Public Policy, and Patent Illegality

In one line

Public policy under section 34(2)(b)(ii) is now defined by Explanation 1 in three heads and no more, Explanation 2 forbids a merits review under the fundamental-policy head, and patent illegality is a separate ground under section 34(2A) available only for a purely domestic award.

Explanation 1: the three heads

For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India ONLY IF:

(i) THE MAKING OF THE AWARD WAS INDUCED OR AFFECTED BY FRAUD OR CORRUPTION OR WAS IN VIOLATION OF SECTION 75 OR SECTION 81;

(ii) IT IS IN CONTRAVENTION WITH THE FUNDAMENTAL POLICY OF INDIAN LAW; or

(iii) IT IS IN CONFLICT WITH THE MOST BASIC NOTIONS OF MORALITY OR JUSTICE.

Head (i) reaches into Part III: section 75 requires confidentiality in conciliation and section 81 bars a party from relying in arbitral or judicial proceedings on views, admissions, proposals or willingness to accept a proposal made in a conciliation, so an award built on material that a conciliation should have kept out is against public policy.

Explanation 2: for the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law SHALL NOT ENTAIL A REVIEW ON THE MERITS OF THE DISPUTE.

How the ground got here

The case. Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644.

Facts. Enforcement of a foreign award was resisted on the ground that it was contrary to the public policy of India.

Held. Public policy in the context of a FOREIGN award is to be construed NARROWLY, and enforcement may be refused only where it would be contrary to the FUNDAMENTAL POLICY OF INDIAN LAW, the INTERESTS OF INDIA, or JUSTICE OR MORALITY. A mere contravention of Indian law is not enough.

The case. Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705.

Facts. A domestic award had disallowed liquidated damages, and the challenge was that the arbitrator had misapplied sections 73 and 74 of the Contract Act.

Held. For a DOMESTIC award the Court added a fourth head: an award that is PATENTLY ILLEGAL is against public policy. An award contrary to the substantive provisions of law, or to the provisions of the Act, or to the terms of the contract, was held to be patently illegal, though the illegality had to go to the root of the matter and not be trivial. The decision was widely criticised for reopening the merits of domestic awards, and it is the reason the 2015 amendment was needed.

The case. Oil and Natural Gas Corporation Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263.