The Public Policy Issue in Awards Without Proper Reason–Madras High Court

Milind Yadav[1]

The 2019 amendments to the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) has helped propel India forward as an arbitration-friendly destination for the global community. The emerging jurisprudence on arbitration discourages judicial intervention in arbitral proceedings until ‘public policy’ enters the frame. Despite acknowledging the need to reduce judicial intervention, courts may occasionally be unable to enforce a challenged award because the challenge that may appear to be a mere procedural error snowballs into a substantive issue related to crucial grounds of challenge like ‘public policy’. The situation gets precarious even further when the arbitral tribunal seems to have overpowered the substantive rules they are bound to follow. The combined situation of substantive irregularity in the award and misuse of jurisdiction by the tribunal calls for judicial intervention as the last resort. The author analyses the above premise through an analysis of the recent case adjudged by the Madras High Court where the challenged award had contravened the provisions of the Arbitration Act. The case appears to revolve around a mere procedural requirement that was not adhered to, and the judicial intervention seems to have been uncalled for. However, the author argues that deeper analysis indicates a potential infringement on the ground of the ‘public policy’ that the Division Bench of the Madras High Court took into consideration but not expressly acknowledged while analysing the award reaffirmed by the Single Judge Bench of the High Court.


Facts of the Case


Recently, the Madras High Court in Hindustan Petroleum Corporation Ltd v Banu Construction[2] heavily criticized the Single Bench for failing to examine the award when an application to set it aside was submitted/filed. In fact, when addressing the Single Bench’s order that passed the challenged award, the Division Bench remarked, “this is a classic example of what cannot be done by an Arbitration Court.”[3]


In this matter, the award was initially challenged before the Single Bench. However, the bench rejected the challenge and reaffirmed the quantum being awarded. This order by the Single Bench was challenged before the Division Bench of the Madras High Court under Section 37 of the Act with the appellant alleging that the order was unreasoned and therefore, unenforceable.


The Judgement


The court primarily examined the content of the award to deduce the shortcomings in the tribunal order in question. Basing their decision on the principle codified in the Act, which provides that “the award shall state the reasons upon which it is based”[4], the court opined that the arbitrator had not given any considerable reason that indicates his ‘application of mind’ in the quantum awarded.[5] However, the author argues that the judgment not only addresses the consequences of not adhering to procedural formalities but also portrays the jurisprudential understanding to keep arbitral proceedings in check with the help of the principles of public policy, the interest of justice and conscience of the court.


Analysis


Scope to Set Aside an Arbitral Award


The statutory authority of the Court to set aside an arbitral award, albeit limited, is enshrined in Section 34(2)(b)(ii) of the Act. The award can be set aside if it violates the public policy of India, i.e., it contravenes the fundamental policy of law or conflicts with the basic notions of morality or justice. Over the years, the courts have attempted to define public policy in order to inspect/review and set aside arbitral awards. Though courts have not established the definition of ‘public policy’ but it is firmly certain that whatever falls within ‘public policy’ can be rightfully lead to judicial intervention.


In Oil and Natural Gas Co. Ltd. v. Saw Pipes[6], the court gave a wider meaning to public policy by applying to it a meaning similar to that of public good and public interest and held that an award that contravenes statutory provisions is against public policy as well. In Mcdermott International Inc v. Burn Standard Co. Ltd[7], the Supreme Court held that courts have a supervisory role to ensure fairness in arbitral awards. In ONGC Ltd. v. Western Geco International Ltd.[8], the court laid down certain principles for a suitable judicial approach as well as natural justice to define the boundaries of the phrase ‘fundamental policy of Indian law’. Essentially, the principles lay down that any court or tribunal must refrain from acting arbitrarily, which may otherwise have civil consequences and that they should act judicially and in the interests of justice.[9]


In 2015[10], the Supreme Court emphasised that an arbitrator is the sole judge who examines the facts of the case. Therefore, the arbitrator cannot be irrational/unreasonable when deciding the award, and the reasons for the award should be able to withstand the ‘reasonable man’ test.[11] The court further held that an award cannot be enforced if it goes against justice and morality such that it shocks the conscience of the court.[12]


In two recent cases, the Supreme Court has adopted views that is opposite to the observations made by the Hon’ble High Court in the present case. In Venture Global Engineering LLC v. Tech Mahindra Ltd.[13], the Supreme Court held that a court cannot examine the legality of an arbitral award. The point was further elaborated in Ssangyong Engineering & Construction Co. Ltd. v. NHAI[14], where the Supreme Court clarified that courts cannot interfere with an arbitral award on the ground that “justice has not been done in the opinion of the Court”.[15] At the same time, the Supreme Court reasserted its earlier stand on the interpretation of ‘public policy’ as was opined in the judgment of Government of India v Vedanta Limited[16], where the court had held that ‘public policy’ comprised of fundamental policy, the interest of justice, and morality.


The Public Policy Role of the Arbitrator


The court found that the award by the tribunal is set on a total of 120 pages which covers everything from facts to claims but the reasoning for the quantum awarded by the tribunal was hardly a paragraph on page number 118 of the award.[17] However, it was not with respect to the lack of proportional reasoning with respect to the total number of pages in the award that led to the contravention of public policy. Rather, it was the fact that the arbitrator did not address the reasoning behind his decision at all. The Act mandates the arbitrator to record reasons for the award[18] because the courts, who would have reviewed the dispute otherwise, have limited authority to examine the award when the same is challenged. The courts can then rely on the arbitral tribunal’s reasons for its findings on merits or jurisdiction to adjudicate the challenge.


The Statutory Responsibility of Tribunal and the Limitation


In the present case, what shook the conscience of the Division Bench Court was that the Single Judge Bench of the High Court chose not to set aside the award despite prima facie inconsistency with the provision of the Act. Rather, the court itself gave reasons for the award in the judgment by examining the merits of the case. It seems unreasonable for the court to take such a course because the Act clearly states that the reasoning for the award must be given in the award itself. There is no provision for the court to provide reasons as a ‘substitute’ to the arbitrator’s findings in a challenged award. The court, instead of analysing the award in its entirety and without examining the merits of the case, stepped into the shoes of the arbitrator to satisfy the ‘reasonableness’ for the quantum awarded. The same is pointed out by the Division Bench to ‘rewrite the arbitration award’ in order to support the quantum awarded is not the ‘business’ of the court.[19] Thus, the court went well over the statutory responsibility by dismissing the challenge and substituting the arbitrator’s lack of reasoning with its own.


The Sense of Subtle Biasness


Though the Madras High Court did not directly assert partiality and a prejudicial bias on part of the arbitrator, if any, the vehement criticism of the arbitral award may suggest a red alert that the Court realized while analysing the award. The Act requires the appointed arbitrator to disclose his personal interest before the arbitral proceedings commence.[20] However, there remains a probable chance that the arbitrator omitted to make a substantial disclosure, either intentionally or mistakenly. The Act recognises the implications of a biased arbitrator and allows the parties to challenge the appointment of arbitrators if circumstances exist to raise “justifiable doubts as to his independence or impartiality.”[21] However, this provision can be successfully invoked only when the party challenging the appointment has sufficient grounds to prove the arbitrator’s partiality and biases. Thus, when an arbitral award is challenged, courts tend to keep the sceptics of partiality within the purview of “interest of justice and morality[22] while examining the arbitral award.


Conclusion

The Madras High Court’s analysis might seem superficial due to the consideration of factors like the number of pages for each part, and the Division Bench observing the lack of proportionality for the reasons assigned to the decision of the arbitrator. However, the court did follow implicitly the spirit of the Indian arbitration jurisprudence within which an award cannot be against the public policy of India and cannot be so egregious as to shock the conscience of the court. The arbitrator in the present case had irrationally chosen to not record proper reasons for the decision. Therefore, the court did take the right approach by opining that the award was “not worth the paper it is printed on”[23] and was hence set aside.


[1] Milind Yadav is a Third Year Student at Jindal Global Law School. He is also the Associate Editor of the International Journal of Legal Studies and Arbitration. He can be contacted at milind9yadav@gmail.com. [2] Hindustan Petroleum Corporation Ltd v. Banu Constructions, OSA.No.270 of 2020. [3] Ibid at [2]. [4] Section 31(3), Arbitration and Conciliation Act. [5] Hindustan, Supra note 2 at [9]. [6] Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., 2003 (4) SC 171. [7] Mcdermott International INC. v. Burn Standard Co. Ltd., (1991) 2 SCC 669. [8] Oil And Natural Gas Corporation Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263. [9] Ibid at [26]. [10] Associated Builder v. Delhi Development Authority, (2004) 73 DRJ 551. [11] Ibid at 23-24. [12] Ibid at 26. [13] Venture Global Engg. LLC v. Tech Mahindra Ltd., (2018) 1 SCC 656. [14] Ssangyong Engineering and Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131. [15] Ibid at [48]. [16] Government of India v. Vedanta Ltd., (2020) 10 SCC 1. [17] Supra note 2 at [5]. [18] Section 31(3), Arbitration and Conciliation Act, 1996. [19] Supra note 2 at [15]. [20] Section 12, Arbitration and Conciliation Act, 1996. [21] Section 12(3), Arbitration and Conciliation Act, 1996. [22] Government of India v. Vedanta Ltd., (2020) 10 SCC 1 43. [23] Supra note 2 at [6].

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