Whether the award could be set aside, if the Arbitral Tribunal has not followed the mandatory procedure prescribed under S. 24, 28 or 31(3), which affects the rights of the parties?

Under sub-section (1)(a) of S. 28 there is a mandate to the Arbitral Tribunal to decide the dispute in accordance with the substantive law for the time being in force in India. Admittedly, substantive law would include the Indian Contract Act, the Transfer of Property Act and other such laws in force. Suppose, if the award is passed in violation of the provisions of the Transfer of Property Act or in violation of the Indian Contract Act, the question would be – whether such award could be set aside? Similarly, under sub-section (3), Arbitral Tribunal is directed to decide the dispute in accordance with the terms of the contract and also after taking into account the usage of the trade applicable to the transaction. If Arbitral Tribunal ignores the terms of the contract or usage of the trade applicable to the transaction, whether the said award could be interfered? Similarly, if the award is non-speaking one and is in violation of S. 31(3), can such award be set aside? In our view, reading S. 34 conjointly with other provisions of the Act, it appears that the legislative intent could not be that if the award is in contravention of the provisions of the Act, still however, it couldn’t be set aside by the Court. If it is held that such award could not be interfered, it would be contrary to basic concept of justice. If the Arbitral Tribunal has not followed the mandatory procedure prescribed under the Act, it would mean that it has acted beyond its jurisdiction and thereby the award would be patently illegal which could be set aside under S. 34.

13. The aforesaid interpretation of the Cl. (v) would be in conformity with the settled principle of law that the procedural law cannot fail to provide relief when substantive law gives the right. Principle is – there cannot be any wrong without a remedy. In M. V. Elisabeth and others vs. Harwan Investment and Trading Pvt. Ltd. (1993) 2 Suppl. SCC 433 this Court observed that where substantive law demands justice for the party aggrieved and the statute has not provided the remedy, it is the duty of the Court to devise procedure by drawing analogy from other systems of law and practice. Similarly, in Dhanna Lal vs. Kalawatibai and others (2002) 6 SCC 16 this Court observed that wrong must not be left unredeemed and right not left unenforced.

14. Result is – if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, which could be interfered under S. 34. However, such failure of procedure should be patent affecting the rights of the parties.

WHAT MEANING COULD BE ASSIGNED TO THE PHRASE ‘PUBLIC POLICY OF INDIA’?

15. The next clause which requires interpretation is Cl. (ii) of sub-section (2)(b) of S. 34 which inter alia provides that the Court may set aside arbitral award if it is in conflict with the ‘Public Policy of India.’ The phrase ‘Public Policy of India’ is not defined under the Act. Hence, the said term is required to be given meaning in context and also considering the purpose of the section and scheme of the Act. It has been repeatedly stated by various authorities that the expression ‘public policy’ does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept ‘public policy’ is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Lacking precedent the Court has to give its meaning in the light and principles underlying the Arbitration Act, Contract Act and constitutional provisions.

16. For this purpose, we would refer to few decisions referred to by the learned counsel for the parties. While dealing with the concept of ‘public policy,’ this Court in Central Inland Water Transport Corporation Limited and another vs. Brojo Nath Ganguly and another (1986) 3 SCC 156 has observed thus :-

“92. The Indian Contract Act does not define the expression “public policy” or “opposed to public policy.” From the very nature of things, the expressions “public policy,” “opposed to public policy,” or “contrary to public policy” are incapable of precise definition. Public policy, however, is not the policy of a particular Government. It connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the Courts and similarly where there has been a well recognised head of public policy, the Courts have not shirked from extending it to the new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy. There are two schools of thought – “the narrow view” school and “the broad view” school. According to the former, Courts cannot create new heads of public policy whereas the latter countenances judicial law-making in this area. The adherents of “the narrow view” school would not invalidate a contract on the ground of public policy unless that particular ground had been well established by authorities. Hardly ever has the voice of the timorous spoken more clearly and loudly than in these words of Lord Davey in Janson vs. Driefontein Consolidated Gold Mines Ltd. (1902) AC 484, 500) “Public policy is always an unsafe and treacherous ground for legal decision.” That was in the year 1902. Seventy-eight years earlier, Burrough, J., in Richardson vs. Mellish (1824) 2 Bing 229, 252) described public policy as “a very unruly horse, and when once you get astride it you never know where it will carry you.” The Master of the Rolls, Lord Denning, however, was not a man to shy away from unmanageable horses and in words which conjure up before our eyes the picture of the young Alexander the Great taming Bucephalus, he said in Enderby Town Football Club Ltd. vs. Football Assocn. Ltd. (1971) Ch 591, 606); “With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles.” Had the timorous always held the field, not only the doctrine of public policy but even the common law or the principles of equity would never have evolved. Sir William Holdsworth in his “History of English Law,” Volume III, page 55, has said :

In fact, a body of law like the common law, which has grown up gradually with the growth of the nation, necessarily acquires some fixed principles, and if it is to maintain these principles it must be able, on the ground of public policy or some other like ground, to suppress practices which, under ever new disguises, seek to weaken or negative them.

It is thus clear that the principles governing public policy must be and are capable, on proper occasion, of expansion or modification. Practices which were considered perfectly normal at one time have today become obnoxious and oppressive to public conscience. If there is no head of public policy which covers a case, then the Court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy. Above all, in deciding any case which may not be covered by authority our Courts have before them the beacon light of the preamble to the Constitution. Lacking precedent, the Court can always be guided by that light and the principles underlying the Fundamental Rights and the Directive Principles enshrined in our Constitution.

93. The normal rule of common law has been that a party who seeks to enforce an agreement which is opposed to public policy will be non-suited. The case of A. Schroeder Music Public Co. Ltd. vs. Macaulay (1974) 1 WLR 1308), however, establishes that where a contract is vitiated as being contrary to public policy, the party adversely affected by it can sue to have it declared void. The case may be different where the purpose of the contract is illegal or immoral. In Kedar Nath Motani vs. Prahlad Rai (1960) 1 SCR 861, reversing the High Court and restoring the decree passed by the trial Court declaring the appellants’ title to the lands in suit and directing the respondents who were the appellants’ benamidars to restore possession, this Court, after discussing the English and Indian law on the subject, said (at page 873) :

“The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiffis not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff’s conduct, and he should not be allowed to circumvent the illegality by resorting to some subterfuge or by misstating the facts. If, however, the matter is clear and the illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to outrage the conscience of the Court, the plea of the defendant should not prevail.

The types of contracts to which the principle formulated by us above applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shcok the conscience of the Court. They are opposed to public policy and require to be adjudged void.”

17. Further, in Renusagar Power Co. Ltd. vs. General Electric Co. (1994) 1 Suppl. SCC 644, this Court considered S. 7(1) of the Arbitration (Protocol and Convention) Act, 1937 which inter alia provided that a foreign award may not be enforced under the said Act, if the Court dealing with the case is satisfied that the enforcement of the award will be contrary to the public policy. After elaborate discussion, the Court arrived at the conclusion that public policy comprehended in S. 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 is the ‘Public Policy of India’ and does not cover the public policy of any other country. For giving meaning to the term ‘Public Policy,’ the Court observed thus :-

“66. Article 5(2)(b) of the New York Convention of 1958 and S. 7(1)(b)(ii) of the Foreign Awards Act do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to the law of the country of enforcement and the ground of challenge is confined to the recognition and enforcement being contrary to the public policy of the country in which the award is set to be enforced. There is nothing to indicate that the expression “public policy” in Art. 5(2)(b) of the New York Convention and S. 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which it was used in Art. 1(c) of the Geneva Convention of 1927 and S. 7(1) of the Protocol and Convention Act of 1937. This would mean that “public policy” in S. 7(1)(b)(ii) has been used in a narrower sense and in order to attract to bar of public policy the enforcement of the award must invoke something more than the violation of the law of India. Since the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are governed by the principles of private international law, the expression “public policy” in S. 7(1)(b)(ii) of the Foreign Awards Act must necessarily be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria it must be held that 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.”

18. The Court finally held that :-

“76. Keeping in view the aforesaid objects underlying FERA and the principles governing enforcement of exchange control laws followed in other countries, we are of the view that the provisions contained in FERA have been enacted to safeguard the economic interests of India and any violation of the said provisions would be contrary to the public policy of India as envisaged in S. 7(1)(b)(ii) of the Act.”

19. This Court in Murlidhar Agarwal and another vs. State of U.P. and others (1974) 2 SCC 472 while dealing with the concept of ‘public policy’ observed thus :-

“31. Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time.

32. The difficulty of discovering what public policy is at any given moment certainly does not absolve the Judges from the duty of doing so. In conducting an enquiry, as already stated, Judges are not hide-bound by precedent. The Judges must look beyond the narrow field of past precedents, though this still leaves open the question, in which direction they must cast their gaze. The Judges are to base their decision on the opinions of men of the world, as distinguished from opinions based on legal learning. In other words, the Judges will have to look beyond the jurisprudence and that in so doing, they must consult not their own personal standards or predilections but those of the dominant opinion at a given moment, or what has been termed customary morality. The Judges must consider the social consequences of the rule propounded, especially in the light of the factual evidence available as to its probable results. ……The point is rather that this power must be lodged somewhere and under our Constitution and laws, it has been lodged in the Judges and if they have to fulfil their function as Judges, it could hardly be lodged elsewhere.”

From this discussion it would be clear that the phrase ‘public policy of India’ is not required to be given a narrower meaning. As stated earlier, the said term is susceptible of narrower or wider meaning depending upon the object and purpose of the legislation. Hence, the award which is passed in contravention of S. 24, 28 or 31 could be set aside. In addition to S. 34, S. 13(5) of the Act also provides that Constitution of the Arbitral Tribunal could also be challenged by a party. Similarly, S. 16 provides that a party aggrieved by the decision of the Arbitral Tribunal with regard to its jurisdiction could challenge such arbitral award under S. 34. In any case, it is for the Parliament to provide for limited or wider jurisdiction to the Court in case where award is challenged. But in such cases, there is no reason to give narrower meaning to the term ‘public policy of India’ as contended by learned senior counsel Mr. Dave. In our view, wider meaning is required to be given so as to prevent frustration of legislation and justice. This Court in Rattan Chand Hira Chand vs. Askar Nawaz Jung (dead) by LRs and others (1991) 3 SCC 67, observed thus :-

“17. …..It cannot be disputed that a contract which has a tendency to injure public interests or public welfare is one against public policy. What constitutes an injury to public interests or welfare would depend upon the times and climes. . . . . The legislature often fails to keep pace with the changing needs and values nor is it realistic to expect that it will have provided for all contingencies and eventualities. It is, therefore, not only necessary but obligatory on the Courts to step in to fill the lacuna. When Courts perform this function undoubtedly they legislate judicially. But that is a kind of legislation which stands implicitly delegated to them to further the object of the legislation and to promote the goals of the society. Or to put it negatively, to prevent the frustration of the legislation or perversion of the goals and values of the society.”

Therefore, in our view, the phrase ‘public policy of India’ used in S. 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy in Renusagar’s case (supra), it is required to be held that the award could be set aside if it is patently illegal. Result would be – 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.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.