Role of Public Policy Notion in Arbitration Regime as Time Effective ADR Mechanism

Misha Bahmani

Abstract

Indian courts have been burdened with a lot of pending and unheard cases since a very long time. In order to improve the Indian scenario, the lawmakers have brought changes in the laws. With an objective to deliver justice within a reasonable period of time alternative disputes resolution modes have played a remarkable role. The author postulates that in order to provide quick relief to the parties and to gain international recognition recently public policy grounds have been elaborated under Section 34 of the Arbitration and Conciliation (Amendment) Act, 2015. The article will highlight the significance of having public policy notion as a ground to set aside an arbitral award. The author postulates that by having proper understanding and interpretation of public policy would encourage foreign investor’s participation and will make India arbitration-friendly country.

The need of the hour is that to lessen the burden of the courts one need to appreciate international and fundamental principles such as public policy in order to safeguard our fundamental rights such as Article 14 and 21 of the Indian Constitution. This will be beneficial for the growth of the Indian economy as well as harmony will be maintained while practicing trade relationship with their neighbouring countries.

Introduction

Recently the Arbitration and Conciliation (Amendment) Act, 2015 has taken place with an objective to provide quick relief to the parties and encourage activities related to international commercial arbitration in India.[1]The Indian legal history illustrates that arbitration was been firstly accepted under the Arbitration Act of 1889. It has been observed that during British rule in India the laws confining to arbitration were limited to certain aspects only. After India’s independence, the Arbitration and Conciliation Act of 1996 gained attention as it focused on domestic and international awards. However, earlier the Arbitration Act of 1940 had focused on domestic arbitration only and it had emphasized on having minimum court intervention. Learning from the English legal system, where 20.9 billion GBP were provided by the legal service sector to the British economy in 2011. London being among the most favourable seat for international arbitration has gained a lot of attention from investors. Today India is making an effort to be an arbitration-friendly country in the coming years by applying international principles in their legal system. Among which is public policy notion, which is applied in the arbitration field in order to practice fairness and to reduce the extensive judicial intervention in such matters. To make India investor friendly it has been the prime concern of the lawmakers to maintain international standards and establish institutional arbitration in India.[2]This has been highly appreciated under 2015 Amendment and now the grounds of public policy are also stated under the Act.

Unfortunately, the National Judicial Data Grid figures depict that in India almost 3.3 crore cases are still pending. Among those, there are sixty percent cases, which are unheard for two years, on the other hand, forty percent of cases are older than five years.[3] In order to overcome such challenges today, India requires strengthening its judicial system and encouraging the use of international principle like public policy in arbitration in order to improve the performance of the Indian courts and settle the disputes outside the court in order to safeguard the interest of the parties and nation’s interest.

Historical Background of Public Policy

It is to be noted that after World War II the nations around the world were concerned about making their country stronger by stretching their hands in trade practices.[4]India during that time was under the British rule their officers wanted to exploit and make use of Indian resources. The parties, which didn’t perform their function as per the contract, were held liable to pay under the Indian Contract Act of 1872.[5]The challenge arose when the parties came across practices such as discrimination and biased system. For instance, there were circumstances where the dispute was intentionally decided in favour of the other party because the court was the home country of them.[6]Due to the rise in a number of such unfortunate events, it was felt that India should have its own laws to govern such practices under British rule.

With the wake of globalization in India, there has been a lot of improvement in the growth of the commercial sector. In 1991 after following liberalization process there has been an increase in a number of trade as well as commerce activities in order to have a better quality of goods and services although there was a rise in a number of disputes between the parties and all the responsibility came to the courts to settle these disputes.

Sadly, the Indian courts during that tenure were not sufficient to handle these matters and this lead to an increase in a number of pending and unheard cases. For instance, when a dispute has arisen between the parties one party approaches the Indian court so that the dispute can be settled. Unfortunately, the courts were taking a lot of time to come to a decision. The parties began to lose faith in the Indian courts and the proceedings were costing them beyond their expectations. The Indian lawmakers came up with the suggestion that in order to protect and secure parties interest it is essential that there should be a third party which could address such disputes and provides relief to the parties within a reasonable period of time.

Also Read  The Implications a Democratic System of Governance has on the Rule of Law

With the support of the Indian Law Commission where it has suggested that there is an urgent need to lessen the burden of Indian courts, which can be possible if changes are made in the laws. For instance, 124th, as well as the 129th Report of the Indian Law Commission in 1988, initiated that arbitration and mediation modes should be part of the Indian legal system. It was suggested that in order to improve the performance of the courts and to deliver justice on time arbitration as well as the mediation process would be beneficial.[7]The great achievement was when the 129th Report motivated settlement of disputes by following mediation, judicial settlement, Lok Adalat and arbitration before issues are framed.[8]

In 2003, the Malimath Committee stated that India requires to improve the standards of their legal system, therefore, there is need to make it compulsory for the courts to refer the matter when the issues are framed and they should be solved by following any alternative dispute resolution modes. It has been constitutionally recognized under Article 14 as well as 21 in order to deliver justice in the business community.[9]There is a facility of free legal aid where significance is given to alternative dispute resolution modes, which are prescribed under the Directive Principles of the Indian Constitution.[10]

The most welcoming step was when the Apex court made it clear that when there is an element of the settlement the party has to follow it and can apply any of alternative dispute resolution modes.[11]The parties can decide and the court can also make it obligatory to refer the dispute to any of the alternative dispute resolution modes. With the passage of time, now it is compulsory to refer such matters after issues are framed. However, when these modes are not referred and didn’t come to a solution under such situation the matter will be filled in the court afterward.[12]Section 89 has motivated in settling the disputes outside the court within a reasonable tenure. In order to have an amicable environment, it was suggested to follow alternative modes when there is a possibility that the dispute can be settled with the help of them instead of going to the court as it will be time and cost consuming process.[13]

The landmark judgment of Afcons Infrastructure v. Cherain[14]as well as Salem Advocate v. Union of India[15]has encouraged the use of alternative dispute resolution modes for solving the matter with an objective to provide speedy justice without any discrimination. By maintaining international standards in the legal system and relying on fundamental principles which are worldwide recognized supported to protect the countries and the parties interest. Among them is the notion of public policy in arbitration, which is considered as a defence to set aside an arbitral award. This has resulted in protecting the interest of the nation and the parties are required to keep in mind that it should be not opposed to the interest of the society. Such practices encourage a friendly trade relationship between the nations and states, as well as the constitutional rights of an individual, are also protected.

Public Policy Exception

One needs to keep in mind that the word ‘public policy’ is a combination of two words public and policy, which are required to be, understood. A policy is the set ideas or when things are done in a specified manner by the public by forming groups, an organization concerned to business activities, government, a political party in order to perform official work.[16]

The word ‘public policy’ itself suggests that these are those principles, which are unwritten mostly, and the social laws are made out of them.[17]These are the policies, which are formed by the state and for their individual. It allows control over the actions of its public, for instance, the manner in which they have to perform in order to protect their interest and can put restrictions on their actions too. Its goal is a public good and it is not confined to any particular policy.[18]

Internationally, the public policy notion in the field of arbitration has been recognized under international conventions like UNCITRAL Model Law, New York, and Geneva Convention. India is a party to these international instruments and obeys its guidelines while conducting trade and commerce activities. For instance, public policy notion has been considered as one of the ground, when the award’s enforcement either recognition is contrary to the state’s public policy then such award would be refused by the court, which is stated under the provision of UNCITRAL Model Law.[19] The court would set aside an award when it is opposite to the state’s public policy.[20]In 1960 when India became a party to the New York Convention it made it clear that public policy exception is an important ground for refusal of an award.[21]The provision states that recognition, as well as enforcement of an award, would be refused when the competent authority agrees that it would be violating the country’s public policy.[22]

Also Read  The Weeping of the Sexually Exploited: Rights to Justice of the Unheard

It has been observed that public policy has not been defined under the New York Convention and therefore its way of interpretation varies. The courts around the world have interpreted the public policy grounds the way they feel it would fulfil their country’s needs.[23] 

The Law Commission in its 246th Report on Public Policy Exception in 2004 has highlighted that India needs to have a speedy mechanism, which can be possible if the Indian legal system maintains international standards. The previous Acts have not mentioned the grounds of public policy, which has laid rise to uncertain results when the courts followed this exception. Earlier the Indian arbitration laws were based on English arbitration laws and arbitration was introduced for certain matters only, which later expanded its horizon under Arbitration Act of 1889 and 1940. Also, Arbitration and Protocol Convention Act of 1937 provided that award wouldn’t be set aside if it lawfully recognized for arbitration under the laws and the award’s enforcement is not violating the public policy or Indian laws which are in force.[24]

Moreover, foreign awards Act of 1961 and Arbitration and Conciliation Act of 1996 has given significance to public policy ground but they have not provided any grounds or explanation in detail manner nor has defined public policy under its provisions. The Indian courts have interpreted the public policy in a narrower as well as in a broader manner.

Recent Amendment

In 2017 the High-Level Committee has provided that in order to improve Indian circumstance there is need to maintain transparency in the Indian legal system.[25] It is essential that India should gain international recognition, which can be possible if the laws are based on international standards. Recently changes have been brought under Article 34 (2)(b)(ii) of the Act concerning public policy ground, which illustrates the grounds of public policy under Explanation I. Moreover, the court would refuse enforcement of an award when it is violating India’s public policy keeping in mind the same grounds.[26] The provision elaborates that an award would be violating India’s public policy when it is induced or it has caused an act of fraud or corruption. Moreover, when confidentiality is affected and there is admissibility of evidence in other proceedings these grounds would amount to a violation of Indian public policy.  In addition, when the fundamental policies of laws are affected it will be contrary to this exception. Lastly, when the award is against the principles like morality or justice it would result in setting aside an arbitral award on the ground of public policy.[27]

In addition, when there is a doubt that it is against the fundamental policy of Indian law under such circumstance it will not be put into test and it will not be reviewed on the merits of the matter.[28] It has been inserted recently under the Act that an award which is arising out of arbitration apart from international commercial arbitration then it can be set aside by the court on the ground that it is patently illegal.[29] Moreover, the award will not be set aside when there is a wrong application of law or there is the existence of re-appreciation of evidence. It is essential to note that now limitation period has been imposed under the 2015 amendment for setting aside an arbitral award. Firstly, the time framed for making an application is three months from the receipt of the award by the party. When an application is made for correction, interpretation of an award or for making an additional award by the parties to the arbitral tribunal under such situations three months will be considered from the date when the arbitral tribunal has disposed such request. Secondly, when the court is with the opinion that parties had sufficient reason for not making an application within the tenure of three months then an additional thirty days are provided to consider this application.[30] Thirdly, time limitation has been imposed for disposing off the application, which is filled under Section 34 (6) in order to lessen the delay in disposing off such application.[31]

Significance of Public Policy

In order to improve the performance of the Indian courts, it is important that there should be a mechanism, which could perform quickly.[32]Public policy notion motivates in protecting fundamental rights such as the right to be heard, equality before law and right to life as well as liberty. By following this exception, it would safeguard the common interest of society. It will encourage the practice of fairness, which is supported by fundamental principles such as justice and morality.[33]This will motivate the courts to perform fairly and the judicial system will be able to maintain its consistency in its working process. By having limited intervention of the courts in matters related to enforcement of arbitral awards one can ensure speedy justice and the fast arbitral process can take place. It is important to note that the public policy defence should be used with caution so that the parties could not misuse it in order to cause unnecessary delay.[34]

Public policy ground act as a guardian for the country’s growth. It is helpful in increasing cross border transactions and improving bilateral trade relations.[35]In other words, we can say that in order to encourage the practice of domestic and international trade it is essential that laws, which are in relation to public policy, must be focused on the public good and should safeguard their interest. The objective set behind this ground must be kept in mind when the courts under such aspects decide the disputes. In order to establish a better place in the global market and to be internationally recognized it is necessary that Indian laws should be arbitration-friendly so that the parties can keep their faith and could further invest. By following public policy ground it encourages in building a cooperative environment for performing contractual obligations.

Also Read  DNA Profiling- DNA based Technology

By promoting international commercial arbitration as well as encouraging fair practice concerning domestic arbitration and conciliation would be supporting the flow of the capital. The 2015 Act is based on UNCITRAL Model Law, which focuses on having an investment-friendly atmosphere for the investors. The investors prefer a country whose legal system has time effective and cost-saving process.[36]

Moreover, the government should take measures to overcome the delays in the proceedings as well as emphasizes should be on the merits of following arbitration jurisprudence. In order to have a friendly ecosystem concerning arbitration, it is necessary that judicial officers should be well trained and informed about the significance of having public policy notion in arbitration regime in reality.[37]

Conclusion

One needs to keep in mind that India is a developing nation which is dependent on other economies also in order to avail better facilities. In order to settle commercial disputes, it is essential that public policy ground should be understood properly. By maintaining international standards, the investors will be keen to invest in different sectors in India. Due to this, the gross domestic product (GDP) of India will also be improved because of the presence of better technology and facilities in India and this will result in the growth of the domestic market.

By protecting the country’s interest, the authorities would be able to protect the Indian resources from any form of exploitation and illegal acts like corruption, fraud. In order to develop faith in the judicial system, it is very important that the Indian courts continue to protect the interest of the parties by practicing equal treatment, providing better opportunities where public policy notion has its own significance to it. In order to make India centre for international commercial arbitration activities, there should be a proper use of public policy defence which would result in a positive impact on the Indian legal system and its economy. There is a need to have adequate infrastructure and time limits prescribed under the recent amendment should be properly followed by the courts in order to avoid pendency of cases in the coming years.[38]


[1] Law Commission of India, Supplementary to Report No. 246 on Amendments to Arbitration and Conciliation Act, 1996, June 28, 2018, 8:45 AM), http://lawcommissionofindia.nic.in/reports/Supplementary_to_Report_No._246.pdf.

[2] Ibid.

[3] CJI Dipak Misra, 3.3 crores case pending in Indian courts, pendency figures at its highest, BUSINESS TODAY (June 28, 2018, 8:45 AM),https://www.businesstoday.in/current/economy-politics/3-3-crore-cases-pending-indian-courts-pendency-figure-highest-cji-dipak-misra/story/279664.html.

[4] Morris S. Rosenthal, Arbitration in the settlement of International trade disputes, 11 L. & CONTEMP. PROBS.808,808 (1946).

[5] Alternative Dispute Resolution: What It Is And How It Works 19 (P. C. Rao & William Sheffield eds., 1997).

[6] Rosenthal, supra note 5.

[7] Dr. S. K. Dixit, Arbitration and Conciliation, ICSI (June 28, 2018, 8:45 AM),

http://www.icsi.edu/WebModules/Programmes/PCS/7PCS/BG%20PCS-4-dixit.pdf.

[8] Law Commission of India, 238th Report on Amendment to Section 89 of the Civil Procedure Code, 1908 and allied provisions, (June 28, 2018, 8:45 AM), http://lawcommissionofindia.nic.in/reports/report238.pdf.

[9] Rosenthal, supra note 5.

[10] INDIA CONST. art. 39 A.

[11] Madabhushi Sridhar, Alternative Dispute Resolution Negotiation And Mediation 324 (1st ed. 2013).

[12] The Code of Civil Procedure, 1908, s. 89.

[13] Ibid.

[14] Afcons Infrastructure v. Cherain (2010) 8 S.C.C. 24.

[15] Salem Advocate v. Union of India (2002) 6 S.C.C. 344.

[16] Cambridge Dictionary, Policy, (Mar. 10, 2019, 10:15 AM), https://dictionary.cambridge.org/dictionary/english/policy.

[17] Oxford Dictionary, Public Policy, (Mar. 10, 2019, 10:25 AM),https://en.oxforddictionaries.com/definition/public_policy.

[18] Law Dictionary, Public Policy, (Mar. 10, 2019, 11:15 AM), https://thelawdictionary.org/public-policy/.

[19] The UNCITRAL Model Law,1985, art. 36(1)(b)(ii).

[20] Id. at art. 34(2)(b)(ii).

[21] New York Convention, Contracting States, (Mar. 11, 2019, 12:30 PM),http://www.newyorkconvention.org/countries.

[22] The New York Convention, 1958, art. V(2)(b).

[23] IBA,IBA Subcommittee on Recognition and Enforcement of Arbitral Awards, Report on the Public Policy Exception in the New York Convention, (Mar. 11, 2019, 12:30 PM),

https://www.ibanet.org/LPD/Dispute_Resolution_Section/Arbitration/Recogntn_Enfrcemnt_Arbitl_Awrd/publicpolicy15.aspx.

[24] The Arbitration (Protocol and Convention) Act, 1937, s. 7(1)(e).

[25] Department Of Legal Affairs, Report of the High-Level Committee to review the Institutionalization of Arbitration mechanism in India, (Mar. 12, 2019, 1:30 PM), http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf.

[26] The Arbitration and Conciliation (Amendment) Act, 2015, s. 48 (2)(b).

[27]The Arbitration and Conciliation (Amendment) Act, 2015, s. 34 (2)(b)(ii).

[28] Id. at s. 34 (2)(b), Explanation II.

[29] Id. at s. 34 (2A).

[30] Id. at s. 34 (3).

[31] Mohit Moonka & Silky Mukherjee, Impact of recent reforms, 4 BRICS L. J. 58, 68 (2017).

[32] Supra note 2.

[33] Ibid.

[34] Supra note 2.

[35] Farshad Ghodoosi, International Dispute Resolution And The Public Policy Exception 20 (1st ed. 2017).

[36] Supra note 2.

[37] Supra note 26.

[38] Moonka, supra note 32, at 71.