PUBLIC POLICY

Public Policy in Arbitration and Conciliation Act

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Arbitration which is necessarily a more private settlement and is based on the autonomy of the parties. There are certain limitations involved in the autonomy of the parties and one such ground is the Public policy. As mentioned in the New York Convention, one of the two grounds for setting aside an arbitral tribunal award is the public policy. The definition and the meaning of public policy vary from country to country and its interpretation varies upon the laws dependent on the country.  

Public policy is the action taken by the government for addressing an issue that affects the public at large. It is the result of governmental regulations, laws that affect a group of people. There can be many issues addressed by public policy.

According to the Black’s Law Dictionary, Public policy is defined as “the collective rules, principles, or approaches to a problem that affects the commonwealth of the public or affect the general good.”

PUBLIC POLICY ON ENFORCEMENT OF ARBITRAL AWARDS IN INDIA 

Inconsistency with the UNCTRAL Model Law, the Indian Arbitration Act was introduced so that there would minimal interference of the judiciary in the process of Arbitration. Regardless of this act, Indian courts have a tendency for interfering with the International Arbitration. The most intervention by the Indian courts into the process of arbitration is during the enforcement stage on the grounds of public policy which is being interpreted and being debated even today. 

The Indian Supreme Court case of Renusagar v General electric has been the point where the Indian court intervened on the grounds of public policy. In this case, the court clarified the following points and these points must be followed while enforcing the arbitral awards. The enforcement of the foreign award would be refused if the enforcement of this award is contravening with; 

  1. The fundamental policy of the Indian law 
  2. The interests of India 
  3. Justice or morality. 

This decision of the court reaffirmed that the national courts could only interfere with the arbitral awards on the grounds of public policy and the supreme court also held that the courts cannot take the defence of public policy for assessing the merits of an arbitral award

However, a few years later, the decision of Renusagar case showed a clear contrast to the case of Oil & Natural Gas Corp v Saw pipes, the Indian supreme court took a different approach and reinterpreted the concept of public policy differently. The case of saw pipes is because of the approach of a dispute about the payment of monetary damages under a contract of supply. The arbitration tribunal gave the award which held that ONGC was not liable to receive any monetary damages as it was unable to prove any loss on the late result of the supply made by the Saw pipes. ONGC applied for setting aside this award to the Indian courts on the grounds of public policy. In that case, the court held that the ground for public policy should be interpreted in a wider meaning in comparison to the Renusagar case because the concept of the public policy included public good and public interest. Based on that, the supreme court set aside the award on the grounds of public policy on the grounds that the tribunal had made a mistake in its decision when it decided that ONGC had to prove the loss in order to claim monetary damages. Supreme court held that the award which violated the Law cannot be said to be within the ambit of public policy and public interest and also held that in addition to the three grounds that were laid down and established in the case of Renusagar, a fourth additional ground must also be added which held that the public policy must be set aside if it is ‘ patently illegal”. Patently illegal as interpreted by the courts in the case as if the award was contradicting the substantive law, the Indian Arbitration Act, and the terms of the contract. This also meant that any error of law made by the arbitrators would also be included. 

The case of saw pipes was widely distinguished and criticized by various observers. It has been widely contemplated due to the wide interpretation of the term public policy defence. The Indian Arbitration Act does not provide for setting aside the arbitral tribunal on the ground of mistake or error of law and also the arbitrator’s decision cannot be rechecked on the ground of error of law as it was violative of the basic principles of arbitration. By clearly defining that public policy also includes the error of law by the arbitral tribunal, the case of saw pipes went ahead of the Indian Arbitration Act and created an entirely new ground for setting aside the award of the arbitral tribunal. By including the errors of law within the scope and application of public policy, the Indian courts have created a conduit for reviewing and rechecking the merits of the case and the arbitrator’s decision which is clearly in contravention with the practice of arbitration and impairs the autonomy of the arbitral tribunals and the arbitrator’s decision and the willingness to be bound by such a decision. These are clearly violative of the fundamental policy of Arbitration. 

The case of saw pipes goes not only ahead of including another head under the public policy but it did not explicitly also state that this would apply to the foreign awards. This becomes rather vague to the International Arbitral communities and the ratio in case of Bhatia International V bulk Trading , the supreme court held that provisions of part 1 of the Indian Arbitration Act would also apply to the foreign awards under part 2 unless specifically stated otherwise by the parties to the contract. This meant the parties could use this additional head of public policy for withholding the enforcement of the foreign arbitral awards. 

Again in the year 2008, the Indian Supreme court, clarified that the decision in the Bhatia case extends to also setting aside the foreign arbitral award on the ground of public policy as seen in the Saw pipes regime which also means that a person seeking the enforcement of the foreign awards should not just follow section 48 of the act but also mean the new application for the act under section 34 of the act so the enforcement of the award should not only be followed under the ground of the New York Convention Act but also under the expanded definition of public policy under the act.

Cases like saw pipes portray the Indian court’s view on the issue of public policy. The Indian courts have misconstrued the provisions of the Indian Arbitration Act in a way that is contrary to the underlying ideas of the provisions in the New York Convention Act. These decisions have of the Indian courts have perplexed the international communities involved with companies in India who generally would like to settle disputes without any court interference rather than the lengthy procedure of the litigation and civil matters in India . 

In a more recent judgment in the year 2010 in the case of Western Maharashtra Development Corporation Ltd. V Bajaj auto Ltdwhich leaned onto the decision of saw pipes case, set aside the arbitral award on the ground of the award being contrary to substantive provisions of law which in meaning is patently illegal. The high court of Bombay analyzed that the arbitrator did not accurately use the provisions of the Indian company Law and as a result the award that was passed in effect contradicting the provisions of the law and is patently illegal. This case brought into view another example of how the Indian courts interfered with the process and enforcement of arbitration and the enforcement of the arbitral awards. 

Globalisation and Public policy

 Public policy is not an unchanging concept, it changes with time, from the country and it is often ambiguous. The concept of public policy consists of three separate yet entwined notions which include Public interest, public morality, and public security. 

Globalisation has changed the economies of many countries and increased the trade relations between many countries, it has also opened the door to injustice and exploitation of the country’s resources. The various freedoms provided with regard to globalisation has also further widened the scope for the misutilization of the resources. The framework of commercial arbitration is to impose some restrictions and regulations on the international and commercial relationships created between the two countries due to trade and commerce. 

 The defence of public policy becomes rather significant and effective as they help in imposing these regulations and restrictions in the usage of resources and preventing the ill effects of the public policy. With the creation of the mandatory public policy in the enforcement of arbitral awards and as an arbitrable subject matter, the role of globalization also contributes to the dynamic nature of the public policy by expanding the scope of public policy. The interpretation of the public policy is not the same as it was 100 years ago, it changes with time and the factors that contribute to the formation of the country’s economy. The interpretation of public policy not only varies with time but also varies from country to country. The principles of public policy vary from every country. A developed and a developing country’s meaning of public policy would differ. Some of the principles would be very effective in various principles of public policy of another country would be very distinct and rigid based on the country’s laws. 

The International Law governing and regulating public policy is the New York convention, 1958. Article 3 of the convention states that every contracting state shall recognize and enforce the award with the rules and the procedure of the country where the award is passed which includes the procedural law of the country. The New York Convention also further states that these awards can also not be enforced if the enforcement of the award is contrary to the public policy of that country.  

The International public policy as mentioned earlier in the Geneva Convention and the New York convention is rather very distinct from the Transnational public policy. The transnational public policy extends to outside the boundaries of a country and territory. The transnational public policy consists of principles that may represent the most common and accepted definition and the interpretation of the term public policy, this interpretation is universal and can be applied to the enforcement of the arbitral awards in every country. This transnational public policy may consist of the basic rules of justice that are universal and the principles of morality by the civilized nations. 

This means that the domestic laws should be aligned with the emerging Transnational Public Policy which would include various heads for determination and interpretation according to the universal acceptance and definition of the term public policy. This does not cause any confusion to the international business communities and the International Commercial Arbitration as the domestic laws are aligned within the definition of the transnational Public Policy. This implementation may seem very easy in Developed countries but in developing countries like India. It is rather difficult for the implementation of this policy because the economic conditions of the state are not the same and unstable and this changes the basic need of the people. Therefore, aligning the domestic laws of India or any other developing country for that matter would be rather complex and ineffective. 

The federal courts have the most limited definition of the term public policy. The reason for this restricted definition of public policy is because of the state’s basic understanding of the aspects of morality and justice. The basic notion of understanding of the term public policy varies from state to state and has developed independently from each other. The trend as observed in the United States towards the public policy is not recognized as the defence and for protecting the integrity of the country rather it is considered as a way in which a party can escape a binding arbitration due to which the interpretation of the term public policy is very narrow. The defence is also not effective due to the ambiguous and the unspecified limitations and restrictions that are imposed on a party regarding morality and justice. As a result of the various realistic and pragmatic approaches that were not taken for the interpretation of the term public policy, it is difficult for the arbitrator’s, courts and attorneys to explore the limitations imposed on public policy. 

The reason why the parties use arbitration rather than the courts is to avoid the long and lengthy process of litigation and the civil system but presently this narrow, strict, and ambiguous usage of public policy in the International Arbitration would contribute much lesser to the reason why it was established. The courts have given a very strict definition and interpretation of the term public policy to avoid enforcement. The violation of public policy in one country may not be illegality in another country because of the independent development and evolution of public policy in different states. 

A very good example of this would be the interpretation of the term public policy in the countries of the US and Germany. The US usually has a very strict and narrow usage of public policy and Germany takes a very pragmatic and broader definition of the term Public policy and it has very progressively used the application of this term in various cases. Public policy in the application in Germany is if it offends the morals and the objectives of the German rules and Laws. The defence of public policy in Germany envisages the flexible usage of the term public policy and a sense of certainty whilst applying them to various cases. Therefore, even if a liberal approach is taken in the interpretation of the public policy, it can still prove to be very effective. 

The defence of public policy is often in controversial books of many scholars due to the fact of its interpretation and how it is often being used in cases across the world. The application of this term public policy in the cases or the defence taken by the parties is increasingly to avoid the enforcement of the arbitral awards rather than the understanding of the importance of the term for the general well being of the public. Therefore, various countries have taken different methods in the interpretation of this term to prevent this trend from misusing the defence of the public policy. Some countries have taken a very rigid and strict approach and some other countries have taken a very pragmatic and broader approach. 

The problem here arises in International commercial arbitration as to how the arbitral tribunals view the definition of the public policy when there are companies in different countries or when there exists transnational application of the Laws. The process of using this term becomes rather complex and can be misconstrued by the courts easily hence there exists a need to have a very uniform and pragmatic approach that should be universally accepted by all the countries. Though the New York Convention act mentions the usage of the term public policy as the defence for enforcement of the arbitral awards. The interpretation of this term is dependent on the laws of the country hence the currently existing law with respect to the International commercial arbitration also uses the interpretation of this term according to the laws of the country.

There arises a need for a very pragmatic, uniform approach for the definition of the term public policy as it is the need of the hour due to the application of this term in many cases based on the interpretation. Courts that want to promote International Commercial Arbitration should be aware of the fact the interpretation used by them for the definition and scope of usage of public policy may prove to be a deterrent effect for the usage of arbitration. 

Therefore, there definitely arises a need for the analysis of public policy by the courts and the legislature for the different states. Germany’s broad view of the interpretation can also be applied instead of strictly using it like in the US. If the public policy is properly interpreted and emphasized according to the universally accepted definitions of public policy. More international initiatives should be taken for defining and restricting the parameters of public policy and the important aspects that must be considered to take or use the defence of public policy .

The courts should interpret the idea and notion of public policy in a way that guarantees fairness and retain integrity in any international commercial arbitration i.e. the meaning of public policy should be constructively interpreted taking in to view the current meaning and definition of public policy so that i can be reflected upon in future cases. Presently, there needs to be a clear and analytical approach taken to consider and interpret the scope and usage of the public policy by the judiciary and the legislature of many countries. Hence it becomes important for even the legislature and judiciary to involve in the process of defining public policy by considering and keeping all factors in mind.

PUBLIC POLICY AND PUBLIC GOODS

Public goods are those goods that are non-excludable and non-rival. These goods cannot be excluded from the usage of the general public and there are no rivals in the consumption and the usage of these goods and there is no payment involved in the usage and consumption of these goods. The negative externalities linked with these goods arise with respect to the over utilisation of these goods as there is no limit to the user since they are available to each person and there is no cost involved in the usage of these goods. This is called the free-rider problem which arises due to the over utilisation and the mis utilisation of the goods. 

The free-rider problem arises because there is no cost involved in the utilisation of these goods and therefore causing over utilisation of the goods. The most common examples of the public goods include air, water, the defence system, public parks and public spaces. These are at disposal to every person but sometimes the usage and consumption of these goods can be subject to some restrictions. These restrictions are usually created by the government of the country in which these public goods are present . The governmental regulation and certain restrictions placed on the consumption to prevent the misuse of the public goods

This interrelation of the government regulating the usage of the public good is where the question of the public policy comes into the picture. The public policy is imposed for the general welfare of the public. Public policy is defined within the ambit of morality. The restriction of these public goods imposed by the government is one of the methods in which the government regulates the usage of these public goods. Like previously mentioned, the public policy includes public order and public securityand the general rules of morality. 

The concept of Public policy has a very wide scope and it is one of the tools that are in the present in the hands of the government to regulate the usage of public goods. For example, free air is available to all and everyone has an uninterrupted usage of it but the government has the right to impose restrictions of the usage of this air i.e. paying some fine for the pollution caused in the air, using cleaner fuels that are easily combustible and non-polluting in nature. All these laws which are imposed in the form of restrictions are made on the grounds of public policy in the general interest of public health. 

Globalisation has impacted the economy in different ways and imposed freedoms that provide for freedom of trade and commerce between different countries and due to these freedoms, that is given to the country with respect to the trade barriers, there seems to be more exploitation of the resources present within the country. The resources would mean the natural resources within the country. The role of Public policy or rather the defence of public policy in the International Commercial Arbitration is very necessary as it has the ability to place some limitations on the globalisation and the freedoms of trade and commerce by facilitating trade in a way so that the parties do not cross the fundamental limits of public policy and retain the public order. 

Due to globalisation and the defence of public policy in the enforcement of arbitral awards, it imposes a restrictive rule and places general norms for promoting trade keeping in mind the national and local interests of the state. The subject matter that can be arbitrarily increased by using the defence of the public policy, therefore the subject matter of the arbitration oversteps and may include new issues like environmental law, forest act etc. 

The subject matter of the arbitration might include a lot of substance in the general interest of the public. The general interest of the public could include various lists of items that affect the national interest of the country at large.  Public policy is one of the tools that can effectively place a check on the usage of the public goods in the country in a way that it does not violate the fundamental interests of the public at large. 

A very good observation of this would be the increasing number of the disputes between the states regarding environmental issues are being taken over by the International Arbitration. The Lake Lanoux casea dispute concerning the construction of a hydroelectricity project on a river between France and Spain. Another good example of is the Southern Bluefin Tunacase a dispute between Australia, New Zealand and Japan regarding a fishing programme initiated by the Japan which could have a great impact on the availability of the Bluefin Tuna fishes that is being fished on a large scale . 

All these disputes involve a question of environmental concern which affects the national interest of the country and therefore the public security and the public welfare of the state. The publicness of the goods determines the effect it has on the large population of the country and this publicness of the goods is determined by the general economic principles of excludability and rivalry. The public policy imposes the restrictions on these public goods so that they do not compromise the general public welfare and the national interest of the country. 

Conclusion 

The research paper primarily focuses on the role of public policy in the enforcement stage of the arbitral awards and how the meaning of public policy has evolved or changed over the course of a few years and the current interpretation of public policy in the Indian scenario. It also further explains the interpretation of the public policy in International Commercial Arbitration and the problems arising with respect to this interpretation of public policy and the ambiguities that are being created by the public policy defence. It also further goes ahead to explain the need to make some suggestive changes in the application and the usage of public policy in the cases of International Commercial Arbitration so that is universally accepted and is more effective. It also explains the interrelation of the public goods with public policy and how this interface has created the functioning of new Laws within Arbitration and how the issues of arbitration can affect the public at large and thereby the national interest of the countries. 


Bhavana-J-Bennett-University

Bhavana J.

Author

Bhavana hails from Bennett University, Delhi and she spends most of her time reading books, writing, music and singing. Her Interest area lies in International Law, Environmental Law, Animal rights and Criminal Law. For any clarifications, feedback, and advice, you can reach her at jbhavanasekhar@gmail.com

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