Supreme Court of India Clarifies the Scope of Public Policy grounds for Challenging a Domestic Arbitration Award under Section 34 of the Arbitration and Conciliation Act

In a decision handed down recently, the Supreme Court of India found that the Delhi High Court had overstepped its powers and wrongly set aside a domestic arbitration award. In the process, the Supreme Court has clarified the scope of the "public policy ground" to set aside awards under Section 34(b)(ii) of the Arbitration and Conciliation Act (Act).

The Supreme Court was critical of the Delhi High Court re-opening an arbitrator's award on merits by reviewing evidence considered by the arbitrator and even considering evidence above and beyond that which the arbitrator had the opportunity to consider. The Supreme Court advocated giving due weight and recognition to a determination by an arbitration – especially on issues of fact. The court recognized that an award could only be set aside on grounds of public policy in very limited circumstances, such as where an award was arbitrary, capricious or such that it would shock the conscience of the court.

Background and decision

In the present case, Associate Builder (Appellant) entered into a construction contract with the Delhi Development Authority (Respondent) for the construction of residential houses. The construction of the houses was severely delayed. The sole arbitrator appointed to hear the dispute found that the Respondent was liable for the delay in the works.

The Respondent made an application to set aside the award. This application was dismissed by a single judge of the Delhi High Court. On appeal the Division Bench of the Delhi High Court overturned the judgment of the single judge and set aside the arbitral award. In setting aside the award, the Division Bench re-examined the factual findings in the award, and also took into consideration facts that had not been referred to in the arbitration. The Appellant appealed to the Supreme Court on the grounds that the Division Bench had incorrectly applied Section 34 of the Arbitration Act by re-examining the factual conclusions of the arbitrator.

The Supreme Court rejected the Division Bench's judgment and enforced the award, stating that:

            "… the Division Bench obviously exceeded its jurisdiction in interfering with a pure finding of fact forgetting that the Arbitrator is the sole Judge of the quantity and quality of evidence before him…

            As has been held above, the expression "justice" when it comes to setting aside an award under the public policy ground can only mean that an award shocks the conscience of the court. It cannot possibly include what the court thinks is unjust on the facts of a case for which it then seeks to substitute its view for the Arbitrator's view and does what it considers to be justice."

In arriving at this decision, the Supreme Court considered the scope of the "public policy" grounds for setting aside awards as provided in Section 34 of the Arbitration Act. The court considered the rulings in its earlier decisions – including ONGC v Saw Pipes[1] – and held that an award would violate "public policy" where it was:

• Contrary to the fundamental policy of Indian law;
• Contrary to the interests of India;
• Contrary to justice and morality; or
• Patently illegal.

The Court noted that while the merits of an arbitral award can be scrutinized when a challenge is made on grounds that an arbitral award has violated "public policy", there were limitations as to when, and the extent to which, such a re-evaluation can be conducted. Against this background, the court considered the scope of each of the above grounds in more detail: :

• Fundamental policy of Indian law: The court recognized that an award can be re-opened on merits for violation of "public policy" if it is against the fundamental policy of India. This would include, for instance, where:
  • Foreign Exchange legislations are violated;
  • Orders of superior courts are disregarded;
  • Binding judgments of superior courts are ignored;
  • The tribunal failsto adopt a judicial approach. A 'judicial approach' is where the tribunal acts "bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration";
  • The Tribunal fails to make its decision in accordance with well accepted principles of natural justice. In this context, the court strongly recommended recording reasons in support of any decision; and
  • The tribunal reaches a decision "which is so perverse or so irrational that no reasonable person would have arrived at the same". The court went on to state that where "an arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or ignores vital evidence in arriving at its decision, such decision would necessarily be perverse."

The court however cautioned that even when considering whether an award is contrary to the fundamental policy of India, due weight must be given to a determination by an arbitrator – especially on questions of fact. In particular, the court recognized that the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award and therefore even an award based on "little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Once it is found that the arbitrators approach is not arbitrary or capricious, then he is the last word on facts."

• Interests of India: The Court gave little guidance as to the interpretation of this term, beyond noting that the term "concerns itself with India as a member of the world community in its relations with foreign powers".
• Justice and morality: In the Supreme Court's view, an award would be set aside on grounds that it is contrary to justice and morality "only when it shocks the conscience of the court." An award would be contrary to justice such as where an arbitrator awards more than the sums clamed for by the party. An award would be contrary to morality where it furthered sexual immorality or where it relates to "such agreements as are not illegal but would not be enforced given the prevailing mores of the day".
• Patent illegality: The court held that an award would be set aside for being patently illegal under three circumstances. Where:
  • the award contravenes the substantive law of India. Even here, the illegality must go to the root of the matter and cannot be of a trivial nature. The court held that this is in effect a restatement of Section 28(1) of the Arbitration Act which requires that where an arbitration is seated in India, the tribunal must decide in accordance with the substantive law in force in India;
  • the award contravenes the Arbitration Act itself; for instance where an arbitrator gives no reasons for an award in contravention of section 31(3) of the Arbitration Act.
  • the tribunal fails to decide the dispute in accordance with the terms of the contract. The court held that this is in effect a restatement of Section 28(3) of the Arbitration Act which again only applies where an arbitration is seated in India. Here again, unless the tribunal interprets a contract in a manner "no fair minded or reasonable person could do", an award cannot be set aside. The mere fact that an arbitrator adopted a different interpretation to that a court would prefer is an insufficient basis to set aside an award.

Comment

The decision of the Supreme Court is welcome as it comprehensively explains and defines the "public policy" grounds to set aside arbitral awards under Section 34 of the Act. The decision is not relevant to arbitrations seated outside India where they arise out of arbitration agreements entered into post BALCO (i.e. arbitration agreements signed on or after 6 September 2012). However, the decision will be potentially relevant to pre-BALCO arbitration agreements, even where the arbitration proceedings are seated outside India (given the duality in Indian jurisprudence we discuss here).

While the decision itself does not expressly set out a distinction between awards arising out of arbitrations seated in India and arbitrations seated outside India, the underlying rationale of the court's decision – particularly in the context of the infamous "patent illegality" ground for setting aside arbitral awards - is helpful.

The court's elaboration of inherently murky grounds for challenge available under the "public policy" heading is helpful – especially since the underlying theme appears to be to give due weight and deference to an award issued by an arbitrator. However, despite an encouraging ruling on the law, the fact that the court entertained arguments on the merits of the dispute – including considering questions as to whether a particular approach adopted by the arbitrator was valid – is less encouraging. While the court ultimately dismissed these arguments, its willingness to consider these issues is likely to encourage disputing parties to bring such challenges – even if merely to delay enforcement of an award.

Supreme Court of India, Associate Builders v Delhi Development Authority, 25 November 2014 [2014 (4) ARBLR 307(SC)]

For further information, please contact Nicholas Peacock, Partner, Donny Surtani, Senior Associate, Vikas Mahendra, Associate,  James MacKinnon, Associate, or your usual Herbert Smith Freehills contact.

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