Understanding ‘Public Policy’ under Arbitration Laws in India

- Rahul M Shankhar

On 22nd April, 2020, a 3 judge bench of the Hon’ble Supreme Court in NAFED vs. Alimenta S.A. (NAFED vs. Alimenta S.A., (2020) 19 SCC 260) followed the long standing position that a foreign arbitral award is not enforceable in India if it is against the nation’s Public Policy. Having been delivered amidst the Covid-19 lockdown period, this judgment has been the point of discussion (both for and against) amongst legal practitioners / scholars in various Webinars throughout the country. Agreeing with the majority, it is my humble opinion that the Hon’ble Supreme Court has failed to consider settled principles of law with respect to what may be construed to be contrary to Public Policy.

Public Policy under Renusagar

We must first understand as to what is Public Policy and how are courts protecting the same. The Supreme Court in its landmark decision Renusagar Power Co. Ltd vs. General Electric Co. (Renusagar Power Co. Ltd. vs. General Electric Co.,1994 Supp (1) SCC 644), cemented the long standing debate as to what may be construed as Public Policy and it’s applicability towards enforcement of foreign arbitral awards. The Supreme Court ventured into the history of international covenants such as the Geneva Protocol, 1923 and the Geneva Convention, 1927 which at that point of time were furthering the cause of recognition of international arbitration agreements and enforcement of foreign awards that stem out of such disputes. To rectify the shortcomings of the 1923 and 1927 covenants and on recommendations of the International Chamber of Commerce (ICC), the Convention on Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) was signed and brought into effect from 7th June 1959. India being a signatory to all three conventions enacted the Foreign Awards (Recognition and Enforcement) Act, 1961 thereby repealing the Arbitration (Protocol and Convention) Act, 1937 to bring the provisions of the covenants into effect. Section 7(1)(b)(ii) of the Foreign Awards Act stated that a foreign award is unenforceable if it will be contrary to public policy. One of the questions for consideration in Renusagar was ‘what is the meaning of Public Policy under Section 7(1)(b)(ii) of the Foreign Awards Act?’. The Court in detail had discussed the difference between the meaning of public policy for proceedings within the boundaries of India and in cases of Conflict of Laws. They took the stand that Public Policy means Public Policy as applied by Courts in India, however, a narrow view is to be taken while enforcing foreign arbitral awards.

The Court also considered its previous attempt in defining Public Policy in Central Inland Water Transport Corp. Ltd. (Central Inland Water Transport Corp. Ltd. vs. Brojo Nath Ganguly, (1986) 3 SCC 156), as connoting some matter which concerns the public good and public interest and if violated, would be harmful to public good and interest. The court iterated the fact that ‘Public Policy’ and ‘Law of India’ are two separate concepts and must not be confused together. Analysing common law trends, the English Courts not restraining from enforcing a foreign award merely because the arbitrator applied the wrong law (in his/her view) or misapplied the right law, the Supreme Court concluded that contravening the provisions of Indian Law alone is not sufficient, something more is required to fall in contravention of Public Policy. In conclusion, contrary to Public Policy would mean being contrary to (i) Fundamental policy of Indian Law, (ii) Interests of India and (iii) Justice or morality. This stands as good law even today as far as enforcement of foreign awards are concerned even though the Supreme Court in subsequent decisions like Saw Pipes (ONGC vs. Saw Pipes, (2003) 5 SCC 705), Western Geko (ONGC vs. Western Geko, (2014) 9 SCC 263), Associate Builders (Associate Builders vs. Delhi Development Authority, (2015) 3 SCC 49) etc. have considered a 4th leg (i.e.) patent illegality, the said proposition being applicable only to domestic arbitrations.

Public Policy Misapplied

Coming to the Supreme Court’s recent judgment in Alimenta, the contract between the parties became unenforceable by NAFED due to the Government of India’s prohibition on export of the consignment as agreed to by the parties. Apart from extensively discussing the doctrine of frustration, the Supreme Court recapitulated the evolving trends on the construction of the term ‘Public Policy’ right from Renusagar until Ssangyong Engineering (Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India, (2019) 15 SCC 131), wherein various case laws and commentaries discuss the unimpeachability of foreign awards based on mere misapplication of the law. The Supreme Court’s reasoning that non-performance of contract is a result of the government’s restrictive export policy and hence any award against such non-performance is against the fundamental policy of India is unfounded.

Following the Renusagar test for the present case, for the award to be contravening Public Policy, it should be against the fundamental policy of the law of India which would harm public interest and fail to comply with morality and justice. In Alimenta, even though non-performance was pursuant to a prohibitory G.O from the Government of India, any award against such non-performance would not affect Indian public interest since any actions against NAFED will not sink the government. The court having considered the effect of performing a prohibited act being against its trade policy has not considered that enforcement of such an award will not end up in adverse consequences for the nation (which is the basis of the Renusagar test). Prevailing guidelines of not probing into the facts of the case that should have been strictly followed has been partially violated by the Supreme Court wherein they have scrutinised the contract between the parties and arrived at a conclusion that the said obligation under the contract ceases to exist. The court has failed to consider that the arbitral tribunal which has passed an award against NAFED is a judicial authority for all purposes and its decision is bound to be enforced without intervention unless it is proved to cause national, economic or social disturbance.