Arbitration is a method where one or more arbitrators resolve disputes and issue legally binding decisions, offering a private alternative to lengthy and complex court procedures. Efforts have been made at both national and international levels to uphold arbitration’s independence by limiting judicial review of arbitral awards. The Arbitration and Conciliation Act of 1996 was enacted to ensure minimal judicial interference and reinforce the binding nature of arbitration awards. Due to its efficiency and finality, arbitration is a valuable alternative in commercial disputes.
In the case of I-Pay Clearing Services Pvt. Ltd. v. ICICI Bank Limited, the Supreme Court of India examined various sections of the Arbitration and Conciliation Act 1996. It concluded that section 34(4) of the Act, which uses the term “where it is appropriate,” allows the court discretion in deciding whether to refer a case back to arbitration. The Court clarified that “curable defects” could be corrected, but only if there is a substantive “finding” on the issue, not merely “reasoning.” Without concrete findings, reasoning alone cannot rectify an award, limiting the Court’s ability to act under Section 34(4) if the award appears patently illegal.
Historical Context
Historically, judicial involvement in arbitral decisions has been significant. When India joined the New York Convention in 1960, the Foreign Awards (Recognition and Enforcement) Act 1961 governed foreign arbitration, establishing that arbitral awards could be refused if contrary to public policy. The subjective nature of “public policy” led to increased judicial intervention, contrary to arbitration’s principles of efficiency and finality.
To address these issues, UNCITRAL adopted a model law aimed at regulating international arbitration with a focus on party autonomy and minimal judicial interference. The model law, which influenced the 1996 Act, aimed to unify India’s arbitration laws with global standards, reduce court oversight, and facilitate the enforcement of awards.
The Law Commission of India proposed including a provision to annul an award if it contained an evident error that raised a substantial legal question. This suggestion was incorporated into the Arbitration and Conciliation (Amendment) Bill 2003, which added patent illegality as a ground for challenging awards. This includes errors in law, breaches of constitutional or statutory provisions, or conflicts with common law.
Case Laws on Public Policy and Patent Illegality
Public policy and patent illegality have been shaped by key Supreme Court rulings. In Renusagar Power Plant Ltd. v. General Electric Co. (1994), the Court defined public policy as a reason for rejecting an arbitral award, establishing three grounds: India’s fundamental policy, national interests, and morality. This expanded judicial involvement with arbitral awards.
In Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., the Court broadened the definition of “public policy,” incorporating the fundamental policy of India, which lacked an exhaustive definition and was subject to interpretation. This increased judicial intervention, sometimes leading to criticisms of judicial overreach.
In Associate Builders v. DDA, the Court established a test for patent illegality, holding that an arbitral award could be set aside if it “shocks the conscience” of the court. The decision emphasized that an award must be based on the agreement’s terms and could be challenged if the arbitrator’s interpretation was irrational or unfair.
In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), the Supreme Court ruled that patent illegality does not necessarily need to relate to public policy. The case of Patel Engineering Ltd. v. North Eastern Power Corporation Ltd. (2020) reaffirmed the standards for patent illegality set by Associate Builders, while distinguishing between non-compliance with contract terms and misinterpretation of contract terms.
Conclusion
While the principle of finality in arbitral awards is crucial, the concept of patent illegality remains relevant to address potential errors and uphold the rule of law. It serves to protect public interest, ensure fairness and justice, maintain contractual integrity, and deter arbitral misconduct. However, it is important to avoid exploiting this principle to preserve the separation of powers and the efficiency goals of arbitration. In I-Pay Clearing Services, the Court appropriately emphasized the need for substantial findings over mere reasoning, indicating that an award without necessary findings is a serious error that cannot be enforced. However, arbitration tribunals can correct such defects in their awards.