Judicial Intervention in The Arbitral Award

JUDICIAL INTERFERENCE IN
ARBITRATION
VIVASVAN GAUTAM
902
C
LLB 3 YEARS COURSE
JUDICIAL INTERFERENCE
IN ARBITRATION
Arbitration Act 1940
The first major consolidated law governing arbitration in
India was the Arbitration Act 1940, which was based on
the English and Welsh Arbitration Act 1934. Section 30
of the 1940 act provided for the setting aside of awards.
(1) More often than not, awards were set aside and
proceedings conducted under the act were subject to
severe criticism. The Supreme Court was among the
critics of the act, as seen in judgments such as Guru Nanak
Foundation v Rattan Singh1 in which it observed that:
the way in which the proceedings under the Act are conducted and without
exception challenged in Courts, has made Lawyers laugh and legal
philosophers weep… Informal Forum chosen by the parties for expeditious
disposal of their disputes has by the decisions of the Court been clothed with
'legalese' of unforeseeable complexity.
1
(1981 4 SCC 634)
Arbitration and Conciliation Act 1996
In 1992 India opened its economy, but it was apparent

that it would never be a destination for developed nations
unless it implemented a proper dispute mechanism.
The legislature thus analysed the discrepancies in India's
arbitration law and, recognising the importance of
modernising its arbitration system, repealed previous
statutes and enacted the Arbitration and Conciliation Act
1996, which came into effect on 25 January 1996. The act
sought to address complaints by foreign investors that
despite its wealth of resources, the prospect of dispute
settlement in India was too daunting. The model laws and
rules were already being widely used internationally; thus,
India joined the international consensus on their use.
The 1996 act was based on the United Nations
Commission on International Trade Law Model Law on
arbitration. One of the primary objectives of the 1996 act
was to minimise court intervention in arbitral proceedings
and awards. P.Anand Gajapathi Raju v PVG Raju 2
2
(2000) 4 SCC 539 at p541
Thus, Section 5 of the act provides that no judicial
authority may intervene in arbitration except as provided
for in the act.3
3
Extent of judicial intervention: "Notwithstanding anything contained in
any other law for the time being in force, in matters governed by this
Part, no judicial authority shall intervene except so provided in this
Part".
Section 34 (prior to 2015 amendment)
Section 34 of the 1996 act sets out the procedure and

grounds for applying to set aside an arbitral award.
Section 34(2)(a) (Prior to the 2015 amendment) provides
certain grounds on which the courts can set aside an
arbitral award, including that:
 a party was under some incapacity;

 the arbitration agreement is not valid in accordance
with the law to which it was subjected by the
parties to the agreement;
 proper notice of the arbitrator's appointment or the
proceedings was not given;
 the dispute did not fall within the terms of those
which could be submitted to arbitration or the
award contains a decision beyond the scope of the
arbitration; or
 the tribunal was not composed in accordance with
the parties' agreement.
Under Section 34(2)(b) of the 1996 act,(Prior to the 2015
amendment) the courts may also set aside an award if:
 the subject matter of the dispute cannot be settled

by means of arbitration; or
 the arbitral award conflicts with the public policy
of India.
The grounds in Section 34(2)(a) are precise, so the courts

cannot widen their scope of interference with arbitral
awards. The only open-ended expression which has left
some ambiguity is Section 34(2)(b)'s 'public policy of
India'. No other ground has been subject to such debate or
the subject of so much judicial intervention.
Public policy – unruly horse
What constitutes being against public policy and thus

grounds to set aside an award has raised questions for
jurists. The term is not defined in the 1996 act 4 or any
other law and is thus open to judicial scrutiny and various
interpretations.
Defining the concept of public policy5 has thus been an
arduous task, with Justice Burrough observing that it is a
"very unruly horse and once you get astride it you never know where it will
carry you"6
The Indian courts have also dubbed it an 'unruly horse',
thus giving the impression that it can never be defined.7
4
A contract against public policy under Section 23 of the Contract Act
1872
5
In Holman v Johnson, Lord Mansfield stated that the principle of public
policy is ex dolo malo non oritur actio which means No court of law will lend
its aid to a party which acts immorally or illegally
6
Richardson v Mellish [1824] 2 Bligh 229, 242
7
Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705
However, some judges have attempted to give structure
to the concept of public policy with respect to the setting
aside of awards.
In this regard, it is necessary to analyse the Supreme
Court's landmark decisions in Renusagar 8 and Saw Pipes 9
Renusagar
Renusagar was one of the earliest Supreme Court

judgments to consider the concept of public policy. In this
decision, the Supreme Court held that an award which
violates the Foreign Exchange Regulation Act 1973,
being a statute enacted to safeguard national economic
interest, will contravene the public policy of India and the
fundamental policy of Indian law. The Supreme Court
limited the scope of public policy to three grounds:
 the fundamental policy of Indian law;

 the interests of India; and
 Justice or morality.
8
Renusagar Power Co Ltd v General Electric Co (1994) SCC Supl (1)
644.
9
Ibid.
Saw Pipes
Saw Pipes stated that the term 'public policy' should be

understood in a wider context and includes the concept of
patent illegality. 'Patent illegality', as explained in this
case, means any error of law on the face of an award. The
judgment also held that an award can be set aside if it is
so unfair and unreasonable that it shocks the conscience
of the court.
On the one hand, the law set out by the Supreme Court in
Saw Pipes led many other courts to include any error of
law within the scope of Section 34, including the
subsequent decisions of the Supreme Court, thus opening
the floodgates.10
On the other hand, some of the subsequent benches
acknowledged the criticism of Saw Pipes but also held
10
ONGC Ltd v Garware Shipping Corporation Ltd, 2007 (13) SCC 434
that they were bound to observe it under the principle of
stare decisis.11
In McDermott International Inc v Burn Standard Co

Ltd 12
the court expressly noted that until a larger bench
reconsidered the correctness of Saw Pipes, it was
bound by the decision.
In Saw Pipes, the Supreme Court widened the scope of

public policy.
As such, the judgment was considered a step backwards
as it allowed for greater judicial interference in arbitral
awards and frustrated one of the objectives of the 1996 act
(i.e., discouraging interference in arbitral awards).
At this stage, Indian law with regard to setting aside an
award on the basis of public policy was indeed proving to
be an unruly horse.
Centrotrade Minerals & Metals Inc v Hindusthan Copper Limited

11
(2006) (2) ARBLR 547

12
(2006) 11 SCC.181
Run-up to 2015 amendment
246th Law Commission report
To deal with the jurisdictional expansion of the concept of

public policy, in August 2014 the Law Commission
provided a narrow interpretation of the term.
It suggested substantial amendments to Section 34 of the
1996 act in an attempt to ensure that the Renusagar
position applied to all foreign awards and all awards
passed in international commercial arbitration.
With respect to domestic arbitration, the Law
Commission recommended that the patent illegality test
be retained but construed more narrowly than under the
Saw Pipes regime.13
The Law Commission's 246th report suggested
amendments to the 1996 act with the aim of ensuring that
terms such as 'fundamental policy of Indian law' and
'[conflict with] most basic notions of morality or justice'
were construed narrowly.
Latest Case Laws of Supreme Court related to

Section 34
1. Whether the award was “patently illegal”?
Patel Engineering Ltd. v. NEEPCO [Judgment dated

22.05.2020] 14
Relying on the decision in Associated Builders and

Ssangyong Engineering, the Supreme Court upheld the
judgment passed by the High Court that an arbitral award
can be set aside under Section 34 if it is patently illegal or
13
Supplementary Report to Report 246, government of India.
14
Special Leave Petition (C) No. 3484-85 of 2020
perverse. The Court observed that the ground of patent
illegality is available for setting aside a domestic award, if
the decision of the arbitrator is found to be perverse, or,
so irrational that no reasonable person would have arrived
at the same; or, the construction of the contract is such
that no fair or reasonable person would take; or, that the
view of the arbitrator is not even a possible view.
2. Whether it is permissible for a party to rely on the

findings of an award to argue that another Award
ought to be set aside?
Gammon India Ltd. & Anr v. NHAI [Judgment dated

23.06.2020]15
Relying on Vijay Karia’s case the Court held that in

proceedings u/s 34 of the Act, it would be inappropriate to
hold that a finding in a subsequent award would render
the previous award illegal or contrary to law. The Court
held that an award would have to be tested as on the date
when it was pronounced, on its own merits, and not on the
15
New No. O.M.P. (COMM)392/2020) & I.A.
basis of subsequent findings which may have been
rendered by a later Arbitral Tribunal.
3. Whether a petitioner is required to file the arbitral

award along with the Section 34 petition?
Union Of India vs Bharat Biotech International Ltd

[Judgment dated 24.02.2020]16
The Court held that filing a copy of the award would be a

sine qua non in every petition challenging the award.
16
Delhi HC O.M.P. (COMM) 399/2019 & IA No.13333/2019 (stay)
4. Whether the interpretation of the terms of the
contract by the Arbitral Tribunal is erroneous and
against the public policy of India?
South East Asia Marine Engineering and

Constructions Ltd. v. Oil India Limited [Judgment
dated 11.05.2020]17
The Supreme Court held that the interpretation of Clause

23 of the contract by the Arbitral Tribunal, to provide a
wide interpretation cannot be accepted, as the thumb rule
of interpretation is that the document forming a written
contract should be read as a whole and as far as possible,
as mutually explanatory. Since the evidence on record
17
SC CIVIL APPEAL NO. 673 OF 2012
does not suggest that the parties had agreed to a broad
interpretation to the clause in question, interpretation of
the clause, as suggested by the Arbitral Tribunal was
perverse.
5. Whether an arbitrator can rely on internal

guidelines/circulars to interpret the contract?
Mohan Steels Limited v. Steel Authority of India

[Judgment dated 04.03.2020]18
The Court held that the arbitrator committed a patent

illegality by placing reliance on the circulars which were
never a part of the tender conditions or the contract.
Further, it was held that since the circulars were beyond
the terms of the contract and were not within the
18
Delhi HC O.M.P. 488/2015
knowledge of the parties, it cannot be relied upon for
interpreting the clauses of the contract.
6. Whether a jurisdictional objection can be taken for

the first time in proceedings under Section 34 of the
Act?
Salar Jung Museum & Anr v. Design Team

Consultants Pvt Ltd [Judgment dated 21.05.2020]19
The Court held that where the jurisdictional objection is

capable of waiver by the affected party, the failure to raise
it before the arbitrator signifies consent to the arbitrator’s
jurisdiction. It was held that a party after participating in
the proceedings without any objection cannot then
challenge the validity of the proceedings u/s 34
19
Delhi HC O.M.P.(COMM) 44/2017

Judicial Intervention in The Arbitral Award

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JUDICIAL INTERFERENCE IN

In 1992 India opened its economy, but it was apparent

Section 34 of the 1996 act sets out the procedure and

 a party was under some incapacity;

 the subject matter of the dispute cannot be settled

The grounds in Section 34(2)(a) are precise, so the courts

What constitutes being against public policy and thus

Renusagar was one of the earliest Supreme Court

 the fundamental policy of Indian law;

Saw Pipes stated that the term 'public policy' should be

In McDermott International Inc v Burn Standard Co

In Saw Pipes, the Supreme Court widened the scope of

Centrotrade Minerals & Metals Inc v Hindusthan Copper Limited

(2006) (2) ARBLR 547

246th Law Commission report

To deal with the jurisdictional expansion of the concept of

Latest Case Laws of Supreme Court related to

1. Whether the award was “patently illegal”?

Patel Engineering Ltd. v. NEEPCO [Judgment dated

Relying on the decision in Associated Builders and

2. Whether it is permissible for a party to rely on the

Gammon India Ltd. & Anr v. NHAI [Judgment dated

Relying on Vijay Karia’s case the Court held that in

3. Whether a petitioner is required to file the arbitral

Union Of India vs Bharat Biotech International Ltd

The Court held that filing a copy of the award would be a

South East Asia Marine Engineering and

The Supreme Court held that the interpretation of Clause

5. Whether an arbitrator can rely on internal

Mohan Steels Limited v. Steel Authority of India

The Court held that the arbitrator committed a patent

6. Whether a jurisdictional objection can be taken for

Salar Jung Museum & Anr v. Design Team

The Court held that where the jurisdictional objection is

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