Should the public policy exception be statutorily defined? The example of Indian arbitration law

Name: Should the public policy exception be statutorily defined? The example of Indian arbitration law
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Author: Nihal Bernard Dsouza
ISBN: 978-3-631-90883-9

Dsouza, Nihal Bernard

Should the public policy exception be statutorily defined? The example of Indian arbitration law

by Nihal Bernard Dsouza (Author)

Law, Economics & Management

Series: Europäische Hochschulschriften Recht, Volume 6761

Summary

The public policy exception has often been relied on by national courts in India and other jurisdictions as a grounds for refusing enforcement of foreign arbitral awards. In this context the exception has been given varying interpretations. This book deals with the question of whether the scope of the public policy exception as a grounds for refusing enforcement should be legislatively defined, or rather left to judicial interpretation. It does this by using recent amendments to the Indian arbitration law as an example, and conducting comparative law research with approaches taken in both major common and civil law jurisdictions. It then evaluates the benefits - disadvantages- and the rationale for having such a definition. It finally evaluates what should be the ideal statutory scope of the exception.

Excerpt

Cover
Title
Copyright
About the author
About the book
This eBook can be cited
Acknowledgment
Table of contents
List of abbreviations
Abstract
Delimiting the public policy exception – an introductory note
I. Research question
II. Background to research
Chapter 1: Public policy and its many contours
I. The origins of public policy in civil and common law systems
II. The different shades of public policy
1. As an instrument of making and interpreting laws
2. To regulate private contractual behavior
3. In applying foreign laws and recognising foreign judgments
4. In the field of arbitration
5. In trade law
6. Common values underlying public policy
III. The role of public policy in international commercial arbitration
IV. The importance and limitations of judicial review of arbitral awards
Chapter 2: Use and abuse of the public policy exception under the Indian arbitration law
I. Introduction
II. Contextualizing the research with a historical background
1. Historical reasons why India should be a pro-enforcement regime
2. Background to the current treatment of public policy under Indian law
III. The interpretation of the public policy exception by the Indian judiciary
1. Interpretation of public policy before the enactment of Indian Arbitration Act 1996
2. Subsequent scepticism of the courts towards arbitration
3. Recent shift towards a more pro-arbitration approach
IV. Understanding the outlook of Indian courts
1. The traditional role of the courts in the Indian legal system
2. Legislative contribution to initial judicial hostility towards arbitration
3. Conflicting approach to judicial powers under Indian civil law
4. Foreign influences on the judicial interpretation of public policy
(a) Influence of foreign courts
(b) Influence of foreign literature
(c) Analysis
Chapter 3: An overview of how the Indian approach to public policy compares with other jurisdictions
I. The rationale for a comparative approach
II. Comparison with specific common law jurisdictions
1. The English approach to public policy
(a) Evolution of doctrine
(b) Legislative framework
(c) Judicial attitudes
2. The American approach to the public policy exception
(a) Evolution of doctrine
(b) Legislative framework
(c) Judicial attitudes
III. Comparison with specific civil law jurisdictions
1. The German approach to public policy
(a) Evolution of doctrine
(b) Legislative framework
(c) Judicial attitudes
2. Ordre public under French law
(a) Evolution of doctrine
(b) Legislative framework
(c) Judicial attitudes
IV. Comparing approaches to procedural and substantive elements of public policy
1. Where there is a violation of procedural public policy
(a) The common law approach to protecting procedural public policy
(b) The civil law approach to protecting procedural public policy
2. In case of violation of substantive public policy
V. Analysis
Chapter 4: The innovative approach of Indian arbitration law in dealing with the public policy exception
I. Why the 2015 amendments to the IAA defined public policy
1. To reduce the scope for judicial intervention and ensure arbitral awards are final and binding
2. To provide certainty to parties
II. The treatment of public policy under the Indian arbitration law
1. Treatment of public policy exception with respect to foreign awards
2. Treatment of public policy exception with respect to domestic awards
III. Analysis of the amendment to section 48(2)b
1. The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81
(a) Refusing enforcements of awards vitiated by fraud
(b) Refusing enforcements of foreign awards on the grounds of corruption
(i) Where the award is obtained by corrupt means
(ii) Where the award gives effect to a corrupt contract
(iii) Where the underlying contract itself is obtained by corrupt means
2. The award is in contravention with the fundamental policy of Indian law
(a) Use of judicial approach
(b) Principles of natural justice
(c) Perverse or irrational award
(d) Protecting the economic interest of India
(e) Protecting free and fair competition as a fundamental policy of Indian law
(f) Essential insolvency law provisions as a fundamental policy of Indian law
(g) The non-exhaustive nature of the fundamental policy of Indian law
3. The award conflicts with the most basic notions of morality or justice
(a) Most basic notions of morality as a breach of Indian public policy
(i) Morality, according to Indian courts
(ii) Comparative approaches to morality
(iii) Corruption or fraud as an immoral act
(iv) Respect for human rights
(b) Most basic principles of justice forming part of Indian public policy
(i) Where arbitrators do not follow due process/procedure established by law
(ii) Manifest disregard of the law or of the contract by an arbitrator
(iii) Impartiality and independence of an arbitrator
(iv) Res judicata
(v) The overarching need for fairness
IV. The burden of proof in invoking the public policy exception
1. Position in statute
2. The burden lies on party resisting enforcement
3. Finding a balance in allocating the burden of proof
V. Evaluating the new definition of the public policy exception under Indian law
1. What the definition seeks to achieve
2. Evaluating the success of the definition in narrowly construing public policy
3. How the courts can play an essential role in making the definition work
VI. The reaction of courts to the statutory definition of public policy under the new regime
Chapter 5: The defining of public policy – a useful innovation?
I. Roadmap of chapter
II. Defining public policy: Pros and cons
1. A case against defining the scope of the public policy exception
(a) The drafters of the New York Convention did not envision a definition
(b) Public policy is ever-changing
(c) A definition would reduce flexibility in interpretation
(d) Public policy is inherently vague and cannot be concretized
(e) The drawbacks of defining public policy may outweigh the benefits
2. Why a definition of public policy may nevertheless be necessary
(a) Defining public policy will lead to reduced judicial arbitrariness
(b) A definition will provide legal certainty
(c) It helps arbitral tribunals to draft enforceable awards
3. Solving the dilemma through core values
4. Need for a middle ground
III. Determining the competent authority for defining the scope of the public policy exception
1. Using the doctrine of separation of powers as a benchmark
2. Determining the appropriate authority based on democratic principles
3. A functional approach to defining public policy – is judicial interpretation better than a statutory classification?
IV. The ideal statutory framework for the public policy exception
1. Elaborating every head of the exception
2. Providing a general and vague categorization
3. Not elaborating what is meant by public policy
4. Not providing public policy as grounds for refusing enforcement of arbitral awards
V. Seeking the elusive boundaries of the public policy exception
1. How should public policy be interpreted?
2. Deriving public policy using balancing tests
(a) Resolving conflicting public policies
(b) How can the judge find the right balance?
(c) The approach of courts towards public policy
3. Public policy as a uniform yet diverging concept
4. Do differing legal cultures lead to different conceptions of public policy?
5. When should the public policy exception be invoked by Indian courts?
(a) Enforcement of awards that are set aside at the seat
(b) Interaction of the exception with mandatory rules of Indian law
6. Should public policy under Indian law be based on a harmonized transnational framework?
(a) Need for delocalisation in delineating public policy
(b) Need for harmonizing approaches to public policy
(c) Transnational public policy as a harmonized framework
(d) Is harmonized transnational public policy a threat to state sovereignty?
7. Reconciling the use of public policy with the goal of making India an arbitration-friendly jurisdiction
(a) The true meaning of ‘arbitration-friendly’
(b) Is restricting public policy truly ‘arbitration-friendly’?
(c) Defining public policy to meet the needs of the arbitration community and society
Chapter 6: Determining the competent authority for deciding on claims where there is a violation of public policy
I. When the underlying contract violates public policy
1. Where there is illegality
(a) Illegality in the underlying contract
(i) Where the sole purpose of the contract was the performance of an overtly illegal act
(ii) In case certain contractual stipulations are illegal and violate public policy
(b) Where illegality is ancillary to the contract
(i) In case the underlying contract was entered into as a result of illegality, including corruption, fraud or coercion
(1) Where the underlying contract is tainted by corruption
(2) Where fraud is the raison d’être for entering into the underlying contract
(ii) Where there is illegality in the performance of contractual obligations
2. Where the subject matter is not arbitrable due to public policy considerations
(a) Courts as the competent authority to hear non-arbitrable disputes
(b) Should arbitral tribunals retain jurisdiction anyway?
(i) A case for reassessing what is considered non-arbitrable
(ii) Reckoning with reality – why some disputes are best left for courts
(iii) The way forward – finding the right balance for arbitrability
II. Where there are violations of public policy during the arbitral proceedings or in obtaining the award
1. In case of allegations of illegality or irregularity at the onset of the arbitral proceedings
2. Where there are allegations of violation of public policy during the arbitration proceedings
III. Where the enforcement of the final award violates public policy
IV. Which jurisdictions public policy should apply?
1. Which public policy should the arbitral tribunal apply?
2. The public policy applied by the courts at the seat
3. Public policy as applied by courts at place of enforcement
4. The subjectivist vs objectivist approach
Chapter 7: Concluding observations
I. Observations from a comparative perspective
II. Conclusion
1. Looking at public policy from a wider context
2. Should the public policy exception be defined? Narrowly?
Bibliography

List of abbreviations

AALCC	Afro-Asian Legal Consultative Committee
Art.	Article
BGB	Bürgerliche Gesetzbuch (German Civil Code)
BGH	Bundesgerichthof (German Federal Court of Justice)
CPC	Code of Civil Procedure, 1908
DDA	Delhi Development Authority
EC Treaty	Treaty establishing the European Community
ECJ	European Court of Justice
e.g.	Example
EGBGB	Einführungsgesetz zum Bürgerlichen Gesetzbuche (Introductory Act to the German Civil Code)
EU	European Union
FARE Act	Foreign Awards Recognition and Enforcement 1961
FCPA	The Foreign Corrupt Practices Act 1977
FERA	Foreign Exchange Regulation Act 1973
GATT Agreement	General Agreement on Tariffs and Trade 1994
GDP	Gross domestic product
Geneva Convention	Geneva Convention on the Execution of Foreign Arbitral Awards 1927
Geneva Protocol	Geneva Protocol on Arbitration Clauses 1924
Hague Judgments Convention	Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters 2019
IAA	The Arbitration and Conciliation Act (including all amendments to date)
IAA 1996	The Arbitration and Conciliation Act, 1996 (India), without amendments
IAA(Am.) 2015	The Arbitration and Conciliation (Amendment) Act, 2015 (India)
IAO 2020	The Arbitration and Conciliation (Amendment) Ordinance, 2020
IBA	International Bar Association
ICC	International Chamber of Commerce
ICC Arbitration Rules 2021	Rules of Arbitration of the International Chamber of Commerce. In force as from 1 January 2021
ILA	International Law Association
ITO	International Trade Organization
LCIA Rules 2020	The London Court of International Arbitration, Arbitration Rules. In force as from 1 October 2020
NCDRC	National Consumer Disputes Redressal Commission
New York Convention	The Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958
NIP	New Industrial Policy
No.	Number
OHADA	Organisation for the Harmonization of Business Law in Africa
ONGC	Oil & Natural Gas Corporation Ltd
PCA	Prevention of Corruption Act (India) 1988 (as amended in 2018)
Sec.	Section
TFEU	Treaty on the Functioning of the European Union
TRIPS Agreement	Agreement on Trade-Related Aspects of Intellectual Property Rights 1994
UAE	United Arab Emirates
UDHR	Universal Declaration of Human Rights 1948
UK	United Kingdom of Great Britain and Northern Ireland
UK Arbitration Act (1996)	Arbitration Law of the United Kingdom (excluding Scotland)
UN	United Nations
UNCITRAL Model Law/Model Law	UNCITRAL Model Law on International Commercial Arbitration, 1985
UNCTAD	United Nations Conference on Trade and Development
United States (U.S.)	The United States of America
WTO law	Law of the World Trade Organisation
ZPO	Zivilprozessordnung (German Code of Civil Procedure)

Abstract

The Indian Arbitration and Conciliation Act in its current form (IAA) largely incorporates¹ the UNCITRAL Model Law on International Commercial Arbitration.² India is also party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.³ Given its roots, it is clear that the IAA was meant to be an arbitration-friendly legislation. This means that under Indian law there should, at least in theory, be a general leaning towards the enforcement of arbitral awards. The public policy exception is a notable exception to the general rule that foreign awards should be enforced. Just like the international framework on which it is based, the IAA in section 48 also provides for the public policy exception as a ground for refusing to enforce foreign arbitral awards. This exception is, however, meant to be construed narrowly.

The narrow interpretation of the exception has sometimes been disregarded in the Indian context. In the past, there have been situations where Indian courts have struggled to find the right balance between respect for party autonomy and their desire to ensure the necessary safeguards which guarantee a fair trial. In some early rulings, Indian courts interpreted the law to increase their powers of intervention and to refuse enforcement of awards. In deciding to intervene the courts largely relied on the public policy exception. The approach of the Indian judiciary towards the public policy exception has not always been consistent or coherent. In the span of a decade, Indian courts have sought to reverse their approach with regards to the public policy exception, significantly and sometimes overly restricting its scope. As will be shown in this thesis, while there is a general need for restricting the use of public policy, overly doing so could have the untoward consequence of undermining the use of the exception itself.

The Law Commission, which the government tasked with solving the problems caused by judicial intervention, suggested that the scope of the public policy exception needed to be statutorily defined. Based on its recommendations, the government defined the scope of public policy in the IAA. Such an approach was novel, as few other countries, notably UAE, Sweden, New Zealand and Australia, have defined the scope of public policy in their arbitration statutes. This thesis will evaluate the wisdom of statutorily defining public policy. Although it has been argued that defining the exception helps restrict the courts from giving it a broad meaning, the definition itself consists of such broad terms that it risks failing its purpose.

This research traces the evolution of arbitration law in India by analyzing how the courts and legislature treated the public policy exception. The thesis seeks to compare how the Indian approach differs from that of select common and civil law jurisdictions. The aim of this thesis is to answer the broader question as to whether the public policy exception needs to be defined. In case an affirmative answer can be given to the need for a definition, the thesis addresses two other questions: which authority, i.e., the legislature or judiciary, is competent for determining the scope of the public policy exception? And what are the ingredients of any such statutory definition?

1 Fali S. Nariman, ‘India and International Arbitration’ (2009) 41 George Washington International Law Review 367, 371.

2 Vereinte Nationen (ed), UNCITRAL Model Law on International Commercial Arbitration: 1985; with Amendments as Adopted in 2006 (United Nations 2008).

3 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (330 UNTS 38).

Delimiting the public policy exception – an introductory note

The finality of awards is one of the key benefits of arbitration.⁴ By doing away with the appeal procedure that is inherent to the court system, arbitration ensures that disputes are resolved expeditiously and helps reduce expenses and uncertainty for the parties involved. A keystone to the edifice of finality is the prohibition of excessive judicial intervention, especially by review of the arbitral awards on merits.⁵ However, there are sometimes situations where this finality must be sacrificed to protect the most basic principles of a national legal system. The public policy exception has been formulated for this purpose.

The discourse about the use of the public policy exception gives rise to some interesting conflicts and difficulties. The need for protecting the parties right to choose a private settlement of their disputes is enshrined in the principle of party autonomy.⁶ According to this principle, parties are free to choose the forum in which they wish to settle their disputes.⁷ It enables parties to choose arbitration by ‘opting out national courts systems’.⁸ Arbitration itself is derived from the Latin term arbitrium, which means ‘free will’.⁹ By extension, courts are generally required to respect parties desire to choose arbitration and abstain from unnecessarily intervening in the arbitral process. Moreover, Article III of the New York Convention, to which India and most major jurisdictions are signatories, requires courts to recognise and enforce arbitral awards regardless of where they are made.

Even party autonomy has its limitations.¹⁰ As astutely pointed out by Jan Paulsson, although parties to a contract desire to have freedom – they also want to be protected by law.¹¹ The public policy exception, which embodies the fundamental requirements of justice and the legal system, acts as a constraint to unrestrained freedom. Through the use of the exception, the desire of the parties to privately resolve their disputes comes in direct conflict with the court’s duty of ensuring fair and equitable dispute resolution.¹²

National courts need to find a balance between the need for finality of arbitral awards and for a fair trial that respects essential procedural safeguards. While reducing judicial oversight on awards encourages finality, judicial supervision in limited measure can help ensure fairness¹³ and protection of essential public interest, such as free competition. This is especially true in cases where courts are dissatisfied and feel an arbitral award breaches the fundamental principles of the legal system. In such circumstances, the public policy exception enables domestic courts to intervene in foreign arbitral awards and consequently endanger its finality. As observed by Paulsson, as a general rule, parties can go about contracting as they please, so long as they do not violate public policy or mandatory law.¹⁴

In India and elsewhere, the public policy exception has been the subject of immense controversy because of the way it has been relied upon to resist the enforcement of arbitral awards. Public policy is unpredictable, and some authors have argued that it contrasts with the ‘logic’ and ‘structure of legal reasoning’.¹⁵ Because of the discretion it gives domestic courts to disregard foreign arbitral awards, the exception has been considered as the single biggest threat to arbitration as a means of dispute settlement.¹⁶ Such descriptions, however, do not take into consideration the essential purposes that the exception serves.

The public policy exception enables domestic courts to set aside or refuse enforcement of arbitral awards in certain special but limited circumstances. Judicial intervention should only be on narrow grounds, and judges are obliged to exercise restraint when it comes to reviewing the arbitrators’ decisions substantively.¹⁷ The public policy exception is of utmost importance insofar as it acts as one of the only checks to absolute party autonomy in choosing to resolve disputes before a private forum and in ensuring fairness in the arbitration process. However, its scope had never been concretized. This is because public policy per se has long been thought of as a concept which is ‘vague’ and of ‘uncertain import’.¹⁸ Indian lawmakers have, however, decided to diverge from this view.

Although this thesis will primarily focus on the public policy exception in the context of India, the use of the exception for refusing the enforcement of arbitral awards is not unique to India.¹⁹ Indeed, public policy is provided for as an exception to enforcement of arbitral awards in most international arbitration law instruments and national arbitration statutes.²⁰ It is referred to as ‘ordre public’ in civil law countries, where it is given a wider scope.²¹

India is one of the few countries to have statutorily set out a definition for the scope of the public policy exception. In setting out the scope of the definition, it could be argued that the Indian legislature has attempted to succeed where most other jurisdictions have failed.²² The rationale behind this move can be deciphered from the parliamentary debates.²³ Previously the inconsistent use of this exception by courts meant that parties would avoid seating their arbitrations in India and would be wary of enforcing awards in India. It was thought that defining the public policy exception would change the approach of the courts and any associated negative perceptions in the business community. This approach, however, needs to be looked at with a fair bit of caution. There must, after all, be valid reasons why even the most ‘arbitration friendly’ countries do not statutorily define the scope of public policy.

The decision to define the scope of the public policy exception was taken based on anxiety about a broad judicial interpretation. In the past, Indian courts have inconsistently and sometimes expansively interpreted the public policy exception causing much uncertainty to parties as to whether they would be able to enforce their awards.²⁴ Such anxiety dissuaded foreign parties from choosing India as a seat of arbitration.²⁵ It also meant that foreign parties were hesitant to engage in business transactions with Indian enterprises, as there would be no adequate forum for resolving any future disputes.²⁶

The Indian legislature sought to allay the fear of investors by seeking recommendations from the executive body responsible for legal reform, i.e., the Law Commission of India, as to what changes could be made to reduce judicial intervention. The Law Commission, in its 246th report, concluded that statutorily restricting the scope of the public policy exception would remove the flexibility which had enabled inconsistent judicial interpretations in the past.²⁷ These recommendations set the foundation for the legislature to define the scope of the exception in the Arbitration and Conciliation Amendment Act 2015 (IAA(Am.) 2015).

The current statutory definition of the public policy exception under Indian law gives rise to certain difficulties. It involves the use of broad and relatively vague terms such as ‘morality and justice’ and ‘fundamental policy of Indian law’, which have been left to the courts to interpret.²⁸ While this may in some ways be advantageous insofar as the courts are able to apply the public policy exception based on evolving legal standards, it also gives rise to certain challenges. The vague definition could enable judges to stretch public policy according to their wishes, defeating the very purpose of the statutory definition. The intended limitation of the exception could become elusive.

In the past, the courts have endeavored to define terms such as ‘morality and justice’ and ‘fundamental policy of Indian law’ with limited success.²⁹ In their attempt to turn India into an arbitration-friendly jurisdiction, the courts have sometimes defined the terms very restrictively, potentially exceeding the intention of the legislature. On the other hand, the courts have sometimes taken the opposite approach by giving the exception a more open-ended interpretation. This lack of coherence by the judiciary causes uncertainty to parties and raises doubts as to whether the statutory definition of public policy is the right approach.

Details

Pages: 330
Year: 2023
ISBN (PDF): 9783631908822
ISBN (ePUB): 9783631908839
ISBN (Softcover): 9783631908778
DOI: 10.3726/b21193
Language: English
Publication date: 2023 (September)
Keywords: Arbitral awards Enforcement party autonomy judicial intervention Ordre public
Published: Berlin, Bern, Bruxelles, New York, Oxford, Warszawa, Wien, 2023. 330 pp.

Biographical notes

Nihal Bernard Dsouza (Author)

Nihal Dsouza is enrolled as an advocate in India, he is currently employed as a legal counsel at a international cruise shipping company. In the past he has been active in giving lectures to undergraduate law students at University of Goettingen and University of Bonn. He worked as a Research Fellow (wissenschaftliche Mitarbeiter) at Bonn University for over six years, during which time he researched extensively in the field of international arbitration and had the opportunity to coach the Vis Moot Court Team of Bonn University. Although his doctoral research was primarily at Bonn University, his participation as an external member of the International Max Planck Research School (IMPRS) on Successful Dispute Resolution in International Law helped facilitate his reasearch.

Should the public policy exception be statutorily defined? The example of Indian arbitration law

Summary

Excerpt

Table Of Contents

List of abbreviations

Abstract

Delimiting the public policy exception – an introductory note

Details

Biographical notes

Key Subject Areas