To be or not to be: the oscillating support of Indian courts to arbitration awards challenged under the public policy exception

Arthad Kurlekar and Gauri Pillai

ABSTRACT

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC) seeks minimal court interference in the enforcement of an award. However, in exceptional circumstances, it grants courts power to refuse awards to preserve elements of sovereignty with the states. Consequently, states have interpreted the width of the exception as per their notions of public policy. The article analyses the Indian interpretation given to the ground of public policy in the light of violent shifts in the positions taken by the Supreme Court of India. The article critiques recent Supreme Court case law, for failure to preserve international comity and obligations under the NYC. Towards this, the first section of the article addresses the drastic broadening of the interpretation of public policy and as a corollary the increasing interference of courts in arbitration in recent times. The second section addresses the widening court interference from the perspective of the power to modify arbitral awards. The article traces the roots of the power through several court decisions and argues against such an assumption of power. It contrasts the power to modify arbitral awards against the partial setting aside of the award and concludes that it is only the latter mechanism that is permitted under the NYC.

1. INTRODUCTION

Indian courts have made dynamic changes in the interpretation of the term public policy as used in the Indian Arbitration Act, 1996 (IAA) as a ground to annul the award. India being a signatory and having ratified the NYC is bound by its provisions. Article V(2) of the NYC provides for several instances where an international award may be refused enforcement. These instances have been codified in two provisions under the UNCITRAL Model Law (ML), under Articles 34 and 36, dealing with setting aside and refusal of enforcement, respectively. The provisions of the IAA dealing with setting aside (section 34) and refusal of enforcement (section 48) verbatim correspond to the respective provisions of the ML. All four provisions provide for annulment of an award on the basis that the award is contrary to the public policy of the state, in this case public policy of India. For a long period of time, this notion of public policy remained vague, ambiguous, and ill defined.

The scheme of the IAA was clarified in a landmark decision of the Indian Supreme Court in BALCO v Kaiser (BALCO). The Court explained that the IAA treats arbitral awards in two ways. The first category consists of domestic arbitral awards which includes awards seated in India and which are dealt with in Part I of the IAA. The second category consists of awards seated outside India (foreign arbitral awards) which are dealt with under Part II of the IAA. Till 2013 the Indian courts had assumed wide powers under both parts of the IAA. These powers envisaged among other things, refusing to enforce or setting aside an award under the ground of public policy if the Court found that the award was ‘patently illegal’. The objective behind providing this was respecting the fundamental principles of justice and administration in India and thus was within the confines of the ‘normative threshold’ adopted in an arbitration friendly state. Over time, however, the focus of the Court has shifted away from the word ‘patently’ resulting in drastic changes and noticeable shifts in the interpretation of the term public policy.

In 2013, the Indian Supreme Court ruling of Sri Lal Mahal v Progetto Grano Spa (Sri Lal Mahal)  was the harbinger of the radical change which followed. The decision did away with the concept of ‘patent illegality’ as a ground for violation of public policy in foreign arbitral awards. This case was projected as being a catalyst in making India an arbitration friendly jurisdiction. Situating this case in light of the past precedents, it was envisioned that it would result in a restrictive approach towards the interpretation of public policy in both domestic and international awards. However, this was followed by a spate of erratic decisions.

In 2014 and early 2015, there was a diffident approach by the Supreme Court resulting in an oscillating and ambiguous position on the issue of the breadth of the public policy exception. As an illustration, the Supreme Court of India gave two rulings involving public policy on 4 September 2014, namely Anand Bros v Union of India (Anand Bros)  and ONGC v Western Geco (Western Geco).In Anand Bros, the Supreme Court states ‘the scope of interference (of courts in arbitral matters) appears to be shrinking in its amplitude’.In stark contrast to this pronouncement, in Western Geco the Court interpreted the meaning of public policy to include ‘all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country’ thereby expanding the scope of interference.The Court also varied the decision of the arbitrator on merits, assuming the power to modify the award.This article seeks to analyse these two controversial aspects of the dictum of the Supreme Court in Western Geco, in the light of relevant jurisprudence. Further the article provides, a comprehensive overview of the stance of the Supreme Court in its interpretation of public policy, mapping the series of oscillations. The article will then situate and criticize the decisions for the intermittent and hesitant support they have provided. Finally, it will analyse the clandestine power of modification of awards assumed by the Indian courts, to conclude that such power would amount to judicial overreach.

2. BACKGROUND TO THE DECISIONS—A CHRONOLOGICAL OVERVIEW

Before Sri Lal Mahal, there was divided opinion on the interpretation of public policy. The first landmark case was decided in 1994 when a three judge bench in Renusagar Power Corporation v General Electric Co. (Renusagar) held that public policy should be construed ‘narrowly’. It held that the IAA was designed to facilitate international trade and keeping in mind this objective the use of the exception should be restricted to only three situations namely: fundamental policy, interest of the state, and justice and morality.Further, the Court held that the circumstances for annulment were limited to those under the NYC.Considering these factors, it set out a high threshold for an exception of public policy to be invoked.

Contrastingly, in 2003, the Supreme Court in ONGC v Saw Pipes (Saw pipes) held that ‘public policy of India’ should be construed in a broad manner.Saw pipes held that the ground of public policy should also contain an additional facet, apart from the three put forth by the Renusagar decision.It held that a lower threshold, that of an award being patently illegal, was sufficient to violate public policy of India.Further, in its opinion, patent illegality entitled the Indian courts to rehear the substantive dispute which was settled by arbitration.Significantly, however, the Saw Pipes decision remained silent on its application to foreign arbitral awards under section 48 and merely expounded upon the principles applicable to section 34.

In 2011, in Phulchand v OOO (Phulchand),the Indian Supreme Court addressed the same issue considered by Saw Pipes in relation to section 48. It held that the wide interpretation of public policy laid down by Saw pipes was applicable to enforcement proceedings of foreign arbitral awards under section 48.The Court held that it could ‘set aside’ a foreign arbitral award brought for enforcement, if it was contrary to public policy of India.

It is important to note that the seat theory had not become a recognized part of the Indian jurisprudence in 2003 or 2011. It was the decision of the Supreme Court in BALCO, in 2012, which paved the way for the seat theory in Indian jurisprudence.31 In its decision, the Court stated that the laws of the juridical seat would be applicable to the arbitration. Consequently, it held that an arbitral award may be set aside only at the seat and not at the place of enforcement. However, it allowed the court of enforcement to refuse enforcement under Part II of the IAA.

Next in chronology was the decision of Sri Lal Mahal which concerned two arbitral awards given by the GAFTA tribunal. The enforcement of the awards was challenged in the Indian courts under Part II of the IAA.The Court re-established the fact that the grounds of review available to it were mirrored from Article V(2)(b) of the NYC.The Bench overruled Phulchand and adopted the narrow interpretation of Renusagar by eliminating the ground of public policy. It stated that there was a fundamental difference in the standard applicable to setting aside under section 34 and that under section 48.In making this observation the Court stated that only those awards which fundamentally violated the system of justice and morality in India could be refused enforcement under the ground of public policy.

Contrarily, Western Geco involved the decision of the Court on a domestic award. Before Western Geco, the Saw pipes decision had broadened the purview of public policy to include patent illegality. However, this was not the reason used by the Court in its determination. It used the term ‘fundamental policy of India’, which was imported from the Renusagar decision to set aside the award. The Western Geco decision laid down a three-fold test to prescribe the ambit of fundamental policy: first, requiring a ‘judicial approach’ which involves the application of judicial mind by the arbitrator, secondly, adhering to the principles of natural justice and thirdly, as a corollary of the second, that a decision which is so perverse or irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. It then used the three-pronged test to invalidate and subsequently modify the contents of the arbitral award challenged in that case.

Subsequently on 25 November 2014, the Supreme Court came out with another ruling in Associated Builders v Delhi Development Authority (Associated Builders) , seemingly restricting the wide ambit of public policy as laid down in Western Geco. Associated Builders concerned a challenge to the arbitrator’s award which attributed the delay in the performance of a construction contract to the Delhi Development Authority. The division bench of the High Court set aside the award stating that the reasons of the arbitrator were erroneous. In reversing the High Court decision, the Supreme Court held that a supervisory court was not a court of appeal of the arbitral award. The Court also made a valiant attempt to neutralize Western Geco. Relying on precedents,it detailed out three specific circumstances under which an award could be set aside on ground of perversity or irrationality: where the finding of the tribunal is based on no evidence, the tribunal takes into account irrelevant considerations or where the vital evidence is ignored while making a final determination.

Following the trend set by Associated Builders, High Courts in various states have adopted a narrow meaning of public policy, indicating that the line of argument broadening public policy is, yet again, waning. For instance, on 12 March 2015, in Sandeep Mathur v Associated Industrial Furnaces,  the Delhi High Court refused to intervene in an award and stated that ‘public policy cannot be cited as an unruly horse’. Before that on 24 February 2015, re-interpreting the reasonableness test in Western Geco the Delhi High Court in Tractel Tirfor India Pvt. Ltd. v. Nehru Place Hotels stated that ‘Merely because another possible conclusion could have been arrived at does not mean that the award of the arbitrator satisfied this test’.

But in January 2015, the Supreme Court came up with BCCI v Bihar Cricket Association (BCCI).This decision dealt with the validity of the Regulation 6.2.4 of the BCCI Regulations for Players, etc. One of the grounds on which it was challenged was public policy. The Court considered the meaning of public policy in India and equated public policy with public interest.The Court, citing WesternGeco, stated that ‘[Fundamental policy] would imply that all those principles of law that ensure justice, fair play and bring transparency and objectivity and promote probity in the discharge of public functions would also constitute public policy.’ This decision hints once again at a detrimental relaxation of the threshold applicable to the public policy exception. The terms ‘principles of law that ensure justice’ may, in the broadest interpretation, cover every statutory provision in India. If that is the potential ambit of public policy, using ‘fundamental policy’ as a reason is a misnomer. Indian courts have, therefore, been ambivalent in their interpretation of public policy, oscillating between significantly expansive interpretations and restrictive formulations. It is thus evident that the stream of cases including and following Sri Lal Mahal show contrasting trends towards public policy, and therefore it is important to analyse the decisions in a bid to harmonize them.

3. ANALYSING THE JUDICIAL TRENDS—THE GOOD, THE BAD, AND THE UGLY

3.1 Interpretation of public policy

3.1.1 Inaccuracies of interpretation of public policy in the Indian context To some extent Sri Lal Mahal becomes seminal for its removal of patent illegality in consideration of awards brought for enforcement under Part II. Thus, Sri Lal Mahal narrowed the ambit of public policy in its application as a ground for refusal of enforcement of a foreign arbitral award.This judicial policy is consistent with the established practice in international commercial arbitration. The International Law Association’s Resolution 2002 promotes a strict interpretation to the public policy exception, requiring that it should be used in exceptional circumstances only, to further the concept of finality in arbitration.Similarly, the Explanatory Note to the ML itself promotes the finality as a feature over judicial interference.Yet, the Sri Lal Mahal decision implicitly creates obstacles, with specific regard to the differing standards of public policy for Part I and Part II arbitrations.

In Phulchand, the Supreme Court had enumerated two propositions: first that the interpretation of section 34 and 48 was uniform and secondly, that this uniformity mandated a broader interpretation to public policy under both setting aside and enforcement proceedings. While overruling Phulchand, the Sri Lal Mahal decision could have stated that the threshold of public policy was uniform (ie agreed to the first proposition) and that the threshold for both setting aside and enforcement was narrow (ie disagreed with the second proposition). Such a determination would have been within the scope of the decision. Yet, the court restricted its opinion on the rejection of patent illegality only to foreign arbitral awards. Thereby it implicitly created two thresholds, one for public policy applicable to domestic awards and the other for its applicability to foreign arbitral awards.The court’s allowance of increased intervention under Part I skews the balance between sovereignty and party autonomy in favour of sovereignty. The Phulchand decision recognized the fact that the threshold used to interpret public policy was identical under both section 34 and 48. This part of the ratio of Phulchand was in sync with most jurisdictions such as eg Australia

In the Australian context, this principle has been upheld by the High Court in TCL v Federal Judges of Australia (TCL),where the Court recognizes the congruence of Articles 34 and 36 of the ML (on which sections 34 and 48 are envisioned).It relies on the basis of the verbatim usage of words in the two provisions. It reasons that only one set of grounds was envisioned under the NYC and therefore to give effect to it, the same narrow threshold should be applied to both Articles 34 and 36 of the ML. The TCL decision is in consonance with the construction of the ML itself, as the ML makes no distinction between the treatment afforded to international awards and domestic awards.

Relying on this reasoning of TCL which was determined approximately four months before Sri Lal Mahal, the Supreme Court of India could have equated sections 34 and 48.It could have then applied its reasoning of discarding patent illegality to both the sections. Yet, the Court chose to create separate thresholds, thereby implicitly promoting higher interference in domestic awards.

The Western Geco decision precisely exploits this failure of the Sri Lal Mahal to address domestic arbitral awards or awards seated in India. It states that ‘Even so, [fundamental policy] must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country’.

In Saw Pipes the Court stated:

Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar case it is required to be held that the award could be set aside if it is patently illegal. The result would be — the award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal

Evidently, in Saw Pipes the Supreme Court sought to broaden the purview of public policy by simply adding an additional ground, that of patent illegality. By using the words ‘narrower meaning’ it clearly denoted that it did not seek to reinterpret the grounds of Renusagar, but merely to add a ground. The Court adopted the interpretation of the remaining three grounds directly from the Renusagar decision. To that effect, the ‘narrow’ interpretation given in Renusagar was applicable to the first three grounds listed therein including fundamental policy of India. Saw Pipes thus never envisioned an expansive approach to any of the grounds given in Renusagar.

It is Western Geco that broadens the meaning of the term fundamental policy. By its formulation, as mentioned above, in the least it equates fundamental policy to the patent illegality standard, as it reasons that a violation of fundamental policy would occur if any principle of law ensuring justice was violated. This, in turn, opens arbitral awards to a risk of being increasingly challenged. In the most, it broadens all the three grounds which were to be narrowly interpreted in the Renusagar dictum. In Western Geco, the Supreme Court failed to note that the Renusagar decision provides relevant context for the interpretation of ‘fundamental policy’. Renusagar relied on the exposition made in Louchs v Standard Oil Co. on the point that fundamental policy included ‘some prevalent conception of good morals, some deep-rooted tradition of the common-wealth [sic]’.It provided context to the threshold it set, by citing cases which have refused to enforce awards on grounds that the two states are at war with each other.Renusagar also recognized the pro-arbitration approach in the American courts and sought to adopt the same.It also cited Deutsche Schachtbau-und TiefbohrgesellschaftmbH v Ra Al Khaimah National Oil Co, a decision of the Court of Appeal, to emphasize that the public policy exception should be approached with caution. The Western Geco decision did not consider any of these checks and balances laid down in Renusagar or thereafter while interpreting fundamental policy.

The Supreme Court in Western Geco also rendered a fatal blow to the principle of minimum court interference by expanding the ground of fundamental policy to include a review of the award on the threshold of the Wednesbury principles of reasonableness. The Court held that:

No less important is the principle now recognised as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a Court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury’s principle of reasonableness. Decisions that fall short of the standards of reasonableness are open to challenge in a Court of law often in writ jurisdiction of the Superior courts but no less in statutory processes where ever the same are available.

Such interpretation of public policy is in direct conflict with past precedents in India which have held explicitly that a court under an application for setting aside cannot examine the reasonableness of the decision of the tribunal as it infringes on the merits of the dispute. For instance, the Supreme Court in B.V. Radhakrishnan v Sponge Iron India overruled the decision of the High Court, which under an application for setting aside examined reasonableness of the reasons relied on by the arbitrator. The Supreme Court clarified that by evaluating reasonableness, a court would be exceeding its jurisdiction under setting aside and would be usurping the role of an appellate court.

The widened interpretation of public policy in Western Geco was also criticized by the Law Commission, which cautioned that it would shift away from the objective of minimal judicial interference on which the IAA is premised.The Law Commission remarked that such expansive interpretation would further erode faith in India as destination for domestic and international commercial arbitration.

In international practice as well, importing administrative standards of review, including reasonableness, as grounds of judicial review of arbitral awards has been dismissed. For instance, the Singapore High Court in Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte)  rejected Wednesbury principles as a ground of review of an award. The Court stated that review on ground of reasonableness is justified with respect to administrative decisions as it is presumed that when discretion is vested by the Parliament in an administrator, the discretion is to be exercised reasonably. However, this presumption is absent in case of private arbitrations, where the parties have contractually agreed to abide by the final decision of the tribunal. Similarly, the Ontario Supreme Court in Mexican States v Cargill opined that a reasonableness threshold would lead to a review on merits, as courts conduct an indepth analysis of the reasoning of the arbitrators to decide reasonableness. Therefore, expansion of fundamental policy to include reasonableness in Western Geco is at loggerheads with both Indian and international jurisprudence on the same.

3.1.2 The NYC and interpretation of public policy in the international context The expansive interpretation adopted by Western Geco does not fit well even with the principles of the NYC or international practice. The NYC sets the maximumstandard for refusal of enforcement so that a Contracting State may not expand the grounds provided therein. However, pursuing the maximum standard in every case is contrary to the objectives of the NYC of harmonizing and facilitating the enforcement of foreign arbitral awards.

One of the major obstacles is the division as propagated by BALCO, and, its exposition on the triggering of Part I and Part II. In laying down the ‘seat theory’ in Indian jurisprudence, as has been discussed above, the Court applies Part I to all arbitrations seated in India, while making Part II applicable to all arbitration seated outside India. To this effect the Court notes: ‘it is evident that the provisions of the Arbitration Act, 1996 were interpreted keeping in mind the consequences in limiting the applicability of Part I to arbitrations which take place in India’.

Resultantly, BALCO subjects even those arbitrations which are deemed to be ‘international commercial arbitrations’ under the IAA but seated in India to the invasive Part I regime. Section 2(1)(f) which defines what constitutes an ‘international commercial arbitration’ states that where one party is a foreign national the arbitration would be an international commercial arbitration.Thus, the instance where at least one of the two arbitrating parties is a foreign entity presents a situation of an international commercial arbitration, governed by the Part I of the IAA. However, as India has ratified the NYC and one of the parties under the arbitration is a foreign entity, these awards have to be enforced as per the provisions of the NYC. Article I of the NYC states that it would be applicable to all arbitrations which are not domestic.Prof Van den Berg interprets it to mean that an arbitration has to be international.In case of India, if the arbitration is seated in India, but between two parties such that one of them in not Indian, the arbitration then becomes an international arbitration which is enforced under domestic law and not under the provisions of the NYC. In essence, this category of awards which should fall under awards enforced under the NYC is excluded from the protections thereunder. Consequently, to this extent it could be argued that India has reneged from its obligations under the NYC.

There are three forms in which public policy as an exception is governed across various prominent ML jurisdictions; namely, unifying the interpretation of public policy for both domestic and foreign awards and consequently for Part I and Part II of the IAA; or statutorily creating an alternate regime for domestic awards made between domestic parties, separate from all other awards for which the narrow standard would be used; or narrowing down the public policy interpretation for even domestic awards as under the present regime.

As discussed above, the Australian, TCL case suggests that only one threshold of interpretation of public policy or any of the exceptions thereunder exists under the ML and such uniform application should be made.This view forms the first alternative, which has been recently supported by a Law Commission Report in Hong Kong, which seeks to unify the regimes into a single regime for arbitration of both domestic and international nature.Consequently, it is removing the power of the courts to review errors of fact or law.However, an argument may be made for the power of a state to regulate its own domestic arbitrations. As discussed above, it is evident that where one or both parties are international but have chosen the seat to be India, Part I of the IAA would apply. Thus, what is different in the Indian scenario as opposed to the second alternative proposed is that same treatment is given to arbitrations seated in India between at least one non-Indian party and another, as is given to arbitrations between two domestic parties.

The second alternative as mentioned above proposes a change to the present mechanism in the form of a statutory amendment. This alternative has been adopted by Switzerland. The Swiss law distinction is based entirely upon the nationality of the parties as opposed to the seat of arbitration.Chapter 12 of the Federal Statute on Private International Law applies to international arbitration. As per Swiss law an arbitration is international if at least one of the parties has its domicile or regular place of residence outside of Switzerland when the arbitration agreement is entered.The rules of the Civil Procedure Code apply to domestic arbitration which is defined as where none of the parties has its domicile or regular place of residence outside Switzerland.Thus, the anomaly which is present in Indian law where an NYC award is not enforced as per the NYC does not arise in Switzerland as they have de-linked the definition of an international commercial arbitration from the seat. This absence of distinction in India results in an unwarranted curbing of party autonomy for international arbitrations.

However, it might be argued that India is not the only country to distinguish awards on the basis of a combination of seat and nationality. This requires the consideration of the third alternative, that of construing public policy narrowly even in domestic arbitration while maintaining a distinction on the basis of the seat and nationality of the parties. Prominent jurisdictions such as France and Germany subscribe to this view. Yet, the Indian position is in no way comparable to them as even domestic awards in those jurisdictions are subject to a highly stringent application of public policy.These jurisdictions maintain the distinction without violating the NYC because the threshold required for violation, even of a domestic award, is higher than that of the NYC. Hence, irrespective of the fact that an ‘international’ arbitration is subjected to non-NYC enforcement, it receives better treatment than it would under NYC. Consequently, there is no violation of the provisions of the NYC. Prof Kro¨ll in a co-authored treatise agrees with the narrow interpretation of public policy when regarding Germany, he states that:

The violation of rules of public policy is always a ground for refusing enforcement of the award (§ 1061 ZPO and Article V (2)(b) NYC). The applicable German case law of the Federal Court of Justice generally applies a very narrow interpretation of public policy.

Further he states that ‘the grounds to refuse enforcement under both regimes are virtually identical and the procedure is largely governed by the same provisions’.In his independent report, Prof Kro¨ll notes that ‘There is in general a presumption that even where certain issues are not explicitly mentioned in the reasoning of the award, they have been taken into consideration by the tribunal.’ Hence, although the German approach envisions a mechanism of distinction of arbitral awards into domestic and international, arguably similar to India, on a comparison, the Western Geco dictum appears to be far more intrusive. Contrary to the German jurisprudence, the regimes applicable to foreign arbitral awards and those seated in India is drastically different and therefore cannot be compared.

Thus, the resulting threshold from the operation of Western Geco is not in consonance with any of the three thresholds considered thus far namely: equating and narrowly interpreting public policy; or distinguishing strictly domestic awards from international awards;or in differentiating the thresholds in light of international public policy and severely limiting the ambit of national public policy such that

[G]rave misapplications of the law will only constitute a violation of public policy where they lead to completely arbitrary decisions, which are so contrary to the fundamental principles of law that their preservation would seriously hamper faith in dispute resolution by arbitration.

The first two thresholds are unviable because of the distinction made between Part I and Part II of the IAA and furthered by numerous decisions such as Saw Pipes and Sri Lal Mahal. The third threshold, as discussed by Prof Kro¨ll, is significantly more restrictive than the threshold of ‘fundamental policy’ and ‘patent illegality’ adopted by the Indian courts

3.2 Modification of arbitral award

Western Geco is also significant because the Court modified the award of the tribunal on merits, reducing the quantum of damages awarded to the affected party. This power of modification was not recognized by the Court in Saw Pipes which offered only two alternatives to courts under section 34: either to set aside or to enforce. In assuming such power, Western Geco raises the question of the legitimacy of this power exercised by courts. The judiciary has been ambivalent towards the question whether an application to set aside the award under section 34 vests the courts with implicit power to modify the award.

The Supreme Court has often assumed the power to modify an arbitral award on an application to set aside under section 34. For instance, in Krishna Bhagya Jala Nigam Ltd. v Harischandra Reddy  the Court modified the rate of interest granted by the arbitral tribunal, stating that:

We do not see any reason to interfere except on the rates of interest and on the quantum awarded for letting machines of the contractor remaining idle for the periods mentioned in the Award. Here also we may add that we do not wish to interfere with the Award except to say that after economic reforms in our country the interest regime has changed and the rates have substantially reduced and, therefore, we are of the view that the interest awarded by the Arbitrator at 18% for the pre-arbitration period, for the pendente lite period and future interest be reduced to 9%.

Therefore, the Court revised the award on merits, though it was not set aside. Similarly, the Supreme Court in Hindustan Zinc v Friends Coal Carbonisation endorsed the modification of the award by the trial court. In these cases, however, the Court simply assumed the power to modify an arbitral award, without addressing the issue whether such a power was in consonance with the statute. This implicit power assumed by the Supreme Court was subsequently expressly recognized by the Bombay High Court in Union of India v Arctic India.  Relying on the aforementioned decisions of the Supreme Court, the Bombay High Court stated that courts under section 34 could modify the award, even if there was no express authorization for the same. A similar view was taken by the Delhi High Court, opining that modification was merely a species of setting aside.The Court remarked that the power to set aside should be construed broadly to include the power to modify. As its basis, it drew an analogy to Saw Pipes’ wide interpretation of public policy to include contravention of substantive provisions of law or terms of the contract. The Court concluded that such interpretation would be in consonance with the objective of speedy disposal of lis which underlies the IAA, with courts finally settling the dispute without relegating parties to a second round of arbitration.

The most emphatic affirmation of the power of modification under section 34 was given by the Madras High Court in Gayatry Balaswamy v ISG Novasoft Technologies Ltd (Gayatry Balaswamy). The Court recognized the existence of a power to modify under section 34:

The expression ’application for setting aside such an award’ appearing in Section 34(2) and (3) merely prescribes the form, in which, a person can seek recourse against an arbitral award. The form, in which an application has to be made, cannot curtail the substantial right conferred by the statute. In other words, the right to have recourse to a Court, is a substantial right and that right is not liable to be curtailed, by the form in which the right has to be enforced or exercised. Hence, in my considered view, the power under Section 34(1) includes, within its ambit, the power to modify, vary or revise.

Therefore, relying on the principle that the form in which a remedy is to be sought can never curtail a substantive right provided by the statute, the court upheld the existence of a power of modification.

However, courts have also refuted the implicit assumption of power of modification. In one such instance, the Delhi High Court in Puri Construction P. Ltd v Larsen and Turbo (Puri Construction)  denied the existence of the power to modify under section 34. The Court compared the IAA which is based on the ML with the Indian Arbitration Act, 1940 (IAA 1940). In its comparison, it specifically noted that section 15 of IAA 1940 provided an express power of modification to the courts. Contrarily such an express grant of a power to modify is absent in IAA. In its decision, the Court heavily weighed this absence as intention of the legislature to deviate from the IAA 1940. To justify its stance, the Court also relied on the exposition of the Supreme Court in McDermott International Inc. v Burn Standard Co. Ltd (McDermott), where the Supreme Court clearly outlined the permissible degree of judicial intervention in arbitral awards. The Court in McDermott stated：

The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.

Though the issue of modification was not expressly addressed in McDermott, the Court in Puri Construction relied on the dictum of the Supreme Court to negate the argument in favour of the power to modify. The Delhi High Court stated that modification of an award by courts would amount to correction of the award of an arbitrator, thereby going against the dictate in McDermott. Thus, the existence of the power of modification was rejected.

In Western Geco, the Supreme Court did not address the issue of power of courts to modify under section 34, but proceeded to revise the award of the tribunal on substantive grounds. The arbitrators in Western Geco awarded damages to the respondent for a period of 4 months and 22 days, attributing the delay in performance of contract to the appellant. The Supreme Court, however, divided this time period into four intervals, concluding that during two intervals the respondent ‘could and indeed ought to have acted diligently and with reasonable dispatch in the matter instead of taking the same easy’. On this ground, the Supreme Court reduced the time period of 4 months and 22 days arrived at by the tribunal by 42 days. The Court, therefore, assumed the power to modify, amending the award, and encroaching on the factual determination made by the arbitrators.

Associated Builders, on the contrary, sought to introduce a caveat to this blanket power of modification assumed by courts across the country. The Supreme Court emphatically stated that the Division Bench erred in setting aside the award of the arbitrator on a question of fact, and replacing the same with what the court determined to be just. The Court remarked that ‘Justice cannot possibly include what the court thinks is unjust on the facts of a case for which it then seeks to substitute its view for the Arbitrator’s view and does what it considers to be ‘justice’. The approach of modifying awards was termed incorrect in entirety as courts under section 34 are not courts of appeal and may not interfere with errors of fact.

The inclusion of a power to modify under section 34 is inconsistent with this difference maintained by courts between an application to set aside and an appeal. Courts have consistently held that the proceedings under section 34 constitute annulment proceedings, and may not be construed as an appeal. Thereby, the nature of power vested in courts would also differ. An appeal authorizes courts to execute a check both on the legitimacy of the decision making process as well as the substantive correctness of the decision. An annulment is, however, restricted solely to determining whether the decision of the arbitrators resulted from a legitimate process. Therefore, where an appeal can modify, an annulment may only void. In the light of this distinction, modification of an award during setting aside proceedings is erroneous.

Further, the power of modification is not in sync with international practice. It is well established, both in India and other jurisdictions, that arbitration as a mode of dispute resolution is premised on minimal court interference. The flexibilities and freedom of choice associated with arbitration bars courts from interfering in the merits of an award, though inappropriately reasoned or erroneous. Courts are thereby discouraged from reassessing the evidence, correcting the arbitral award and substituting its own view in place of that adopted by the arbitrator. This respects the primacy which ought to be given to the dispute resolution mechanism the parties themselves have chosen. Vesting in courts the power to modify an arbitral award would be in direct conflict with these fundamental principles. Modification implies change, addition, or alteration to the award of an arbitrator, thereby correcting the award and substituting the same with the decision of the court.This undermines the finality of the arbitral process, and defeats the objective of parties who made a conscious decision in favour of the expediency and finality offered by arbitration. Interference by courts in the merits of an arbitral award through modification would also render speedy disposal meaningless, thereby relegating arbitration to merely the first step of a Sisyphean process of litigation.

Additionally, as has been discussed above, the power to modify an award has no statutory force in India. The power of modification existed only under the IAA 1940, which has since been repealed. In light of the same, modification of awards by Indian courts under section 34 is to be construed as judicial overreach. In fact the phrasing of section 34, derived entirely from the ML, indicates the legislative intent to restrict the power of courts solely to setting aside. Section 34 specifically states that ‘recourse to a court against an arbitral award may be made only by an application for setting aside’ the award, thereby barring resort to other forms of judicial interference.In this context, the Explanatory Note to the ML clarifies that all possible modes of judicial interference have been detailed in the ML, thereby prohibiting courts from interfering through other means.Similarly, the IAA specifies setting aside as the sole permissible form of court intervention in arbitral awards. Despite this, courts across the country have often proceeded to amend arbitral awards. This also does not accord with the international framework of arbitration, where courts exercising the power to modify have acted only on statutory authority. For instance, the arbitration acts of England, Australia, Singapore, and the USA expressly vest in courts the power to modify an arbitral award. Corresponding provisions being absent under the IAA, Indian courts have transgressed their jurisdiction by modifying arbitral awards

Yet, the trend of judicial intervention through modification has been widespread in India, with courts often adjudicating on the merits of a case in the guise of exercise of power under section 34. In Mrinal Chowdhury v Union of India, the Calcutta High Court scrutinized the evidence presented before the tribunal, coming to the conclusion that the arbitrator erred in inflicting a ‘more severe punishment’ on one party. On these grounds, the court passed an order setting aside the ‘punishment’ imposed. The court also went one step further by imposing on the party an alternate ‘punishment’, therein crossing the threshold of permissible limits of interference. Similarly, the Delhi High Court in Sikka Associates v Airport Authority of India modified the award of the arbitrator, quoting the ‘interest of justice’. Continuance of such a trend would open floodgates to litigation, defeating the objectives of the 1996 Act

However, courts which have included within section 34 the power to modify have in instances been prompted by considerations of expeditious disposal of proceedings. In the absence of such power, even in instances where merely a portion of the award of arbitrator is defective, requiring minor modification for final settlement, the courts will be compelled to set aside the entire award. Parties would thereby be required to resort to a second round of arbitration, or pursue other civil remedies, incurring substantial loss of both money and time. This would render arbitration as an alternate mode of dispute settlement more ‘cumbersome that the traditional judicial process’. Such an interpretation of the statute, in the court’s opinion, would be redundant, making the ‘remedy worse than the disease’.

Nevertheless, such claims cannot be used to justify the exercise of power by courts beyond what is statutorily vested and in contradiction to the foundation of arbitration. A viable alternative to modification is partial setting aside of the arbitral award, rendering void only the defective portion of the award, thereby addressing concerns of efficacy while preserving the integrity of arbitration.

Partial setting aside has been expressly endorsed by the Supreme Court in J.G. Engineers v Union of India, authorizing courts under section 34 to sever the good portions of the valid from the infructuous. With respect to the portions set aside, the parties may be redirected to arbitration. However, a significant, untainted portion of the award would still be in existence, ensuring that parties are not compelled to resort to a second round of arbitration with regard to the same. This would restore to arbitration its core characteristics of efficacious and expeditious disposal. Such interpretation would also be in accordance with the framework contemplated by the 1996 Act, providing swift resolution of disputes free of excessive court interference.

Partial setting aside or enforcement is also an accepted procedure in other jurisdictions, preventing misguided attempts to topple an entire award. It is permitted as long as the two parts of the award are severable, such that the remaining portion of the award is unaffected by the part set aside. The policy of courts being to support the arbitral process, it would be absurd if the entire award was to fail on account of a shortcoming in one portion. An ‘all or nothing’ approach would also be unnecessarily technical, and inconsistent with the policy behind arbitration. Further, it would also have undesirable commercial consequences, resulting, for instance, in an award of £100 million being set aside in entirety on a challenge to only a £5 million part of it.

Partially setting aside an award thus provides the ideal limit of curial interference in an arbitral award. By preserving a significant portion of the award, partial setting aside ensures that parties are not compelled to begin the process of adjudication once again. At the same time, it does not lead to excessive intervention by courts, which is associated with the power of modification. It is, therefore, in tune with both finality of an award and party autonomy in choosing arbitration as a mode of dispute resolution. In fact, the Austrian Supreme Court on 26 January 2005 permitted partial

enforcement of the award but refused to substitute the interest awarded by the arbitrator with its own decision. Similarly, in Puri Construction, the Delhi High Court rejected the existence of a power of modification, while it partially set aside the award granted by the arbitrator. This may be indicative of a gradual change in the attitude of Indian courts in recognizing limits on their exercise of power, thereby opting for partial setting aside where the award is severable. Yet, a definitive claim towards this shift would be premature without the validation of such decisions by the Supreme Court.

This, however, does not imply that in instances where the defective portions of the award are not severable, the courts may resort to modification. Such modification of an award would require the court to make a determination on the basis of evidence available. However, evidence cannot be presented before the court under section 34, as it would then amount to an appeal. Thus, in modifying the award, the court would be arriving at a conclusion without providing parties with an opportunity to present their case, violating governing norms of natural justice. Ignoring the strict distinction between setting aside and modification would thus infringe on the inherent rights of the parties. It is, therefore, imperative that courts acknowledge this distinction so as to further arbitration as a viable dispute resolution regime in India.

4. CONCLUSION

The Supreme Court decisions since Renusagar to Sri Lalmahal and Saw Pipes to Western Geco indicate contrasting approaches in allowing autonomy to arbitration. Despite the Indian commitment to reduced judicial intervention vide section 5 of the IAA, demonstrably, on occasions the courts have refused to accept this commitment. Instances such as the assumption of power to modify the arbitral award indicate a position, that courts believe intervention is necessary to support arbitration. Other instances such as broadening of the public policy exception clearly show an assertion of superiority on part of the courts to regulate and control arbitration. Both these circumstances warrant a critique as they are detrimental to the arbitration framework of India.

The courts’ peculiar broadening of the interpretation of ‘fundamental policy’ resulting in the adamant compliance to ‘all principles which ensure justice’is exactly what the Court warned in its Renusagar dictum. That case rightly cited the US Supreme Court decision in Fritz Scherk v Alberto-Culverstating that ‘We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our Courts.’It also cites another landmark US decision of Mitsubishi Motors stating that ‘concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system’ are warranted. The two abovementioned instances of broadening public policy are the most recent invasion of the autonomy of the parties and the integrity of the arbitral process.

The authors have postulated three possible approaches the Indian interpretation of public policy could take, illustrated in three prominent jurisdictions and analysed the Indian position to conclude that it falls foul of all three such mechanisms as well as the NYC. Finally, however, only a change initiated by the legislature can substantially streamline the position and help in formulating a consistent regime ensuring predictability. With the probability of an amendment bill in the parliament, there could be a major shift in the position on the interpretation of public policy. A narrower construction of public policy would in its spirit forego the power of the courts to modify awards which would be a welcome step in making India an arbitration friendly jurisdiction.