This] requirement reflects the fact that the criteria for the grant of

permission to appeal are clear cut and easy to apply. They do not require

the drawing of fine lines, nor will they usually give much scope for the

Court to require assistance in the form of submissions or advocacy... Any

[such] application... should normally be capable of being read and

digested by the Judge within the half-hour...301

public importance because The Nema guidelines reduced the likelihood of even conflicting judicial decisions on

such issues. 298 DEPARTMENTAL ADVISORY COMMITTEE, supra, note 137, at Para 290. Following are illustrative of

the situations which courts considered it “just and proper” to determine the question:

• Where parties have specified in their agreement that the arbitration proceedings are to be conducted in

a swift manner.

• Party seeking permission to appeal was the claimant in the original arbitration proceedings. MERKIN,

supra, note 63, at 929, 930. 299 Section 69(4) 300 The documentation is called as the Claim Form in U.K. 301 CMA CGM SA v Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH &

Co [2002] EWCA Civ 1878, at Para 23.


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b) The court has to determine an application for leave to appeal without a

hearing unless it appears to the court that a hearing is required.302

c) Lord Diplock, in The Nema and in Antaios Compania v. Salen AB303, held that

there was no need of giving reasons while granting or rejecting leave for

appeal. Such a proceeding does not entail decision on a question of law but

merely involves decision as to whether the award is suitable for being

appealed against. Further Lord Diplock also reasoned that full-blown

proceedings for such purpose would add “to the excessive volume of reported

judicial semantic and syntactical analysis of particular words and phrases

appearing in commercial contracts which judges are inveigled to indulge in by

the detailed oral arguments...”304 However, it was held that giving no reasons

was against Article 6 of the European Convention on Human Rights. In

Mousaka Inc v. Golden Seagull Maritime Inc305, David Steel J. held that the

obligation to give reasons under Article 6 differed according to the context and

in case of arbitration; in dismissing an appeal, it would be enough to state

whether the criteria under Section 69(3) (for example, whether the award was

obviously wrong or was of public importance etc) has been satisfied or not. 306

d) Appeal to the court ought to be brought only after the appellate remedies

available to the appellant, like an appellate arbitral tribunal, those available

under Section 57 (that is, correction or additional award) are exhausted.307

e) Satisfaction of Section 70(3) which imposes a time-limit of 28 days for

appealing against an award.

302 Section 69(5). On this point the DAC’s opinion was: “[W]e have included a provision that the Court should

determine an application without a hearing unless it appears to the Court that a hearing is required. This...

reflects what was said in The Nema... about the tendency for applications for leave being turned into long

expensive court hearings. In our view, the tests for leave... are such that in most cases, the Court will be able to

decide whether to allow or reject the application on written material alone.” Para 291 303 [1985] A.C. 191 304 Id 305 [2001] 2 Lloyd’s Rep. 657 306 David Steel J.’s approach was approved by the Court of Appeal in North Range Shipping Ltd. V. Seatrans

Shipping Corporation [2002] 4 All E.R. 390, and followed in, Northern Pioneer, supra, note 332 307 Sections 70(2) & (3) of the English Act.


82

These are the requirements under Section 69 by which UK has tried to filter out

challenges of awards that are meant to prolong the proceedings. On the success of Section 69

in limiting challenges on the substance of the award, Taner comments:

The intention of the architects of the 1996 Act was to severely restrict the scope of

permission to appeal. It appears that this objective has been met, as there do not seem to

be many successful s.69 applications getting through the system.308

USA

The Federal Arbitration Act, 1925 (“FAA”) is the federal statute that governs

arbitration in the US. The FAA was enacted with a pro-arbitration flavour and placed

“arbitration agreements in the same footing as other contracts”.309 § 10 of the FAA contains

the following grounds on which an arbitral award could be set aside:

1. The award was procured by corruption, fraud, or undue means.

2. There was evidence of partiality and corruption in the arbitrators, or either of them.

3. The arbitrators were guilty of misconduct in refusing to postpone the hearing, upon

sufficient cause shown, or in refusing to hear evidence pertinent and material to the

controversy, or of any other misbehaviour by which the rights of any party have been

prejudiced.

4. The arbitrators exceeded their powers, or so imperfectly executed them that a mutual,

final, and definite award upon the subject matter submitted was not made.310

Though § 10 contains limited grounds on which an award could be vacated, the

Federal Courts in the US have framed a non-statutory ground from the language of the United

States Supreme Court in Anthony Wilko v. Joseph E. Swan311 (hereinafter “Wilko”), where

the Supreme Court had observed that the FAA did not provide for “judicial review for error

in interpretation” even if the interpretations by the arbitrators” was “in contrast to manifest

308 Northern Pioneer, supra, note 332; Taner Dedezade, Are You In? Or Are You Out? An analysis of Section 69

of the English Arbitration Act 1996 - Appeals on a Question of Law, 9 Int. A.L.R. 56 (2006) 309 Robert D. Gilmer v. Interstate/Johnson Lane Corporation 114 L Ed 2d 26 310 § 10(a)(5) of the FAA does not contain a ground for setting aside award. It provides: “Where an award is

vacated and the time within which the agreement required the award to be made has not expired the court may,

in its discretion, direct a rehearing by the arbitrators.” 311 346 U.S. 427 (1953)


83

disregard of the law”.312 In his dissent to the majority opinion in Wilko on different grounds,

Frankfuter J. stated that though there is no effective way of assuring obedience by the

arbitrators to the governing law, the arbitrators cannot disregard the law and such failure to

observe the law would constitute valid ground for vacating the award as per § 10 of the FAA,

even if such means of judicial scrutiny is implied.313 From Wilko, the Federal Circuit courts

have proceeded to set aside awards for “manifest disregard” of the law, in direct conflict with

“public policy”, “arbitrary and capricious”.314

The ground of “manifest disregard of law” meant that the arbitrator had found the

proper law applicable to the dispute before him but after finding the law failed to apply the

law to the facts.315

Apart from the “Manifest Disregard” ground, the Federal Courts have also used the

ground of “public policy” to overturn awards on the basis of substantive considerations in the

awards. In PaineWebber, Inc. v. Argon316, the Eighth Circuit observed that it had the power

to set aside arbitral awards that are contrary to well defined and dominant policy embodied in

laws and judicial precedent. However, the Court stated that in doing so they had no power to

merely substitute its judgement for that of the arbitration panel, no matter how wrong the

tribunal might be.317

312 Id, at 437. See, James M. Gaitis, Unraveling the Mystery of Wilko v. Swan: American Arbitration Vacatur

Law and the Accidental Demise of Party Autonomy, 7 Pepp. Disp. Resol. L.J. 1, 2-3 (2007), for a historical and

critical analysis of the “Manifest Disregard doctrine. 313 346 U.S. 427, 440 (1953). 314 The Supreme Court has never elaborated on the nature and scope of the Manifest Disregard ground though it

had made “oblique” references to the ground in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473

U.S. 614, 656 (1985), Shearson/American Express, Inc. v. McMahon 482 U.S. 220 (1987), and Rodriguez de

Quijas v. Shearson/American Express 490 U.S. 477 (1989). See, Stephen L. Hayford, Law in Disarray: Judicial

Standards for Vacatur of Commercial Arbitration Awards, 30 Ga. L. Rev. 731, 764, 775 (1996). 315 Greenberg v. Bear, Stearns & Co 220 F.3d 22, 28 (2d Cir. 2000); Health Svcs. Mgmt. Corp. v. Hughes 975

F.2d 1253, 1267 (7th Cir. 1992); Bowen v. Amoco Pipeline Co. 254 F.3d 925, 932 (10th Cir. 2001); Prudential-

Bache Sec., Inc. v. Tanner, 72 F.3d 234, 240 (1st Cir. 1995). See, Noah Rubins, “Manifest Disregard of the

Law” and Vacatur of Arbitral Awards in the United States, 12 Am. Rev. Int'l Arb. 363 (2001). 316 49 F.3d 347 (8th Cir. 1995) 317 Also see, Diapulse Corp. of America v. Carba, Ltd 626 F.2d 1108 (2d Cir. 1980); Arizona Electric Power

Cooperative, Inc. v. Berkeley 59 F.3d 988 (9th Cir. 1995)


84

Whether the courts have used the “Manifest Disregard” or “Public Policy” rubric,

they have held that the court required something more than mere error of law to set aside an

award.318 Hayford notes the distinction between the concepts of manifest disregard and public

policy:

[T]he “public policy” ground, in application, centers upon either the degree of the

arbitrator's alleged error of law or the effect of that alleged error on the parties... [W]hen

properly conceptualized, the “manifest disregard” of the law analysis does not concern

the degree of the arbitrator's purported error of law or the effect of the award on the

parties. Rather, it looks to the arbitrator's conduct, the manner in which he discovers and

applies the law.319

Some courts have set aside awards for being “arbitrary and capricious”. In Ainsworth

v. Skurnick320, the court held that where the ground for the arbitrator’s decision cannot be

inferred from the facts of the case, the award is arbitrary and capricious and is liable to be set

aside. In Brown v. Rauscher Pierce Refsnes Inc.321, the Eleventh Circuit laid down the means

of review of the arbitral award on the basis of the grounds of public policy and that the award

was arbitrary and capricious. The court devised a two-stage scheme wherein the first step

would be a review of whether there was any “rational basis” for the award.322 If there was

rational basis for the award, the court could inquire whether the award was either contrary to

public policy or was arbitrary and capricious.323 To find out if the award was arbitrary or

capricious, the court would find out if the award exhibits a wholesale departure from the law

or where the award was not grounded in the contract.324

The courts devised other statutory grounds to strike down arbitral awards, such as

setting aside a “completely irrational” award, a non-statutory ground devised by the Third

318 Hayford, supra, note 350, at 782 319 Id, at 784 320 960 F.2d 939, 941 (11th Cir. 1992) 321 994 F.2d 775 (11th Cir. 1993) 322 The onus of proof is on the party attacking the award to prove that the award lacked any rational basis. Id, at

779. 323 Hayford, supra, note 350. 324 Id


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and Ninth Circuit Courts of Appeals by which the court could set aside the award in which

the arbitrator interprets the contract in a way that the arbitrator’s interpretation cannot be

derived from the contract.325

Another non-statutory ground relating to the contract is the “essence of the contract”

ground. This ground has received its backing from the Supreme Court decision in United

Steelworkers v. Enterprise Wheel & Car Corp.326 By virtue of this ground, the court could set

aside an award in which the arbitrator has disregarded or modified unambiguous contractual

provisions.327

Scholarly literature on the subject show that though the parties have relied often on

the manifest disregard ground, rarely have they succeeded in establishing the ground.

Drahazol cites a study that was conducted on the number of cases between 1975 and 2006 in

which the employment arbitral award was challenged by taking recourse to the manifest

disregard ground. Out of 239 trial court cases in which an award was challenged, parties had

taken recourse to the manifest disregard ground in 84 cases (35.1%) but only in six cases

(7.1%) did the trial court set aside the award on the basis of this ground.328

B. Reforms

The essence of SAW Pipes is that an award that is patently illegal is against public

policy and is therefore, liable to be set aside. But what is patent illegality? The term ‘patent’,

in contradistinction to ‘latent’, refers to something that is very obvious and not needing any

further explanation or not being open to doubt.329 Patent illegality or patent error or error

325 Id. See, Swift Industries v. Botany Industries 466 F.2d 1125 (3d Cir. 1972). The Courts have abandoned this

approach now and do not seem to take recourse to this ground. 326 363 U.S. 593 (1960) 327 Inter-City Gas Corp. v. Boise Cascade Corp. 845 F.2d 184 (8th Cir. 1988). Also see, Seymour v. Blue

Cross/Blue Shield 988 F.2d 1020 (10th Cir. 1993); Anderman/Smith Operating Co. v. Tennessee Gas Pipeline

Co. 918 F.2d 1215 (5th Cir. 1990). 328 Cited in, Christopher R. Drahozal, Codifying Manifest Disregard, 8 Nev. L.J. 234 (2007). 329 ENCARTA WORLD ENGLISH DICTIONARY 1382, MCMILLAN (Special Indian Ed. 1999).


86

apparent on the face of the record refers to an error that is open to view, readily visible or

intelligible.330 A commentary on Indian Arbitration defined patent illegality:

The expressions ‘patent illegality’, ‘blatant illegality’, and ‘error of law apparent on the

face of the record’ have synonymously been used to denote the illegalty or error of law

which goes to the root of the matter, or is violative of constitutional or statutory

provisions or is inconsistent with the law established by judicial decisions.331

Review of arbitral awards on the ground of patent error of law, or error of law

apparent on the face of the record owes its origin to the writ of Certiorari by which the Court

of the King’s Bench could interfere into lower court’s or tribunal’s decision if it is in error.332

Through the writ of certiorari a superior tribunal could quash a decision of an inferior tribunal

for error apparent on the face of the record. A similar power vested with the Courts in

England as regards arbitral awards. The tribunals had the power to judicially review arbitral

awards for patent error of law. Denning L.J. explained that the Court of King’s Bench had an

inherent jurisdiction to intervene into the lower tribunal’s decision in a supervisory capacity,

as opposed to an appellate capacity. The purpose for this exercise of power of quashing a

tribunal’s determination for being ex facie against the law, was not only to see that the

inferior tribunals acted within their jurisdiction but also that they observed the law.333

As regards arbitration, Denning L.J. explained, the Court of King’s Bench initially

never interfered into the arbitral awards as arbitration was considered to be a private affair

and not a subject of prerogative writs. However, in Kent v. Elstob334 it was held that an award

could be set aside for error apparent on the face of the record.

330 Y.V. CHANDRACHUD (GEN. ED.), RAMANATHA AIYER: THE LAW LEXICON: THE

ENCYCLOPAEDIC LEGAL AND COMMERCIAL DICTIONARY 1422 (1997). 331 supra, note 3, at 1175. 332 Denning L.J. explained the jurisdiction of the Court of King’s Bench to intervene into the lower tribunal’s

decision: “[T]he Court of King’s Bench has an inherent jurisdiction to control all inferior tribunals , not in an

appellate capacity, but in a supervisory capacity. This control extends not only to seeing that the inferior tribunal

s keep within their jurisdiction, but also to seeing that they observe the law. The control is exercised by means

of a power to quash any determination by the tribunal which, on the face of it, offends against the law”. 333 R. v. Northumberland Compensation Appeal Tribunal Ex parte Shaw [1952] 1 All E.R. 122, 127 (CA). 334 102 E.R. 502


87

Under the 1940 Act, there was no express ground on which an arbitral award vitiated

by error apparent could be set aside. But, the courts interpreted Section 30 to read in error

apparent into firstly, Section 16(1)(c) and later, in Section 30(c) of the 1940 Act.335 This

caused enormous problems as it led to frequent overturning of the awards and consequential

delay and costs.336 The inclusion of error apparent on the face of the record had created

unintended consequences and this made the drafters of the 1996 Act omit this provision for

setting aside awards on merits, including setting aside for error apparent on the face of record

or patent error. As discussed in Chapter II, the Apex Court in SAW Pipes read in patent

illegality into public policy. The Apex Court explained that an “award which is, on the face

of it, patently in violation of statutory provisions”337 is against public policy. It further

clarified that an illegality to be patent “must go to the root of the matter and if the illegality is

of trivial nature it cannot be held that award is against public policy”.

The notion of error apparent was used in the context of administrative law in India by

the courts to quash decisions of tribunals through the writ of Certiorari.338 But while issuing a

writ of certiorari, the court does not function as an appellate authority; rather it functions as a

supervisory authority which exercises the power of review. Even for the issue of the writ of

Certiorari, the error must not merely be a technical error or an error simpliciter339; the error of

law must be patent or manifest on the examination of the record without any recourse to

lengthy arguments.340 But the problem with such a distinction is that in practice the courts can

simply characterise an error of law as a patent error.341 The same holds true for the realm of

arbitration. The courts could simply characterise an error of law as a patent error or a

jurisdictional error and interfere into the award. This, it was feared, was a move backwards to

335 State of U.P. v. Allied Constructions 2003(3) Arb. LR 106 (SC): (2003) 7 SCC 396; Union of India v. Om

Prakash AIR 1976 SC 1745 336 See, Section A Chapter II 337 Supra, note 10. 338 See for example, T.C. Basappa v. T. Nagappa AIR 1954 SC 440 where the Supreme Court held that the

decision of an authority can be quashed through the writ of certiorari if there is a manifest error of law apparent

on the face of the record. Also see, M.P. JAIN & S.N. JAIN, PRINCIPLES OF ADMINISTRATIVE LAW

(VOL. II) 2193, Wadhwa Nagpur (6th Enlarged ed. 2007). 339 Id. Also see, Nagendra Nath Bora v. Commisioner, Hills Division AIR 1958 SC 398: Sathyanarayana v.

Mallikarjun AIR 1960 SC 137. 340 M.P. JAIN & S.N. JAIN, supra, note 394, at 2193. 341 Id.


88

the 1940 Act, where the arbitral tribunal virtually became the first stage in a long chain of

proceedings in the Indian Courts.342 Dushyant Dave’s opinion on the effect of SAW Pipes is

relevant to note:

What is the result [of SAW Pipes]? Devastating. Every Arbitration Award... is now

challenged by the losing party invoking [the] newly propounded public policy. Courts are

flooded with such challenges. Section 34 has been given new life but arbitration process,

virtual death.343

The trial courts have been very lenient and have set aside awards without even

considering the fact that SAW Pipes made a distinction between mere errors of law and patent

errors.344

But this is not to say that there should be no challenge of the arbitral awards for patent

illegality. The advantages of supervision by the courts of arbitral awards, i.e. just,

amplification of law and impartial arbitration, have already been noted in Chapter III.

The researcher suggests that the following reforms would go a long way in mitigating,

if not eliminating, the fallouts of a broader reading of public policy that is inclusive of patent

illegality.

342 See, text attached to note 251, supra. Also see, F.S. Nariman, The Function and Utility of International

Commercial Arbitration in International Trade and Investment, in, CRITICAL ISSUES IN INTERNATIONAL

COMMERCIAL ARBITRATION: INTERNATIONAL JUDICIAL COLLOQUIUM ON ARBITRATION

AND COURTS: HARMONY OVER DISHARMONY 12-13 (2007); A.K. Sikri (Justice), Trends and

Developments of Arbitration Law in India, Function and Utility of International Commercial Arbitration in

International Trade and Investment, in, CRITICAL ISSUES IN INTERNATIONAL COMMERCIAL

ARBITRATION: INTERNATIONAL JUDICIAL COLLOQUIUM ON ARBITRATION AND COURTS:

HARMONY OVER DISHARMONY 21 (2007); 343 Dushyant Dave, Alternative Dispute Mechanism in India, in, CRITICAL ISSUES IN INTERNATIONAL

COMMERCIAL ARBITRATION, supra, note 397, at 22 344 See, for instance, T.K. Sarkar v. State of West Bengal 2007(2) Arb. LR 508 (Cal.)(DB); also see, Purushoth

Das v. Sarita Devi (2006)2 Arb. LR 170 (Gau)(DB); Hyder Constructions Ltd. V. State of Orissa 2007(1) Arb.

LR 244 (Ori.)


89

1. Elimination of Concurrent Grounds for Setting Aside Arbitral Awards: The

mischief that was committed under of the 1940 Act was that the grounds under

Section 30 for setting aside were read in a wide manner and this led to availability of

several grounds on which awards could be challenged for the same cause of action.

For example, where the award was alleged to have been patently in violation of any

provision, such an award could be set aside either under Section 30(a) or under

Section 30(c).

The same trend continued even under the 1996 Act though there has been a

substantial change in the policy of the Act. For example, where the arbitral

award is challenged for bias, such challenge could be brought either on the

basis of Section 13(5)345 or by virtue of Section 34(2)(a)(iii).346 Even the SAW

Pipes court is guilty of the same error. The effect of SAW Pipes is that an error

of law could be challenged under Section 34(2)(a)(v) or under Section

34(2)(b)(ii).347 The argument is not that the Courts cannot set aside an award

on more than one ground. There might be situations where the award could be

set aside on different grounds. For instance, one of the parties might not have

had the capacity to enter into an arbitration agreement. An award ignoring

such incapacity could be challenged under Section 34(2)(a)(i) for incapacity

and also under Section 34(2)(b)(ii) for being patently illegal. If so, the court

should not take recourse to the latter and instead set aside the award under the

former. The legislature could have simply provided one catch-all ground; the

reason why it provided different grounds was because each ground had its own

purpose and domain within which it operates.

345 SAW Pipes, supra, note 10; Narayan Prasad Lohia v. Nikunj Kumar Lohia MANU/SC/0114/2002, at para 18;

Bharat Heavy Electricals Ltd. v. C.N. Garg 2001(2) Arb. LR 545 (SC); Krishna Bhagya Jala Nigam Limited v.

G. Harischandra Reddy MANU/KA/0061/2005. 346 O.P. MALHOTRA & INDU MALHOTRA, supra, note 3, at 1110-1111, where the authors state: “The

phrase ‘otherwise [sic unable] to present his case’ at the end of s 34(2)(a)(iii) is of wide residual import as a

requirement of due process... Though s 18 has not been specifically set forth as a ground for setting aside an

arbitral award, the phrase ‘otherwise unable to present his case’ [covers] the requirement of compliance with s

18.. If a party has been treated with bias... the award will be liable to be set aside for lack of due process.” Also

see, Godrej Properties and Investments Ltd v. Tripura Constructions, Mumbai 2003(2) Arb. LR 195 (Bom.). 347 After SAW Pipes, the courts have not taken recourse to Section 34(2)(a)(v) to set aside awards for substantive

errors.


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Hence, it is suggested that the courts should take due care while setting aside

the awards and should not create concurrent grounds for challenge of awards. Doing

otherwise would lead to broadened reading of all the grounds, which is neither good

for the parties nor good for Indian arbitration.

2. Remission of Defective Awards: Section 34(4) provides that on receipt of an

application for setting aside an award, the court may, adjourn the proceedings for a

period of time determined by it to give the arbitral tribunal an opportunity to resume

the arbitral proceedings or to take such other action as in the opinion of arbitral

tribunal will eliminate the grounds for setting aside the arbitral award. Such

opportunity, according to the provision, is to be afforded where it is appropriate and is

so requested by a party. This provision has been, in substance, taken from Article

34(4) of the Model Law. The drafters of the Model Law envisaged that the Court

should set aside the award only if it finds that it is futile to remit the award back to the

tribunal.348 Thus it can be said that, under the Model Law, remission of the award is

the rule and setting aside, the exception.

It is suggested that the Courts should, as a rule, remit the arbitral awards and

only where it is not possible or feasible to remit the award to the tribunal should the

courts set the awards aside. This practice has been followed by few High Courts. For

example, in Union of India v. Prem Kumar Lihala349, the arbitrator had, after one of

348 UNCITRAL, supra, note 96. 349 2005(Suppl.) Arb. LR 506 (Del.). See, Gayathri Projects Ltd. V. Airport Authority of India 2007(3) Arb. LR

416 (Del.), where Sanjay Kishen kaul, J., remitted the issue of computation of escalation charges back to the

arbitrator. The case concerned a contract for the extension of runway of the Calicut airport between Gayathri

Projects Ltd. and the Airports Authority of India. The bitumen that was a raw material necessary for the carrying

out of work under the contract was subsidised by the Union Government under the Administrated Price

Mechanism. But during the subsistence fo the contract, the Union Government discontinued this scheme and

this led to substantial increase in the prices of bitumen, which the Petitioner claimed from the Respondent. The

Respondent disagreed and consequently, the issue, among several other issues, were referred to an arbitrator

who awarded in favour of the Respondent. The petition for setting aside the award was partially allowed with

respect to the escalation charges and dismissed with respect to the other issues. The Delhi High Court held that

the arbitrator wrongly disallowed the Petitioner’s claim as regards the escalation prices and remitted back the

issue to the arbitrator for calculation of the escalation prices).


91

the parties had terminated the contract, ordered that such termination was invalid and

had revived the contract.350 Sanjay Kishen Kaul J. found that the arbitrator could not

order for the revival of the contract as the tribunal was not empowered to grant such a

relief. Therefore, the dispute was remitted to the arbitrator, who was asked to find out

if the termination of the contract was lawful.351

Such an approach is pragmatic and in consonance with the principle of party

autonomy and judicial supervision of arbitral awards. On the one hand, remission

accords with the intention of the parties not to litigate but to arbitrate and on the other

hand, the awards are supervised for patent errors. But there are situations where it

would be futile to order remission. For example, where the challenge is regarding the

impartiality or capacity of the arbitral tribunal, it would be impractical to remit the

dispute to it. It is submitted that the Courts should remit the dispute to the tribunal for

its resolution, unless the error committed by the tribunal was such that any reasonable

person would lose his confidence over the tribunal, either for its partiality or its

capabilities.352

350 The arbitrator had ordered the parties to perform the obligations that had been agreed in the terminated

contract. 351 For procedural aspects that might arise after remission, see LAW COMMISSION OF INDIA, ONE

HUNDRED AND SEVENTY SIXTH REPORT ON THE ARBITRATION AND CONCILIATION

(AMENDMENT) BILL, 2001 137, (2001). The Law Commission recommended the following provisions be

added to Section 34: “(5) Where the court adjourns the proceedings under sub-section (4) granting the arbitral

tribunal an opportunity to resume its proceedings or take such other action and eliminate the grounds referred to

in this section or in section 34A for setting aside the award, the arbitral tribunal shall pass appropriate orders

within sixty days from the receipt of the request made under sub-section (4) by the Court and send the same to

the court for its consideration.

(6) Any party aggrieved by the orders of the arbitral tribunal under sub-section (5), shall be entitled to file its

objections thereto within thirty days of the receipt of the said order from the arbitral tribunal and the application

made under sub-section (1) to set aside the award shall, subject to the provisions of sub-section (2) and (3) of

section 37A, be disposed of by the court, after taking into account the orders of the arbitral tribunal made under

sub-section (5) and the objections filed under this sub-section.” 352 Such a test was laid down by the English Court of Appeal in Hagop Ardahalian v. Unifert International S.A.,

(The 'Elissar') [1984] 2 Lloyd's Rep. 84, 89: “It seems to me that what the court must consider is whether it is

reasonable for either party to consider that the arbitrator can no longer conduct the matter properly; in other

words, whether in the court's view either party can reasonably say that his confidence has been wholly


92

3. Need for Supervisory Body: One of the constant themes running through the

recently held Conference on Critical Issues in International Commercial Arbitration353

was the need for an apex arbitral authority for governing arbitration in India. One of

the most efficient methods through which the quality of arbitrators can be improved is

by establishing an apex body to regulate the practice of arbitration. In this context,

Professor Dr. N.R. Madhava Menon stated:

Given the importance that ADR is assuming in our judicial system, there is a clear

need to develop professionals as mediators and arbitrators. They can be non-

lawyers as well provided they have the necessary training and are bound by the

ethics adopted for the purpose. Once trained mediators and arbitrators are

available in adequate numbers, there is need for standardisation and

accreditation for which professional agencies have to be set up under the law,

perhaps distinct from the Bar Council.354

Thus, there is a need for ensuring that a system is in place to ensure quality of

arbitrators and availability of infrastructure for conducting arbitrations in a proper

manner.

Sabin remarks that the workable solution must be keeping the existing

structure and the rationale of speedy arbitration in mind. According to him, solutions

such as market enforcement, increased judicial oversight, personal liability or policing

arbitrators by private arbitration associations355 are impractical, economically

inefficient, or contrary to current policy. Therefore he suggests, firstly, that arbitrators destroyed.” Also see, Lovell Partnerships Northern Limited v A W Construction PLC (1996) 81 BLR 83, 99;

Miller Construction Limited v. James Moore Earthmoving [2001] EWCA Civ 654. 353 CRITICAL ISSUES IN INTERNATIONAL COMMERCIAL ARBITRATION: INTERNATIONAL

JUDICIAL COLLOQUIUM ON ARBITRATION AND COURTS: HARMONY OVER DISHARMONY

(2007). A summary of the papers presented in the conference is available at

http://www.ficci.com/icanet/report/IFCAI.zip last visited on March 08, 2008. 354 N.R. Madhava Menon, Reforming the Legal Profession: Some Ideas, available at

http://www.hindu.com/2008/02/20/stories/2008022052621000.htm last visited on March 08, 2008. 355 Sabin contends that enforcement by private arbitration associations is discretionary, inconsistent, and

fictional. Supra, note 128


93

must be accountable to a supervising body; secondly, this body must have power to

discipline arbitrators for misconduct or violations of unified rules; thirdly, the

supervising body must be neutral and impartial to arbitrators and fourthly, the body

must enforce its standards; fifthly, the system's scope must be broad enough to

accommodate the wide range of professions from which arbitrators come; sixthly,

such a system must not undercut the economic advantages of arbitration; and finally, a

system of oversight must function in conjunction with the apex arbitral institution of

the country.

It is submitted that such a move would be useful in ensuring that the

arbitrators are selected from a pool of efficient arbitrators.356 This would useful in

preventing parties of an ad hoc arbitration from selecting inefficient and improper

arbitrators due to information asymmetry. Arbitrators have been accused of several

transgressions including taking bribes from the parties. There have been allegations of

arbitrator corruptions, especially where one of the parties was a government entity.357

Therefore an apex national institution and state arbitral institutions in the lines of bar

councils, with licensing requirements and code of ethics would go a long way in

ensuring quality arbitration in India.

4. Fee Shifting: It has been observed that one of the consequences of SAW Pipes was to

encourage reckless challenges to arbitral awards, lacking any proper basis for the

challenge.358 The dangers of allowing such reckless challenges have already been

noted in Section B of Chapter III. One way of preventing this trend is by regulating

the number of petitions for setting aside such that unmeritorious petitions are filtered

356 The Indian Council for Arbitration (ICA) states that “membership of the Council does not ipso-facto entitle a

member for inclusion of his name in the panel of arbitrators. The inclusion of names in the panel is decided by

the Arbitration Committee of the Council keeping in view the background, qualifications and experience of the

applicant as also the existing strength of persons on the panel with similar background and experience in the

region of the concerned person... [The arbitrators] are put on the list by the Arbitration Committee after the latter

is satisfied about their competence, integrity and impartiality to act as arbitrators..” See,

http://www.ficci.com/icanet/services.htm#10 last visited on March 08, 2008. True, such accountability is worth

appreciating but it would be better for Indian arbitration if the institution is made accountable too. 357 Sharma, supra, note 203. 358 Dave, supra, note 397; Nariman, supra, note 397.


94

out.359 Though some High Courts in the recent past have imposed costs on

unmeritorious suits360, it would seem that the courts have imposed costs only in

exceptional cases; non-imposition of costs on the basis of results has been the norm

and imposition of costs, an exception.361

For a long time, scholars have contended that the costs to borne by the parties

influence the incentive to file suits.362 The rationale is simple: The decision whether to

file an appeal or a suit is an economic question363- the plaintiff will sue if the expected

cost is less and the expected benefit364 is more.365 If so, an increase or a decrease in

the cost or benefit would alter the plaintiff’s incentive to sue. In the past, fee shifting

has been used in USA to increase or decrease the number of suits on certain laws.366

359 Usually such unmeritorious petitions are filed to delay the inevitable result or to increase the costs of the

party who won the arbitration so as to induce him to settle the dispute out of court. Sharma, supra, note 203. 360 See, for example, Larsen and Toubro Ltd. v. Sunfield Resources Pvt. Ltd MANU/MH/0880/2005; A & A

Restaurant v. Dwarikajeet Restaurant 2005(1) Arb. LR 526 (All.); T.K. Aggarwal v. Tara Chand Jain

2005(Suppl.) Arb. LR 13 (Del.). In v/o Tvazhpromexport v. Mukand Ltd. 2005(3) Arb. LR 406 (Bom.) the

Court ordered the Petitioner to pay the Respondent’s costs even when the award was partially set aside. 361 See, for example, the following cases where petition for setting side was dismissed but no costs levied: Delhi

Jal Board v. Reliance Diesel Engineering 2005(3) Arb. LR 602(Del.); Avinash Bawa v.State of Himachal

Pradesh 2005(Suppl.) Arb. LR 184 (HP); Ennore Port Trust v. Hindustan Construction Co. 2005 (Suppl.) Arb.

LR 129 (Mad.)(DB); Union of India v. Pradeep Vinod Construction Co. 2005(Suppl.) Arb. LR 33 (Del.);

Hindustan Copper Ltd. V. Bhagwati Gases Ltd. 2005(3) Arb. LR 622 (Rajasthan); Kanha Credit & Holding Pvt.

Ltd. v. Janacim Electronics 2005(1) Arb. LR 338 (Del.); Krishna Bhagya Jal Nigam Ltd. V. G. Harishchand

2005(Suppl.) Arb. LR 470 (Kar.)(DB); Union of India v. Deccan Enterprises 2006(4) Arb. LR 444 (Del.);

Haryana State Agricultural Marketing Board v. Dharam Puri 2006(3) Arb. LR 285 (P & H); Delhi Development

Authority v. Manohar Lal 2006(1) Arb. LR 132 (Del.) 362 See, for example, SHAVELL, supra, note 146, at 429; Avery Weiner Katz, Indemnity of legal Fees, in,

BOUDEWIJN BOUCKAERT & GERRIT DE GEEST (EDS.), ENCYCLOPEDIA OF LAW AND

ECONOMICS (VOLUME V: THE ECONOMICS OF CRIME AND LITIGATION) 63- 94 (2000); 363 Steven Shavell, Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the

Allocation of Legal Costs, 11 J. Legal. Stud. 55, 58 (1982). In the realm of Arbitration, the petitioners of a set

aside proceeding usually try to either delay the imposition of liability for breach of contract so as to induce the

other party to settle to succeed in setting aside the award. Either way, the cost imposed on the petitioner would

be lesser than the benefit derived out of such settlement or a judgement setting aside the award. 364 Here, the costs and benefits are “expected” unless it is stated to the contrary. 365 SHAVELL, supra, note 146, at 390 366 Harold J. Krent, Explaining One-Way Fee Shifting, 79 Va. L. Rev. 2039, 2041- 2042 (1993)


95

Hence fee shifting has the potential of becoming a potent device in reducing the

number of reckless challenges of arbitral awards.

There are primarily two models of fee shifting: (1) American Rule, (2) English

Rule.367 In American Rule, the parties bear their own costs of the litigation and the

costs are not imposed on the basis of success in the suit. Under the English Rule, the

losing party bears the cost of the winning party.368 The assumption is that the

probability of winning is 50 %. If so, under the American Rule, the plaintiff would

sue where cost369 incurred is lesser than the benefit received.370 Under the English

Rule, a plaintiff would sue if the probability of winning is equal to or more than 50 %

and the benefit, which is the sum of benefit received from the Defendant and the fee

incurred by the plaintiff, outweighs the cost, the plaintiff would sue.371 Under the

American Rule, even if the Plaintiff loses, litigation expenses incurred by the

Defendant would not be imposed on him. Therefore, the plaintiff would sue if there is

a remote possibility of winning. In the English Rule regime, the plaintiff might not

sue if the probability of winning the case is less than 50 % because the expected cost

might overweigh the expected benefit if he loses. Therefore adopting the English Rule

would minimise the incentive to sue provided the probability of winning is less than

50 %.372 The probability of winning can be reduced if the judiciary if the courts

espouse the policy of giving deference to the arbitral awards. Adopting the English

Rule for setting aside petitions could prevent the plaintiff from challenging arbitral

367 The terms “plaintiff” and “defendant” are used here though in the context of this essay, the parties are

“petitioners” and “respondents” 368 Id., at 428. 369 Direct costs such as attorney fee, court fee and indirect fee such as the time spent on pursuing a suit and so

on. 370 If, EC (Expected Costs) are > EB (Expected Benefit), the plaintiff would not sue; Conversely, if the EC < EB

the plaintiff would sue. 371 If probability of winning is more than 50 %, the plaintiff would sue provided EB + F (Fee incurred) > EC. If

the probability is less than 50% the plaintiff might not sue. 372 Shavell observes, “[I]f the plaintiffs are risk averse, then superimposed on the effects just mentioned is a

disinclination to bring suit, because the risk of trial is increased by the fact that the sum of the legal fees depends

on the trial outcome”. SHAVELL, supra, note 146, at 430.


96

awards in the courts unless the plaintiff expects that his chances of winning are

more.373

Such a policy would be problematic for two reasons. One, the English Rule

would increase the expenditure in the suit.374 Also, the value of an increase in

spending towards winning under the English Rule would be more than under the

American Rule.375 Two, the English Rule would substantially increase the litigation

cost of the Defendant because the Defendant would have to spend more to prevent the

award from getting set aside and also to win the case so that the costs are shifted to

the Plaintiff. This expenditure would increase if the courts take a hostile attitude

towards the arbitral awards. Thus the Defendant would become risk averse and would

suffer disutility due to the uninsured risk.376 Both these consequences are not

desirable for arbitration, which ought to aim at inexpensive dispute resolution.

It is not that there are only two systems of fee shifting; there are also other fee

shifting models like the pro-plaintiff and the pro-defendant which have been used to

achieve certain policy goals.377 In pro-plaintiff fee shifting, the winning plaintiff is

compensated by the losing defendant for the reasonable litigation fee incurred but the

winning defendant is not so compensated. In pro-defendant fee shifting, the defendant

is compensated for the cost litigation incurred while the plaintiff is not. A pro-

defendant fee shifting policy might operate to reduce the number of challenges of

arbitral awards because of the following reasons:

a) In pro-defendant fee shifting, the benefit, which the plaintiff might receive, is

substantially reduced or even eliminated by the shifting of fee in case he loses.

Thus, the plaintiff would not sue if the probability of winning is not extremely

high.

373 SHAVELL, id., at 429 374 Expenditure for the suit forms an integral part of the direct cost of suit. See, Mitchell Polinsky & Daniel L.

Rubinfeld, Sanctioning Unmeritorious Suits: An Economic Analysis, 82 Geo. L.J. 397, 410 (1993) 375 SHAVELL, supra, note 146, at 431 376 Polinsky et al, supra, note 431, at 414. 377 Thomas D. Rowe, Jr., Predicting the Effects of Attorney Fee Shifting, 47 Law & Contemp. Probs. 139, 140

(1984); Also see, Harold J. Krent, Explaining One-Way Fee Shifting, 79 Va. L. Rev. 2039, 2040 (1993)


97

b) The Defendant can, in such cases, put forth costly defences and still, recover

the expenses in litigation on winning the case.

c) If the cost to sue is greater and the probability of winning is lower, it might

induce the plaintiff to settle the dispute.

If the courts provide reasonable deference to the arbitral awards, the

probability of the plaintiff losing increases. This factor would be instrumental in

reducing plaintiff’s incentive to sue.378

The purpose of discussing fee shifting was to find out if there was a way to

prevent unmeritorious petitions challenging the arbitral award from being filed.

Ordinarily, imposition of costs on unmeritorious petitions would deter such behaviour

in the future. However, it has been argued by scholars that the consequences of fee

shifting is so complicated that general inferences cannot be drawn and the reaction to

a particular mode of fee shifting is too complicated that prediction of outcome.379

However, a pro-defendant fee shifting scheme seems to be a good candidate for the

purpose of reducing unmeritorious petitions for challenging arbitral awards.

5. Appeal on Merits: Several jurists had pointed out the lack of setting aside awards on

the ground of error of law in the 1996 Act. Nani Palkhiwala, observes:

I welcome your view on the need for giving the doctrine of public policy its full

amplitude. I particularly endorse your comment that the courts of law may

intervene to permit challenge to an arbitral award hic is based on an irregularity

of a kind which has caused substantial injustice.380

Jurists who argued for reading errors of law into the conception of public

policy were partly right in suggesting that public policy in Section 34(2)(b)(ii) should

cover even errors of law but it is the way in which it was done by the SAW Pipes court

is problematic. There was no requirement of the Court to add a new dimension in the

378 Polinsky et al, supra, note 432, at 407. 379 Rowe, supra, note 433, at 140. 380 Nani Palkhivala, Foreword, in, SARAF & JHUNJHUNUWALA, supra, note 84, at xviii.


98

name of “patent illegality” to public policy because the dimension of “justice or

morality”, which already existed in public policy, could have covered the kind of

illegality envisaged by SAW Pipes. The question is whether such illegality caused

substantial injustice to one of the parties, for there is no point in setting aside

“patently illegal” awards which cause no injustice to the parties. Further, the effect of

SAW Pipes is that the courts have been asked to set aside a huge number of awards,

most of them being frivolous applications.381 The reason is apparent from a perusal of

the cases post-SAW Pipes: the courts have not been able to properly sieve genuine

cases of patent illegality where it was just to set aside the award from frivolous cases

which were probably brought to the Court as a dilatory tactic.382

After reviewing and surveying various authorities on the subject, the Law

Commission of India came to the conclusion that a new section, Section 34A ought to

be added to the 1996 Act which should provide for two grounds on which domestic

awards could be set aside.383 The recommended provision reads as follows:

34A. Additional grounds of challenge in the case of certain awards: (1) In the

case of an arbitral award made in an arbitration other than an international

arbitration (whether commercial or not), recourse to the following additional

grounds can be had in an application for setting aside an award referred to in

sub-section (1) of section 34, namely:-

(a) that there is an error which is apparent on the face of the arbitral award

giving rise to a substantial question of law;

381 See, Dave, supra, note 397. 382 While the Courts, even under the 1940 Act, tried to frame some tests for separating patent errors from

ordinary errors, they have not been very successful. A judge, who decides to interfere into the award, whether

legitimately or not, had to call a minor error as an error apparent and nullify the award. The trial courts have

proved ineffectual in filtering out improper claims and have readily set aside awards on the mistaken notion that

even errors of law can be set aside. See, for example, Purushoth Das v. Sarita Devi (2006)2 Arb. LR 170

(Gau)(DB), where the trial court wrongly set aside the award on the wholly extraneous ground of non-

compliance of Order V Rule 15 of the Code of Civil Procedure, 1908. 383 LAW COMMISSION OF INDIA, supra, note 407, at 145-146


99

(b) that the arbitral award is an award in respect of which reasons have to be

given under sub-section (3) of section 31 but the arbitral award does not state

the reasons.

(2) Where the ground referred to in clause (a) of sub-section (1) is invoked in the

application filed under sub-section (1) of section 34, the applicant shall file a

separate application seeking leave of the court to raise the said ground:

Provided that the court shall not grant leave unless it is prima facie of the opinion

that all the following conditions are satisfied, namely:-

(a) that the determination of the question will substantially affect the rights of

one or more parties;

(b) that the substantial question of law was one which the arbitral tribunal

was asked to decide;

(c) that the application made for leave identifies the substantial question of

law to be decided and states relevant grounds on which leave is to be granted.

(3) Where a specific question of law has been referred to the arbitral tribunal, an

award shall not be set aside on the ground referred to in clause (a) of sub-section

(1).

As regards substantive review of arbitral awards, the Commission

recommended that in the view of Section 28, which mandates the arbitral tribunal to

follow the substantive law of India, public interest and rule of law, and with due

consideration to the speed of the arbitral process, appeal must be allowed for a

“substantive question of law” arising from a domestic award.384 Further, it was also

recommended that the appeal on substantive question of law should be in consonance

384 Id, at 141. The Law Commission gave the following justification for its recommendation to add Section 34A

to the 1996 Act: “The courts in India... are to decide disputes in accordance with law. There is, therefore, no

justification in placing the arbitral tribunal on a higher pedestal and allowing it to decide according to its own

whims and fancies. Awards involving crores of rupees are passed against the State, the public sector

undertakings and statutory corporations. For example, if the period of limitation for an action is three years and

a claim is barred by ten years and still allowed by the arbitral tribunal, should the award be left alone? If huge

damages are awarded in violation of section 73 of the Contract Act or there is violation of other provisions of

that Act or the Sale of Goods Act or Interest Act, should there be no remedy at all? If it does not follow a

decision of the Supreme Court or wrongly ignores the decisions of the Supreme Court, can it not be corrected?

In the opinion of the Commission, it is not possible to follow the Model Law by omitting this important ground

of attack. At 141-142.


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with the strict standards adopted under Section 69 of the English Arbitration Act,

1996.385

It is, therefore, submitted that the English situation as a whole would not be

suitable for Indian conditions. UK has had a long tradition of trade and commerce in

the medieval and the modern periods which has contributed to a sound body of

commercial law, which India clearly lacks. It is high time that India develops its

commercial law to suit the requirements and conditions. Considering the prevailing

vacuum, the courts have to play a significant role in this regard. Adopting Section 69

as a whole would be futile, though parts of it might be adopted. It should be noted

parties to arbitration can opt out of Section 69 if they agree to that effect. The Law

Commission was silent as to this point. But then it has not, in Section 34A, adopted

the stance of English Law making appeal as an option. Since the courts will have to

play an important role in the development of commercial law, opting out of the appeal

procedure, which performs, inter alia, the function of settling unsettled law, India

would lose an opportunity to develop its own corpus of commercial law. It is doubtful

whether the trial courts in India are equipped enough to deal with the complications

that arise in commercial contracts and arbitration.386 Therefore, the process of Leave

to Appeal from trial courts to High Courts might not be of much help to Indian

arbitration and dispute resolution. The High Courts should first hear the parties to find

whether the appeal requires any merit or not. The standards used to assess whether a

question of law is appealable are the standards laid down by the Law Commission,

which are almost the same as the standards under English Arbitration Act 1996.

The English Act contains one more ground which the Law Commission has

not included in its recommendation. Under Section 69 of the English Act, an award

can be appealed against only if the decision of the arbitral tribunal on the question is

obviously wrong, or the question is one of general public importance and the decision

of the tribunal is at least open to serious doubt.387 The DAC recommended against the

385 Id, at 142 386 Purushoth Das v. Sarita Devi (2006)2 Arb. LR 170 (Gau)(DB), where the trial court wrongly set aside the

award on the wholly extraneous ground of non-compliance of Order V Rule 15 of the Code of Civil Procedure,

1908 387 Supra, note 322.


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use of the ground of error of law apparent on the face of the record as it was long

discarded under the common law.388 Instead the DAC decided that appeals should be

restricted to the questions of law raised in the arbitration on the basis of finding of

facts. It is submitted that the Law Commission’s approach is appropriate in the Indian

context. This is because the English approach under the 1996 Act would take away

the court’s jurisdiction to set aside awards for patent errors of the arbitrator in failing

to consider documents, which the English Courts excluded from the purview of the

courts.389 The Law Commission has retained the error apparent on the face of the

record test. Warranting appeal if the question is of general public importance is

necessary for the development of commercial law and therefore inclusion of such a

provision would prove extremely useful in the Indian context . This was amply shown

in Section A of Chapter III.

Written submissions of parties to the trial court objecting or defending the

award must be brief and to the point. It must merely state the points on which the

award errs and the Courts must find out if the error in the award was so apparent that

without even hearing the parties, the court could come to the conclusion that the

award was manifestly in violation of law. Thus, hearing need not be afforded to the

parties for applications for setting aside awards. Further, where the award is

challenged for setting aside for patent error of law, the parties should state their

submissions in brief and submit the award. If the error is so apparent on the face of

the award, it would be obvious to the judge of the trial court. Therefore there is no

need for hearing or for documents other than the award.

6. Need for Separate Challenge Mechanisms for Domestic and Foreign

Arbitrations? Chapter II traced the evolution of treatment by the Indian courts of

foreign arbitrations till Venture Global Engineering v. Satyam Computer Services

Ltd.390, where the Supreme Court laid down that Part I of the 1996 Act, including

Section 34, would apply to all arbitrations- domestic or foreign; but in case of

international commercial arbitrations held outside India, the parties could waive, 388 DEPARTMENTAL ADVISORY COMMITTEE, supra, note 137, Para 286 389 How Engineering Services Ltd v. Lindner Ceilings Floors Partitions Plc (No.2) [1999] 2 All E.R. (Comm)

374, cited in, TWEEDDALE & TWEEDDALE, supra, note 15, at 805. 390 Supra, note 17


102

expressly or impliedly, the applicability of Part I of the Act. The problem with the

approach of the Supreme Court in Bhatia and Venture is that it wholly contradicts the

policy of the 1996 Act and the role of arbitration law in a globalised world. No doubt

the SAW Pipes Court extended the doctrine of public policy with the policy objective

of improving the arbitral mechanism in India; but the extension of SAW Pipes to

foreign awards is neither in consonance with modern arbitration nor is it good for

international commerce in India. As the United States Supreme Court, in The Bremen

v. Zapata Off-Shore Co held:

The expansion of American business and industry will hardly be encouraged if,

notwithstanding solemn contracts, we insist on a parochial concept that all

disputes must be resolved under our laws and in our courts... We cannot have

trade and commerce in world markets and international waters exclusively on our

terms, governed by our laws, and resolved in our courts.391

India should have a distinct system for domestic and international arbitrations.

One of the objectives of the New York Convention was to avoid the problem of

double executur, which referred to the need under the Geneva Convention392 for

recognition of the arbitral award at the seat of the arbitration as well as from the

forum of enforcement.393 This was done to prevent the losing party from attacking the

award both in the seat of arbitration and the place of enforcement. Venture has

overtaken even the Geneva Convention in this regard. Now, even foreign awards

391 The Bremen v. Zapata Off-Shore Co. 407 U.S. 1, 9 (1972); approved in Scherk v. Alberto-Culver Co. 417

U.S. 506, 516-517, where it was observed, “[a] parochial refusal by the courts of one country to enforce an

international arbitration agreement would not only frustrate these purposes, but would invite unseemly and

mutually destructive jockeying by the parties to secure tactical litigation advantages.... [It would] damage the

fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into

international commercial agreements.”; Mitsubishi Motors v. Soler Chrysler-Plymouth Inc. 473 U.S. 614, 629

(1985) 392 Article 1(d) of the Geneva Convention on the Execution of Foreign Arbitral Awards, on the requirements for

recognition of foreign awards, provided: “That the award has become final in the country in which it has been

made, in the sense that it will not be considered as such if it is open to opposition, appel or pourvoi en cassation

(in the countries where such forms of procedure exist) or if it is proved that any proceedings for the purpose of

contesting the validity of the award are pending:” LEW ET AL, supra, note 150, at 51-52. 393 See PARK, supra, note 54, at 300.


103

could be challenged in India under Section 34 where one of the parties to the foreign

arbitration is an Indian. This is undesirable. The Law Commission has clearly rejected

the approach that Part I of the 1996 Act is applicable to all arbitrations, domestic or

foreign, and has suggested that a distinction ought to be made between domestic

arbitrations and international arbitrations.394 Numerous other nations such as France,

USA, Switzerland, Hong Kong, Nigeria, Singapore etc make a distinction between

international and domestic arbitration because in international arbitration the juridical

seat already exercises supervisory control over the arbitration and there is not much

reason for another country to do so.

Venture lays down that parties to an international commercial arbitration not

held in India can contract out the provisions of Part I of the Act, including Section 34.

This raises an important question of whether parties can contract out the public policy

of India or not. Till now, world over, public policy has mandatorily applied to restrict

or restrain private actions. For the first time, the Supreme Court has created the

doctrine of optional public policy, which runs against all existing conceptions of

public policy in private law.395

However, Venture raises an important point: it is a case where a foreign court

had to decide whether an award was violative of public policy of another country.

Usually, it is the practice of states to enforce the laws of others in consonance with the

principle of international comity. However, where a state feels that its law was not

properly enforced by another state, it should have the freedom to make sure its laws or

not violated. Such an extraordinary case calls for a special remedy. Venture is a one-

off case which could have been resolved by giving the parties a relief under Article 394 It is not in dispute that there are “international arbitration awards” which do not fall under Part II, may be

because the dispute is not ‘commercial’ or the agreement is not in writing or the award is made in a non-

reciprocating state. The Act in Part I covers awards where all parties are of Indian nationality and award is made

in India and also to international commercial awards, i.e., where at least one party is not an Indian national,

where the seat of arbitration is in India. Both these types of awards are called ‘domestic awards’ under Section

2(7). This is the broad nomenclature used in the Act. LAW COMMISSION OF INDIA, supra, note 407, at 22-

24. 395 In the realm of arbitration, already the doctrine of public policy could be applied by the discretion of the

Courts. In Section 34 of the 1996 Act, the award may be set aside if it is violative of the public policy of India.

Thus, public policy is given a subservient position than certain other ends.


104

142 of the Indian Constitution.396 Venture is a case where one of the parties tried to

evade one of the lois de police of India, the Foreign Exchange Management Act. In

the absence of an express provision in the 1996 Act, the Court could have simply

treated it as an exceptional circumstance and granted relief in the name of justice

under Article 142 instead of destroying the scheme of the 1996 Act.397 Even under

Article 142, the Supreme Court cannot give relief ignoring the framework under

Arbitration and Conciliation Act, 1996 which does not provide for setting aside of

foreign arbitral awards. Owing to the special circumstances of the case, relief could

have been afforded under Article 142. It has also been suggested that the Indian

396 Article 142 of the Indian Constitution declares: “(1) The Supreme Court in the exercise of its jurisdiction

may pass such decree or make such order as is necessary for doing complete justice in any cause or matter

pending before it, and any decree so passed or order so made shall be enforceable throughout the territory of

India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that

behalf is so made, in such manner as the President may by order prescribe.

(2) Subject to the provisions of any law made in this behalf by Parliament, the Supreme Court shall, as

respects the whole of the territory of India, have all and every power to make any order for the purpose of

securing the attendance of any person, the discovery or production of any documents, or the investigation or

punishment of any contempt of itself.” 397 However, for the applicability of Article 142, certain conditions have to be satisfied. Following is the nature

of, and conditions in which such power could be exercised:

a) The power under Article 142 of the Constitution is an inherent power of the Court and are complementary

to the powers specifically conferred on the court by various statutes though are not limited by those statutes.

b) These powers also exist independent of the statutes with a view to do complete justice between the parties.

These powers are of very wide amplitude and are in the nature of supplementary powers.

c) However, this jurisdiction is a residual power which the Apex Court has to exercise only whenever it is just

and equitable to do so and in particular to ensure the observance of the due process of law, to do complete

justice between the parties, while administering justice according to law.

d) But the power under Article 142 is curative and does not authorise the Court to ignore the substantive rights

of a litigant while dealing with a cause pending before it. This power cannot replace the substantive law

applicable to the case before the court.

e) Also, such a provision cannot be used to build a new edifice where none existed earlier, by ignoring express

statutory provisions dealing with a subject and thereby to achieve something indirectly which cannot be

achieved directly.

See, Supreme Court Bar Association v. Union of India & Anr. AIR 1998 SC 1895: (1998) 4 SCC 409, at Para

47.


105

Courts should have residual power to review and set aside foreign arbitral awards.398

This suggestion might work against arbitration because there would be constant

challenges of foreign arbitral awards.

These reforms could play an important role in ensuring that the arbitral

process is not subverted eve when public policy is read broadly to include within its

purview patently illegal arbitral awards.

398 Aloke Ray & Dipen Sabharwal, Another Setback for Arbitration (and Investors), Business Standard, Kolkata

Edition, March 13, 2008.


106

V

CONCLUSION

Law Commission of India, in its 176th Report, 2001, recommended for several

measures that could be adopted to improve the law of arbitration in India. However, the

Parliamentary Committee, 2005, rejected the recommendations of the Law Commission

holding that the Law Commission’s recommendations had to be discarded because there was

a consensus among several experts that the proposed amendments by the Law Commission

would make the arbitral tribunal an organ of the court rather than a party-structured dispute

resolution mechanism.399 On the role of courts, the Committee held that bringing back control

and supervision by the courts in arbitration would neither be in the interest of growth of

arbitration in India nor in tune with the best international practices. The Committee’s

conclusion was that the recommendations were incongruent to the best international practices

in arbitration and therefore would hamper further development of international trade relations

and diminish the confidence of the international community in the Indian system of

arbitration.400 Therefore the Committee recommended that the Parliament should enact a new

law on arbitration. The new law should, hopefully, not generate the same kind of conflict

between the courts and the legislature in determining whether to allow patently illegal awards

to be set aside.

The Law Commission has suggested that the English way ought to be adopted as

regards appeal to the court on point of law on narrow grounds. The Parliamentary

Committee’s approach, on the other hand, suggests that the pre-SAW Pipes position (that is,

absence of challenging awards for patent errors) would be adopted by the new law. This pro-

arbitration approach is definitely welcome; but one must be mindful of the necessity of

judicial supervision of arbitral awards. The motive behind this essay was to find out the

advantages of a mechanism which provided for judicial supervision of awards and also to

suggest remedies in removing the fallouts of such a mechanism.

399 DEPARTMENT RELATED PARLIAMENTARY STANDING COMMITTEE ON PERSONNEL, PUBLIC

GRIEVANCES, LAW AND JUSTICE, supra, note 81. 400 Id.


107

A conceptual analysis of the term public policy, it is felt, is necessary to understand

the problem and contextualise it. In the second chapter of this work, it is argued, using

Wittgenstenian semantic theory, that the concept of public policy does not have a meaning on

its own; rather it acquires specific meanings by the context. The inference from this idea as

regards arbitral awards is that the policy of giving deference arbitral awards has influenced

the scope of the concept of public policy. The point that the first section of Chapter II made

was that the public policy was regarded as a doctrine capable of undermining the institution

of arbitration. Therefore a restricted meaning of the doctrine was given so that it could

operate without sabotaging the arbitral process. The other sections of this chapter pointed out

the divergent positions taken by the taken by the Legislature and the Judiciary on patently

illegal arbitral awards and explained the current scenario.

In Chapter III, the benefits of a broader reading of public policy were analysed. The

arbitral process, it argued, is not so sacrosanct to be immune from any kind of supervision

merely because of the intention of the parties to choose to arbitrate rather than to litigate.

Surely, this intention of the parties would not imply that the parties to the arbitration would

be forced to be bound to whatever kind of service that the arbitrator provides. Parties must

have the safety valve to free themselves from liability when such imposition of liability is

based on considerations otherwise than law and justice. Justice demands that in case

arbitrators base their awards on perverse considerations parties should obviously have the

option to challenge them in courts. Thus this would act as an indirect check on the arbitral

process, and would benefit the arbitral process by necessitating the arbitrators to base their

awards within the strict contours of law and justice. Also, the parties would be careful in

selecting quality arbitrators. At the same time, there are chances that parties might use such a

safety valve to delay the performance of the award. The chances of misuse should not be the

reason to sacrifice the advantage of supervision of arbitral awards. Section A of the third

chapter also argued the need for supervision of arbitral awards to improve the quality of

arbitration in India. At the present need for development of modern arbitration, India cannot

ensure the quality of arbitration sans supervision of arbitral awards by a higher authority.

However, this supervision must be limited and pragmatic. It was also contended the courts

have an important role in ensuring predictability, stability and certainty in statute law by

settling conflicting interpretations, updating statute law to new developments and also to

make statutes work at a practical level. This was also illustrated with the help of the Northern


108

Pioneer case.401 The section concluded by analysing the benefit of a broader reading of

public policy in ensuring an arbitral process free from bias and corruption. Despite the Act’s

commitment towards a fair arbitral process, the Act has not provided adequate mechanisms to

address the problems of bias and corruption in arbitration. Review of arbitral awards on

merits would be a better means of mitigating the incidence of bias and corruption in

arbitration. However, an inclusive reading of public policy would produce significant fallouts

such as subversion of arbitral process, incompatibility with the policy of the 1996 Act and

also hindrance to economic development due to weakening of formal contract enforcement

mechanisms.

The next chapter was an attempt find out whether the above-mentioned fallouts of

inclusive reading of public policy could be eliminated. An effort was made to find out how

other legal systems had dealt with the same problem of reconciling the apparently conflicting

needs of supervision of arbitral awards and finality of arbitral awards. Three jurisdictions,

UK, USA and Hong Kong, were selected on the basis of similarity with the Indian legal

institutions and also their advancement in the field of arbitration. It was found that even

among these three jurisdictions it was only UK which could balance both supervision of

arbitral awards and finality of awards in a successful manner. The second section of the

fourth Chapter suggested certain reforms that could be undertaken to achieve an appropriate

balance between finality of these policy goals. It was suggested that the courts should not

create concurrent grounds for challenge of awards. The 1940 Act suffered from the malaise

of reckless challenge of arbitral awards and the 1996 Act was also going in the same direction

post-SAW Pipes. This is good neither for the parties nor for Indian arbitration. The second

suggestion was about the increased use of the mechanism of remission by which party

autonomy and the policy of supervision of arbitral awards could be balanced. Thirdly, need

for an apex arbitral institution that could effectively govern the arbitration industry in India

and ensure that the arbitrators are of good quality was pointed out. Fourthly, it was suggested

that a pro-respondent fee shifting mechanism could be adopted to filter out unmeritorious

petitions seeking to setting aside arbitral awards. The fifth suggestion was that a strict

standard for review of arbitral awards on merits, similar to that of the UK, ought to be

adopted. However, certain significant deviations from the UK model were suggested, based

on the peculiarity of the Indian conditions. Finally, it was suggested that domestic arbitration

401 Supra, note 323


109

and international commercial arbitration need to be treated in a different manner in

accordance with the necessities of international trade and commerce. At the same time,

situations like that which arose in Venture Global Engineering v. Satyam Computer Services

Ltd.402 Should be tackled by the Apex Court through its power under Article 142 or any other

mechanism built in the arbitration law itself authorising the Apex Court to interfere with

foreign arbitral awards that attempt to evade the laws of India and cause injustice and

externalities.

Thus, it is possible for an inclusive notion of public policy to symbiotically coexist

with the need for speedy and inexpensive resolution of disputes, and such an inclusive notion

would be beneficial to the development of arbitration and law, specifically commercial law.

However, this depends to a great extent on the arbitrators’ and judges’ fidelity to justice. The

Civil Justice Committee noted in 1924-25, “arbitration is an extraordinary (sic

extraordinarily) ineffective device in the absence of a fairly high degree of honesty in the

parties”.403 No amount of reform can successfully develop the arbitral mechanism unless the

participants of the arbitral process, the parties, arbitrators and courts, are committed towards

that goal.

402 Supra, note 17 403 Supra, note 57, Para 12.


110

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Other Resources

Dictionaries and Encyclopaedias

1. BOUDEWIJN BOUCKAERT & GERRIT DE GEEST (EDS.), ENCYCLOPEDIA

OF LAW AND ECONOMICS (VOLUME V: THE ECONOMICS OF CRIME AND

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1. XI LOK SABHA DEBATES, Disapproval of Arbitration and Conciliation (Third)

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1. Vahanvati, Sore Pipes, Deccan Chronicle, Hyderabad Edition, July 26, 2003.

2. Aloke Ray & Dipen Sabharwal, Another Setback for Arbitration (and Investors),

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Documents

Public Policy & Setting Aside Patently Illegal Arbitral Awards