The article argues that the Supreme Court was right in deciding the ONGC vs Saw Pipes case and that its decision will not, or at least should not, have any effect on foreign parties choosing India as a place for arbitration Public policy as a ground for setting aside an award1 resorted to by the losing party has become controversial in and for India because the Supreme Court has...
The article argues that the Supreme Court was right in deciding the ONGC vs Saw Pipes case and that its decision will not, or at least should not, have any effect on foreign parties choosing India as a place for arbitration
Public policy as a ground for setting aside an award1 resorted to by the losing party has become controversial in and for India because the Supreme Court has ruled that if an award is contrary to the terms of the contract, then it would be against public policy and liable to be set aside.2,3
Some believe that the ruling in ONGC vs Saw Pipes will dissuade foreign parties from agreeing to make India as a place of arbitration. This article argues that the court was right in deciding the ONGC vs Saw Pipes case and that its decision will not, or at least should not, have any effect on the foreign parties in choosing India as a place for arbitration. For a different reason, foreign parties may still choose to avoid India as the place for arbitration, which I will revert to later. But not because of Saw Pipes case.
Why the court was right
In the ONGC case4, the issue was whether the clause in the contract that in case of delay in the supply of pipes, ONGC would be entitled to damages at the agreed rate without ONGC having to prove that it had actually suffered loss.
The arbitral tribunal found that there was delay in supply, but held that as ONGC had not proved the loss, it was not entitled to damages.
The Supreme Court found that the award was against the terms of the contract5. The court relied upon the following provision of the Act:
"S. 28(3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."6
The court held that to be a mandatory provision, the violation of which the court cannot ignore. It appears that the court found that the only provision under s. 34 that the court could act was 'public policy' ground.
Other judgements have followed the ONGC judgement7 Useful assistance can be obtained from a recent judgement of the House of Lords judgement in England.8 The facts were these:
S. 48(4) of the English Arbitration Act, 1996 empowers arbitral tribunal to express its award in 'any currency'.9 Relying on that provision, the tribunal, in Lesotho case, awarded damages in currency other than that agreed to by the parties. The question was whether, in doing so, the tribunal exceeded its powers. If it did, the award would be judicially reviewable under s. 68(2)(b).10
The House of Lords, by a majority, reversing both the Court of Appeal and the High Court, held that though the tribunal committed 'error of law', judicial review did not lie.11
Lord Steyn, who spoke for the majority, wrote: "The power of the tribunal under s. 48(4) was unconstrained and was available to the tribunal. ... On this simple basis I would reverse the Court of Appeal on the currency point".12
Lord Steyn then went on to discuss the effect on the validity of the award assuming there was 'error of law'. He held: "The major purpose of the new Act was to reduce drastically the extent of intervention of courts in the arbitral process".13 He further held: "In order to decide whether s. 68(2)(b) is engaged it will be necessary to focus intensely on the particular power under an arbitration, the terms of reference, or the 1996 Act which is involved, judged in all circumstances of the case."14
Lord Philips of Worth Matravers held as follows:
a. "I am unable to agree with either the arbitrators or Lord Steyn as to the ambit of that power". (Under s. 48(4)).15
b. "(Previous judgements) did not imply that "arbitrators or the courts had a free discretion as to the currency in which awards should be made or judgements given."16
c. "Was this simply an error of law, ... or was this an example of 'a tribunal exceeding its powers ..., so as to be capable of amounting to a 'serious irregularity' under s. 68?. I have come to the conclusion that the latter is the true position. The concept of an excess of power that is not in excess of jurisdiction is not an easy one, but I find that it applies to the arbitrator's conduct in this case."17
Lord Hoffman, Lord Scott of Foscote and Lord Roger of Earlsferry all agreed that the arbitrator had committed an error of law but in the result they agreed with Lord Steyn.
It is noteworthy that both the High Court and the Court of Appeal had held that the currency part of the award had to be set aside. The House of Lords, by a majority, did not agree and held the award to be valid. It is submitted that the judgement of the House of Lords can be explained by reference to the fact that the English Act does not require the arbitrator to give award in accordance with the terms of the contract.18 If there were a provision like the one under s. 28(3) of the Indian Act, the result might have been different. Even without such a provision as s. 28(3), the High Court, the Court of Appeal and 4 out of 5 Law Lords in the House of Lords concluded that there was a clear error of law. Whether such an error of law amounts to 'exceeding the power' or not is not relevant to our Act, which does not have a similar provision.
The question raised above is important in several jurisdictions as article 28(4) of the UNCITRAL Model Law contains a provision identical to s. 28(3) of the Indian Act.
In these circumstances, the courts in India were right in setting aside the awards that violated s. 28(3) of the 1996 Act.
Public policy in international commercial arbitration
India has a good record of enforcement of international awards made outside India, which is why parties fix the venue outside India, even where both parties are Indian.
In Renusagar's case, the Supreme Court upheld a foreign award that was not legal according to the law of India.19 The court held:
"the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality."20
In so holding, the Supreme Court of India followed the English principles that have been summarised as follows:
"(i) Where the fundamental conceptions of English justice are disregarded;
(ii) Where the English conceptions of morality are infringed;
(iii) Where a transaction prejudices the interests of the United Kingdom or its good relations with foreign powers;
(iv) Where a foreign law or status offends the English conceptions of human liberty and freedom of action;"
(See : Cheshire and North, Private International Law, 12th Edn., pp. 131-133.)21
The Supreme Court of India has followed these principles consistently.22
All the four judgements referred to above23 were in respect of domestic arbitration.
The Indian courts treat purely domestic arbitral awards in the same manner as they do to the international awards made in India.24
Worse, the latest judgement in ONGC vs Western Geko delivered on 4th September 2014 lays down new principles equating arbitration law with administrative law. With respect, the comparison is not apt.
Hence, the object of the Act - to attract International Commercial Arbitration to India - is likely to be frustrated.
Footnote:
1 The Arbitration and Conciliation Act, 1996, S. 34(2)(b)(i), corresponding to article 34(2)(b)(ii) of the UNCITRAL Model Law. 2 ONGC v Saw Pipes (2003) 5 SCC 705; 3 Hindustan Zinc Ltd v Friends Coal Corp (2006) 4 SCC 445; McDermott International v Burn Standard Co (2006) 11 SCC 181; Security Printing v Gandhi Industrial Corp C. A. 4857 of 2007, Judgment dated October 12, 2007, unreported. 4 ONGC v Saw Pipes Ltd (2003) 5 SCC 705. 5 ONGC v Saw Pipes Ltd. (2003) 5 SCC 705, at page 719 (paragraph 14). 6 The Arbitration and Conciliation Act, 1996, s. 28(3). 7 See footnote no. 4 above. 8 Lesotho Highland Development Corp v Impreglio SpA. (2005) 3 All E R 789. 9 S. 48 bears the title 'Remedies' and s. 48(4) reads thus: "The tribunal may order the payment of a sum of money in any currency". 10 S. 68 bears the title 'Challenging the award: serious irregularity'. S. 68(2)(b) defines 'serious irregularity' where the tribunal exceeds its powers. 11 Lesotho Highland Development Corp v Impregalio SpA (2005) 3 All E R 789. 12 Lesotho Highland Development Corp v Impregalio SpA (2005) 3 All E R 789, at page 800-f/g; paragraph 22. 13 Ibid., page 802-a/b; paragraph 26. 14 Ibid., page 804-b/c; paragraph 32. 15 Ibid., page 808-f/g; paragraph 43. 16 Ibid., page 808-j to 809-a; paragraph 46. 17 Ibid., page 810-e/f; paragraph 51. 18 S. 46 (of English Act) 19 Rensagar Power Co. v General Electric Co. (1994) Supp (1) SCC 644. 20 Ibid., page 682. 21 Ibid., page 679. 22 McDermott International Co. v Burn Standard Co Ltd (2006) 11 SCC 181; Dresser Rand S A v Bindal Agro Chem Ltd. (2006) 1 SCC 751l 23 See f.n. 3 and 4. 24 See Shri Lal Mahal v Progetto Grano SpA (2014) 2 SCC 433.
Disclaimer-The views expressed in this article are the personal views of the author and are purely informative in nature.