Public Policy in International Arbitrations
Public policy can be generally defined as an attempt by the government to address a public issue. According to Lord Truro, “Public policy is that principle of law which holds that no subject can lawfully do, which has a tendency to be injurious to the public or against the public good, which may be termed, as it sometimes has been, the policy of the law or public policy in relation to the administration of the law.” Public policy connotes some matter which concerns public good and public interest. The concept of public policy varies from time to time and is open to interpretation.
Arbitration, in law, is a form of Alternative Dispute Resolution - specifically, a legal alternative to litigation, whereby the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a NEUTRAL third party called the Arbitrator (s) or Arbiter (s) for resolution.
Major kinds of Arbitration
(1) Ad-hoc Arbitration: When a dispute or difference arises between the parties in course of commercial transaction and the same could not be settled friendly by negotiation in form of conciliation or mediation, in such case ad-hoc arbitration may be sought by the conflicting parties. This arbitration is agreed to get justice for the balance of the un-settled part of the dispute only.
(2) Institutional Arbitration: This kind of arbitration there is prior agreement between the parties that in case of future differences or disputes arising between the parties during their commercial transactions, such differences or disputes will be settled by arbitration as per clause provide in the agreement.
(3) Statutory Arbitration: It is mandatory arbitration which is imposed on the parties by operation of law. In such a case the parties have no option as such but to abide by the law of land. It is apparent that statutory arbitration differs from the above 2 types of arbitration because
(i) The consent of parties is not necessary;
(ii) It is compulsory Arbitration;
(iii) It is binding on the Parties as the law of land;
For Example: Section 31 of the North Eastern Hill University Act, 1973, Section 24,31 and 32 of the Defence of India Act, 1971 and Section 43(c) of The Indian Trusts Act, 1882 are the statutory provision, which deal with statutory arbitration.
(4) Domestic or International Arbitration: Arbitration which occurs in India and have all the parties within India is termed as Domestic Arbitration. An Arbitration in which any party belongs to other than India and the dispute is to be settled in India is termed as International Arbitration.
(5) Foreign Arbitration: When arbitration proceedings are conducted in a place outside India and the Award is required to be enforced in India, it is termed as Foreign Arbitration
International Conventions on Arbitration
India is a party to the following conventions:
* The Geneva Protocol on Arbitration Clauses of 1923
* The Geneva Convention on the Execution of Foreign Arbitral Awards, 1927; and
* The New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. It became a party to the 1958 Convention on 10th June, 1958 and ratified it on 13th July, 1961.
There are no bilateral Conventions between India and any other country concerning arbitration.
The Indian Arbitration and Conciliation Act, 1996 (The governing arbitration statute in India)
It was conceived by the compulsions of globalisation. It is based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985.
Previous statutory provisions on arbitration were contained in three different enactments:
• The Arbitration Act, 1940, the Act which governed the domestic arbitration
• The Arbitration (Protocol and Convention) Act, 1937 and
• The Foreign Awards (Recognition and Enforcement) Act, 1961, which governed international arbitral awards.
The Indian Arbitration and Conciliation Act, 1996 applies to both domestic arbitration in India and to international arbitration. Section 2(1)(f) of the Act defines "International Commercial Arbitration" as arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India where at least one of the parties is:
1. An individual who is a national of, or habitually resident in any country other than India; or
2. A body corporate which is incorporated in any country other than India; or
3. A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
4. The Government of a foreign country.
The main objectives set out in the Statement of Objects and Reasons of the 1996 Act are “to minimise the supervisory role of courts in the arbitral process” and “to provide that every final arbitral award is enforced in the same manner as if it were a decree of the Court”.
Public policy in relation to international commercial arbitration
There have been few instances of the use of Public Policy in context of arbitration proceedings. The prominent cases are:
• Renusagar Power Plant Ltd. v. General Electric Co., AIR 1994 SC 860
• ONGC v. Saw Pipes Ltd., AIR 2003 SC 2629; (2003) 5 SCC 705
• Venture Global Engineering v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)
Renusagar Power Plant Ltd. V. General Electric Co.
Renusagar Power Plant Ltd. had entered into a contract with General Electric Co., a company incorporated under the laws of State of New York in USA under which it had to supply equipment and power services for setting up a thermal power plant. The said contract was approved by the Government of India. The total price of the contract was US$13,195,000. All the items were to be delivered in 15 months from the effective date and the completion of the plant was to be done within 30 months. The contract provided for payment in installments and also required execution of unconditional negotiable promissory notes for all the installments. The contract contained an arbitration clause which provides that any disagreement arising out of or related to the contract which the parties are unable to resolve by sincere negotiation shall be finally settled in accordance with the Arbitration Rules of the International Chamber of Commerce. It seems there was some delay on the part of General Electric in adhering to the time schedule for supply of equipment and consequently Renusagar rescheduled the payment installments and certain installments were unpaid under due dates.
Renusagar approached the Government of India for approval of the revised schedule regarding the payment of installments which was not approved by the Government of India and Renusagar was asked to take necessary action to make the payment of the past installments immediately. At this stage General Electric initiated arbitration proceedings before the Arbitration Court of ICC. Both the sides filed civil suits in Bombay and Calcutta High Courts. The arbitration proceedings resulted in an award in favour of General Electric and it also awarded compensatory damages and computed the same by applying the average prime rate to the amount withheld. The award came to be challenged on several grounds and one of them was that it was contrary to public policy of India, the reason being the order relating to the payment of interest in particular in foreign exchange would be contrary to the Foreign Exchange Regulation Act. This case arose in particular under Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961. The Supreme Court was faced with the question whether to give the words ‘public policy' a narrow or a broad meaning.
Final Judgment: After referring to the various decisions of the English, and American courts and quoting classic textbooks on international commercial arbitration the Supreme Court went on to very rightly give narrow interpretation to the words public policy and held that
1. the payment of interest on interest (compound interest),
2. possibility of violation of FERA,
3. payment of damages,
4. possibility of unjust enrichment by General Electric
did not amount to or was not contrary to the public policy of India.
The Supreme Court concluded that “it is obvious that since the Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction.”
Renusagar thus was very correctly decided; when it took a narrow view of the word ‘public policy' thus leaving little scope of judicial interference in arbitration proceedings and the final determination of awards.
ONGC V. SAW Pipes Ltd.
Short Facts: In this case, ONGC ordered pipes from SAW Pipes Ltd. on certain terms and conditions and for dispute resolution it also had an arbitration clause. Disputes arose as SAW Pipes was unable to conform to the time schedule prescribed for supplies due to the strike of the workers in Europe for almost two months. SAW Pipes informed these facts to ONGC which in turn replied that damages as per the contract would have to be paid. SAW Pipes thereafter supplied the pipes and ONGC deducted a large sum from the bill on account of delay without there being any adjudication or determination by a third party.
Case Proceedings: The matter was referred to arbitration and an order was passed in favor of the respondents. The same was challenged before a single Judge of High Court which dismissed the petition. A further challenge before a division bench was also negated. An appeal to the Supreme Court under Article 136 (Special Leave Petition) came to be heard by two Judges who allowed the appeal and set aside the award. It then considers the facts of the case, and concluded that ONGC was justified in deducting the amount and the arbitrators were wrong in awarding the amount with interest and set aside the award.
The Court held that any arbitral award which violates Indian statutory provisions is “patently illegal” and contrary to “public policy”. By equating “patent illegality” to an “error of law”, the Court effectively paved the way for losing parties in the arbitral process to have their day in Indian courts on the basis of any alleged contraventions of Indian law, thereby resurrecting the potentially limitless judicial review which the 1996 Act was designed to eliminate. The ONGC case's decision was widely criticized in the International community. Three years later the Supreme Court had an opportunity to refer the matter to a larger Bench which it did not though it accepted that ONGC's case had invited considerable adverse comments.
The Bench in Renusagar case held that the term ‘public policy of India' was to be interpreted in a narrow sense, the Division Bench in ONGC case went ahead unmindful of the prior precedent and expanded the same to such an extent that arbitral awards could now be reviewed on their merits. This is a huge step backwards in laws relating to alternate dispute resolution in the era of globalization.
Venture Global Engineering v. Satyam Computer Services Ltd.
In this case Venture Global Engineering (VGE) incorporated in the USA and Satyam Computer Services Ltd (SCSL) of Hyderabad, India, entered into a joint venture agreement in 1999 to constitute a company named Satyam Venture Engineering Services Ltd. (SVES) in which both VGE and SCSL have 50 per cent equity shareholding. A Shareholders Agreement (SHA) was also executed between the parties on the same day which provides that disputes have to be resolved amicably between the parties and failing such resolution, the disputes are to be referred to arbitration.
In February 2005, disputes arose between the parties. SCSL alleged that the appellant had committed an event of default under the SHA owing to several venture companies becoming insolvent and they had exercised its option to purchase the VGE shares in SVES at its book value. On a request from SCSL, the London Court of International Arbitration appointed an arbitrator and he passed an award directing VGE to transfer the shares to SCSL. SCSL filed a suit for enforcement and recognition of the award before the US District Court of Michigan under the New York Convention, which was allowed to SCSL. Aggrieved, VGE filed a suit in the City Civil Court, Secunderabad, to set aside the award and the court passed an interim order of injunction restraining SCSL from seeking or effecting the transfer of shares under the terms of award or otherwise. On appeal from SCSL, the Andhra Pradesh High Court suspended the trial court's order holding that the award cannot be challenged even if it is against the public policy and in contravention of statutory provisions, but made it clear that SCSL would not affect the transfer of shares until further orders. Thereafter, the trial court rejected the suit filed by VGE and the High Court dismissed VGE's appeal. The present civil appeal by VGE in the Supreme Court of India is directed against this order. VGE asserted that the relief in the award violated certain Indian corporate and foreign investment statutes, specifically the Foreign Exchange Management Act, 1999, and therefore constituted a “conflict with the public policy of India” pursuant to the general provisions contained in Section 34 of Part I of the Arbitration Act.
The Supreme Court in its judgment stated: “The provisions of Part I of the Act (Arbitration and Conciliation Act, 1996) would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. We further hold that where such arbitration is held in India, the provisions of Part-I would compulsorily apply and parties are free to deviate to the extent permitted by the provisions of Part-I. It is also clear that even in the case of international commercial arbitrations held out of India provisions of Part-I would apply unless the parties by agreement, express or implied, exclude al or any of its provisions.”
The Arbitration and Conciliation Act, 1996 (Act), is divided into four parts. The first two parts consists as follows:
Part I of the 1996 Arbitration Act deals with domestic arbitration, i.e., those arbitrations where the seat of arbitration is in India.
Part II deals with provisions relating to enforcement of New York Convention Awards and Geneva Convention Awards in India.
This has been the basis of all the Arbitration clauses incorporated in the contract between various Indian and Foreign companies until now. However, with the recent judgment by the Supreme Court of India in the case of Venture Global Engineering v Satyam Computer Services Limited, Part I of the Act is now made applicable to all international commercial arbitrations, which consequently has led to a great deal of mistrust, confusion and uproar amongst the foreign companies.
The law of arbitration in India is very much at its crossroads. An eminent personality has commented at the state of affairs of arbitration laws in India as “arbitration in India is not for the faint-hearted”.
The 1996 Act was designed primarily to implement the UNCITRAL Model Law on International Commercial Arbitration and create a pro-arbitration legal regime in India. Prior to its enactment, there was widespread discontent over the excessive judicial intervention allowed by its predecessor, the 1940 Act. The 1996 Act attempted to rectify this problem by narrowing the basis on which awards could be challenged, thereby minimising the supervisory role of courts, ensuring finality of arbitral awards and expediting the arbitration process.
The continued intervention of courts in arbitration is harmful in two ways:
1) In a legal system plagued by delays, a pro-arbitration stance would reduce the pressure on the courts. Recent reports indicate that over 30 million cases are currently pending resolution in India. Arbitration is therefore not just an attractive option for resolving disputes, it is essential to maintaining the integrity of the Indian legal system.
2) For a country seeking to attract foreign investment, it is imperative that its legal system provides efficient and predictable remedies to foreign investors. When commercial parties enter into transactions, they factor in the potential legal costs of enforcing their rights. If a legal system does not hold the promise of speed or certainty, a risk premium is added to the cost of the transaction which, if excessive, may make the transaction commercially unviable. Foreign investors typically prefer arbitration and have shied away from Indian courts due to prolonged delays in litigation.
The recent judgment in the Satyam case has made Part 1 of the 1996 Act applicable to all International arbitrations. Many foreign companies having relevant business interests in India have relied heavily upon Indian law based on the Act itself and already opted for Arbitration procedures. This recent judgment has totally turned over the original intention of the legislators while enacting the Act, thereby infusing a strong feeling of insecurity in dealings of foreign companies with their Indian counterparts.
So, it is largely upto the Indian Judiciary to step in and contain the interventionist role it has assumed for itself and have greater trust in the arbitral process.
Indian Arbitration and Conciliation Act, 1996
Renusagar Power Plant Co. Ltd v. General Electric Co., AIR 1994 SC 860
ONGC v. SAW Pipes Ltd., AIR 2003 SC 26299
Venture Global Engineering v. Satyam Computer Services Ltd., AIR 2008 SC 1061 (April)