25/08/2006

PUBLIC POLICY AS A GROUND FOR REFUSAL OF ENFORCEMENT OF ARBITRAL AWARD

Recognition and enforcement are concerned with having the arbitral award carried into effect, in the face of the refusal by the losing party to perform it voluntarily. Though before proceeding further we should keep in mind two noticeable distinctions.

There is an important distinction between enforcement of domestic awards and enforcement of international awards. Former is a relatively easy process and involves procedures of domestic arbitration law whereas the latter is more complex and invites application of treaty obligations. The article looks into the refusal of enforcement of foreign awards as well as domestic awards on the ground of public policy, more so in the light of the recent Supreme Court judgement [i] . The recent controversial judgement of the hon’ble court is the precise reason about the need for a discussion on this issue today.

Moving on further it is important to distinguish between recognition and enforcement of an arbitral award. An award may be recognised without being enforced; but if it is enforced then it is necessarily recognised. The precise distinction in other words is between ‘recognition’ and ‘recognition and enforcement’ [ii] . Though in regular usage recognition and enforcement may be used interchangeably, in legal terminology there exists a thin but prominent difference between them.

While a vast majority of awards are voluntarily enforced, if a party does not comply with the terms of the award, the winning party will have to seek enforcement of the arbitral award against the recalcitrant party in order to obtain the relief that the winning party was granted. The first step in enforcing an international arbitral award is to determine the country or countries in which enforcement is to be sought. One of the factors to be taken into consideration at this stage is the extent to which the prospective forum is linked to the place in which the award was made. We would though limit our discussion here to the ground of ‘public policy’ for refusing enforcement of an arbitral award.

New York Convention of 1958 and the Geneva Convention of 1927 are the two main international conventions frequently used in enforcing international arbitral awards. International arbitral awards can be enforced in the countries which are signatories to the above conventions (ratification is subject to some reservations which are beyond the scope of this article) while in other countries enforcement can be sought on the grounds of justice, equity and good conscience which has been seen to be working well. Article V (2) of the New York Convention provides :
“Recognition and Enforcement of an arbitral award may also be refused if the competent authority in that country where recognition and enforcement is sought finds that:
(a) the subject matter of the difference is not capable of settlement by arbitration under the law of that country; or
(b) the recognition and enforcement of the award would be contrary to the public policy of that country.”

Thus clause (b) of the convention expressly provides for ‘public policy’ as a ground for refusal of enforcement of the arbitral award.
Let us now attempt to discuss a few cases that have been reported from courts in various countries as to the interpretation and application of the ground of ‘public policy’.
In Parsons and whittemore Overseas Inc. v. RAKTA [iii] the United States court of appeals for the second circuit rejected the argument that the enforcement of arbitral award should be refused on ground of severance of Egyptian and American relations. The court observed,
“… the convention’s public policy defense should be constructed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state’s most basic notions of morality and justice.”
It further went on to state that,
To read public policy defense as a parochial device protective of national political interests would seriously undermine the New York Convention’s utility. This provision was not meant to enshrine the vagaries of international politics under the rubric of public policy. Rather a circumscribed public policy doctrine was contemplated by the convention’s framers.”

Hence the court of appeals provided for a narrow interpretation of public policy as a ground for refusal of enforcement or else a liberal interpretation could prove to be a major loophole in the implementation of the provisions of the convention. It may be remembered here that limited grounds for refusal of enforcement and appeal is one of the chief reasons for growth of arbitration as a means of dispute resolution. Providing a wider scope and perspective to ‘public policy’ would frustrate the very purpose of initiation of arbitration proceedings.

Even the German courts accept a violation of public policy in ‘extreme cases only’ and have held that in the case of a foreign award not every infringement of mandatory provisions of German law constitutes a violation of public policy [iv] .

Similar views have been echoed by the Swiss courts which have held that ground of Public Policy for refusal of enforcement will be accepted only if “there is a violation of fundamental principles of Swiss legal order, hurting intolerably the feeling of justice…” [v]
Thus we see that globally ‘public policy’ has been narrowly defined by the judiciary. Intrepreting ‘public policy’ in a wider sense would imply by passing the very purpose of Article V (b) of the New York Convention. As was held by a French Court “the appeal against an award can be heard as an exception to the rule when it aims to establish the nullity of the award for breach of public policy” [vi] . Such a construction of public policy affirms the commitment of judiciary towards enforcing arbitral awards.

Though it is very often questioned whether courts, especially those in West Europe and United States, have gone too far in limiting public policy to considerations of “the forum state’s most basic notions of justice and morality” [vii] . Hence it is alleged the courts have given public policy too narrow a construction that it now must be characterized as having no meaningful definition, leaving it pragmatically useless if not altogether non-existent [viii] . This is said to have adverse effects as the courts are more inclined to enforce awards which may tacitly violate public policy of the state.

In my view the above proposition is not justified. To strengthen the process of arbitration, arbitral awards must be followed by the parties in their true spirit. If the parties are given the freedom to lay their own rules and procedures for arbitration and even appoint their own arbitrators then they should be willing to strictly adhere to the arbitral award and as such any appeal against the arbitral tribunal’s award should only be accepted on grounds of proven violation of arbitration procedures or public policy. In that sense it becomes imperative to narrowly construct public policy so as not to instigate parties to file an appeal against the arbitral award. Though this should not be confused as saying that genuine violations of public policy should also be enforced. That has never been the judiciary’s intention.

Thus gross violation of public policy by the arbitrators should indeed be unacceptable but the courts should not, in my opinion, willingly accept any violation of public policy as a ground for refusal of enforcement. In the interest of the parties and upholding the validity of the arbitral awards, courts should allow for minor variations from the strict definition of public policy. We may be reminded here that definition of public policy varies from country to country and even within the domestic statutes of the nation. Various international conventions and national legal systems provide for public policy as a ground for refusal of enforcement of the arbitral award [ix] .

The Position in India
As we have seen ‘public policy’ cannot be defined with any degree of precision. Making full use of this the Indian Courts, quite unlike their global counterparts, have somewhat liberally interpreted ‘public policy’. Whatever tends to injustice of operation, restraint of liberty, commerce, natural or legal rights, whatever tends to the obstruction of justice or to the violation of a statute and whatever is against good moral when made the object of contract is against ‘public policy’, and, therefore, void and not susceptible to enforcement [x] . In the opinion of D.P. Mittal, “public policy is equivalent to the policy of the land” [xi] . If that is interpreted to mean that any award which is, even in part, against the policy of law is against the public policy and hence cannot be enforced, then it is indeed a setback for the whole process of arbitration. A chief characteristic of arbitration is the flexibility that it permits the parties to frame their own rules and regulations so as to reach a just and economical award. The notions of Economic Theory of Contracts would ensure that parties, after lengthy negotiations, indeed reach a settlement which is best in their interests. If in this settlement no grave injustice is caused or harm done to the basic notions of justice and morality, then the courts should be inclined towards enforcing the award. Though in my opinion the learned author points out towards a general or basic policy of law which should not be violated. In other words the macro-legal policy should not be disturbed or violated and if such an infringement occurs then the courts should nullify enforcement on the ground of public policy. Though the judiciary should permit some departures from the micro-legal policies which are largely individualistic in nature and susceptible to frequent amendments.

With this in mind let us now look at a few cases where the courts have had an opportunity to interpret public policy. In Renusagar Power Co. v. General Electric Co [xii]. the hon’ble Supreme Court held that “the expression ‘public policy’ refers to the public policy India and the recognition and enforcement of the award of the arbitral tribunal in India cannot be questioned on the ground that it is contrary to the public policy of any other country”.

It has been held in various cases that it is against public policy if the arbitrator is partial or biased towards a party [xiii] . Thus the arbitrator is bound:
1) by the contract between the parties and decide the case in the light of the contractual provision, and to give proper opportunity to the parties;
2) to pass the award in accordance with the law so as not to be guilty of misconduct and
3) to apply mind to crucial questions as non-application amounts to legal misconduct [xiv] .

The recent judgement of the apex court in Oil and Natural Gas Corpn. Ltd. V. Saw Pipes ltd [xv] is important and will be widely referred to in interpreting public policy. The court has held that if an award is ‘patently illegal’ or if it is in contravention with any provision of the Arbitration and Conciliation Act 1996, then it could be set aside under section 34 of the said act.

Section 34 (2) (b) (ii) of the act states that an arbitral award can be set aside if the award is in conflict with the public policy of India.

The judgement provides that a wide meaning is required to be given to ‘public policy’ in India. Thus it enlarges the powers of interference by the courts in arbitral awards. Anything ‘patently illegal’ will be liable to be remedied by the court. Thus the court has expressly stated that “an award which is, on the face of it, patently in violation of any statutory provisions cannot be said to be in public interest”.

The pronouncement is vulnerable to be grossly misused by the courts and almost provides a right to the courts to interfere in every arbitral award brought to its notice. This construction of ‘public policy’ circumscribes the narrow interpretation given to ‘public policy’ by the courts around the globe. Though it is conceded that meaning of ‘public policy’ will vary from country to country and depend upon specific circumstances of the case, the article attempts to make a case for narrow construction of ‘public policy’. With the ONGC judgement there is an implied encouragement by the higher judiciary to appeal against an arbitral award on the ground of public policy. For the court having said that a wider meaning needs to be given to ‘public policy’, we can expect with certainty in future that an entire gamut of issues will be interpreted under ‘public policy’. Though the court has recognised this and laid down certain safeguards in the judgement. The court has said that “if the illegality is of a trivial nature, it cannot be held that it is against public policy. The illegality must go to the root of the matter, if it is taken to be repugnant public policy”. In stating this the had the foresight of imagining a future misuse of the phrase ‘public policy’ but this safeguard may just not be enough to bar judiciary’s unnecessary intervention in enforcing arbitral awards. Public policy cannot be interpreted to mean violation of any provision of law. Intolerable damage has to be caused to the Indian legal system for it to be classified as violation of public policy.

The ‘public policy’ has to be used in a narrow sense. In order to attract the bar of public policy the enforcement of the award must invoke something more than the violation of the law of India [xvi] . Thus ‘public policy’ should be only so interpreted as far as it aims to broaden the public interest of honesty and fair-dealing, of not violating a basic notion of Indian law.

Conclusion
It may thus be seen that ‘public policy’ has had varied interpretations across the globe. Courts have interpreted it keeping in mind their own laws and morals. Almost common to all the courts has been the fact that ‘public policy’ has been narrowly constructed and very limited options are available for widening its scope, for the judiciary does not encourage the same. Amongst other reasons arbitration is resorted to by the parties as it has limited grounds for filing an appeal; enlarging the scope of public policy as a ground for refusal of enforcement of the arbitral award has the capacity to terminate the advantages inscribes in the very purpose of resorting to arbitration.


- Ajit Sharma, Associate, JM Sharma & Co., Advocates & Solicitors. This article was published in the July-September 2003 issue of ICA ARBITRATION QUARTERLY.
[i] Oil and Natural Gas Corpn. Ltd. V. Saw Pipes ltd (2003) 8 CLA-BL Supp 14 (SC).
[ii] Alan Redfern and Martin Hunter Law and Practice of International Commercial Arbitration (Sweet and Maxwell London 1986) P.335.
[iii] December 23, 1974 (U.S. No.7).
[iv] Oberlandesgericht of Hamburg, April 3, 1975 (Federal Republic of Germany no.11).
[v] Cour de justice (1st section) of the Canton Geneva, September 17, 1976, Leopold Lazarus v. Chrome Resources S.A. (Switz no.6).
[vi] Ste Grands Moulins Prodhomme v. Ste Suja France, Court of appeal of Paris, December 12, 1978.
[vi] J.Junker, “The Public Policy defense to the recognition and enforcement of the foreign arbitral award”, 7Wes. Cali. Int’l L. journal (1977) p.228 at p.245.
[viii] Albert Jan Van Den Berg The New York Arbitration Convention 1958 (Kluwer Law Publishers Netherlands 1981) p.367.
[ix] International Conventions :
• The Geneva Convention 1927, Article 1 (e);
• The New York Convention 1958, Article V (2);
• United Nations Model Law 1985, Article 36 (b);
• Arab league Convention on Execution of Judgements 1952, Article 3 (e);
• European Convention Providing a Uniform law on Arbitration, 1966, Annex. Articles 29 (2) and 31 (2);
• Inter-American Arbitration Convention 1975, Article 5 (2) (b);
• Inter-American Convention on Extraterritorial Validity of Awards 1979, Article 2 (h).

Municipal Laws:
• India - Arbitration and Conciliation Act 1996, Section 34 (2) (b) (ii);
• Italy – Civil Procedure Code, Section 797;
• France – Nouveau Code de Procedure Civile 1981, Section 1502 (5);
• England – Arbitration Act 1975, Article 5.3;
• Australia – Arbitration (Foreign Awards and Agreements) Act 1974, Section 8 (7) (b);
• Canada – British Columbia-International Arbitration Act 1986, Section 36 (1) (b) (ii);
• Singapore – The Arbitration (Foreign Awards) Act 1986, Section 7 (4) (b).

[x] Kolapati Venkatareddi v. Kolapati P. Venkatchalam AIR 1965 AP 465.
[xi] D.P. Mittal Law of Arbitration ADR & Contract, p.184.
[xii] (1994) 81 Comp. Cas. 171 (SC)
[xiii] Transocean Shipping Agency (P) ltd. V. Black Sea Shipping (1999) 96 Comp. Cas 367 (SC); K.V. George v. Secretary to government, Water and Power Dept. (1989) 4 SCC 595; Union of India v. Jain Associates (1994) 14 CLA 149 (SC).
[xiv] Supra no. 14.
[xv] (2003) 8 CLA-BL Supp 14 (SC).
[xvi] Supra no. 14.