Indian Arbitration: Is Public Policy its Shield or Its Shackle?

Introduction 

In the intricate tapestry of law, certain threads are woven with a purpose so fundamental they underpin the very fabric of society. “Public policy” is one such thread, an overarching principle that, at its heart, serves as a societal compass, guiding legal systems to invalidate agreements or actions detrimental to the common good. Think of it as an invisible guardian, ensuring that no contract, however meticulously drafted, can stand if it threatens the welfare of the public – be it through promoting illegal activities, stifling competition, or undermining basic human rights. This age-old concept, deeply rooted in common law, has perpetually evolved, oscillating between narrow interpretations that cautiously apply its tenets and broader ones that embrace its protective spirit.

This dynamic evolution finds a particularly fascinating battleground in the realm of Indian arbitration. Here, public policy transforms from an abstract legal concept into a tangible gatekeeper, capable of both opening the way for just outcomes and blocking the path of unjust ones. The journey of this principle within arbitration is a tale of judicial interpretation and legislative reform, punctuated by landmark cases like Renusagar Power Co. Ltd. v. General Electric Co.¹ and ONGC v. Saw Pipes Ltd.² These judicial pronouncements have not merely interpreted the law; they have actively shaped the contours of public policy in the arbitral landscape, dictating when and how this powerful exception can be invoked.

Within the framework of the Arbitration Act³,  Sections 34 and 48 enshrine the “public policy exception,” providing the mechanism through which an arbitral award, be it domestic or international, can be challenged and potentially set aside or refused enforcement. This critical provision acts as a safeguard, ensuring that even in the pursuit of efficient dispute resolution, the fundamental principles guiding the Indian legal system are never compromised. The very existence of an arbitration agreement, as defined in Section 7 of the Arbitration Act, is a prerequisite for arbitration, and even in instances where this foundational agreement is flawed or absent, the flexibility of the Act allows for the consideration of public policy implications, particularly when foreign parties are involved, as highlighted by Section 28. This article will delve into the nuances of this public policy exception, which is crucial to understanding the intricate interplay between party autonomy and the overarching mandate of justice in Indian arbitration.

In the intricate tapestry of law, certain threads are woven with a purpose so fundamental they underpin the very fabric of society. “Public policy” is one such thread, an overarching principle that, at its heart, serves as a societal compass, guiding legal systems to invalidate agreements or actions detrimental to the common good. Think of it as an invisible guardian, ensuring that no contract, however meticulously drafted, can stand if it threatens the welfare of the public – be it through promoting illegal activities, stifling competition, or undermining basic human rights. This age-old concept, deeply rooted in common law, has perpetually evolved, oscillating between narrow interpretations that cautiously apply its tenets and broader ones that embrace its protective spirit.

This dynamic evolution finds a particularly fascinating battleground in the realm of Indian arbitration. Here, public policy transforms from an abstract legal concept into a tangible gatekeeper, capable of both opening the way for just outcomes and blocking the path of unjust ones. The journey of this principle within arbitration is a tale of judicial interpretation and legislative reform, punctuated by landmark cases like Renusagar Power Co. Ltd. v. General Electric Co. and ONGC v. Saw Pipes Ltd. These judicial pronouncements have not merely interpreted the law; they have actively shaped the contours of public policy in the arbitral landscape, dictating when and how this powerful exception can be invoked.

Within the framework of the Arbitration Act, Sections 34 and 48 enshrine the “public policy exception,” providing the mechanism through which an arbitral award, be it domestic or international, can be challenged and potentially set aside or refused enforcement. This critical provision acts as a safeguard, ensuring that even in the pursuit of efficient dispute resolution, the fundamental principles guiding the Indian legal system are never compromised. The very existence of an arbitration agreement, as defined in Section 7 of the A&C Act, is a prerequisite for arbitration, and even in instances where this foundational agreement is flawed or absent, the flexibility of the Act allows for the consideration of public policy implications, particularly when foreign parties are involved, as highlighted by Section 28. This article will delve into the nuances of this public policy exception, which is crucial to understanding the intricate interplay between party autonomy and the overarching mandate of justice in Indian arbitration.

The Judicial Pendulum: Oscillations in Interpreting Public Policy

The narrative of public policy in Indian arbitration is marked by a fascinating judicial pendulum, swinging between cautious restraint and expansive intervention. In the pre-1996 era, the Supreme Court, in Renusagar Power Co. Ltd. v. General Electric Company, laid down a foundational precedent for foreign arbitral awards, championing a narrow interpretation of public policy. It decreed that enforceability could be challenged only on three specific grounds: fundamental policy of Indian law, the interests of India as a nation, and justice and morality. This approach reflected a clear intent to foster the enforceability of international awards, aligning with the spirit of global commerce.

However, the post-1996 Act landscape witnessed a significant shift with ONGC v. Saw Pipes Ltd., where the Supreme Court, venturing into domestic arbitral awards, introduced “patent illegality” as an additional ground for judicial interference. This decision, akin to opening a Pandora’s Box, broadened the avenues for challenging both domestic and, by extension through subsequent rulings like Bhatia International v. Bulk Trading S.A.⁴, Venture Global v. Satyam Computers, and Phulchand Exports Limited v. O.O.O. Patriot⁵, even foreign arbitral awards. The pendulum had swung decisively towards wider scrutiny.

A corrective wave emerged with Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.⁶, a landmark judgment that acknowledged the overreach and prospectively overruled Bhatia International, reaffirming that international arbitral awards would not be subjected to the domestic public policy exception under Section 34. This was a crucial step towards re-establishing India’s pro-enforcement stance in international arbitration.

Yet, the judicial journey was far from linear. ONGC v. WesternGeco International Ltd.⁷ represented another twist, seemingly betraying a tendency to reinforce and even expand the public policy exception. Critically, the Court, in this instance, conflated the merits of an award with its enforceability, inadvertently paving the way for courts to re-examine the substantive aspects of arbitral decisions, a potential subversion of the very essence of arbitration. The ripples of this decision were addressed, in part, by Associate Builders v. DDA⁸, which sought to mitigate the damage. Here, the Court refined the “patent illegality” ground by introducing a test of reasonability for contract interpretation, and also meticulously explicated the confined boundaries of the “justice and morality” and “interests of India” exceptions, aiming to prevent further manipulation.

The legislative response to these judicial oscillations came with the 2015 Amendments to the Arbitration Act. Promoted by a supplementary to the 246th Law Commission Report expressing disapproval of the expansive interpretations, these amendments, through the inclusion of two explanations and Section 34 (2A), served as a necessary overhaul. The impact was clearly demonstrated in Ssangyong Engineering v. National Highways Authority of India⁹, where the Supreme Court, extensively referencing the 2015 amendments, emphatically held that the broad interpretation of public policy seen in WesternGeco was no longer tenable. This judgment marked a much-anticipated return to the narrow construction of public policy akin to that championed in Renusagar.

The pro-enforcement tide continued with Vijay Karia v. Prysmian Cavi E Sistemi SRL¹⁰ in 2020, where the Supreme Court reinforced that mere contravention of law alone would not suffice to deny the enforcement of foreign arbitral awards. However, the saga remains dynamic. The recent ruling in National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A.¹¹ presented a fresh challenge, where a foreign arbitral award was deemed unenforceable on two counts: its voidness under Section 32 of the Indian Contract Act, and its dissonance with India’s export policy. This enhanced application of domestic laws in a foreign award enforcement suggests that the pendulum, though largely favoring a narrow interpretation, may still harbor surprises, hinting that foreign arbitral awards in the future might encounter a greater level of scrutiny concerning their consonance with specific domestic legal provisions.

In the intricate tapestry of law, certain threads are woven with a purpose so fundamental they underpin the very fabric of society. “Public policy” is one such thread, an overarching principle that, at its heart, serves as a societal compass, guiding legal systems to invalidate agreements or actions detrimental to the common good. Think of it as an invisible guardian, ensuring that no contract, however meticulously drafted, can stand if it threatens the welfare of the public – be it through promoting illegal activities, stifling competition, or undermining basic human rights. This age-old concept, deeply rooted in common law, has perpetually evolved, oscillating between narrow interpretations that cautiously apply its tenets and broader ones that embrace its protective spirit.

This dynamic evolution finds a particularly fascinating battleground in the realm of Indian arbitration. Here, public policy transforms from an abstract legal concept into a tangible gatekeeper, capable of both opening the way for just outcomes and blocking the path of unjust ones. The journey of this principle within arbitration is a tale of judicial interpretation and legislative reform, punctuated by landmark cases like Renusagar Power Co. Ltd. v. General Electric Co. and ONGC v. Saw Pipes Ltd. These judicial pronouncements have not merely interpreted the law; they have actively shaped the contours of public policy in the arbitral landscape, dictating when and how this powerful exception can be invoked.

Within the framework of the Arbitration & Conciliation Act, 1996 (A&C Act), Sections 34 and 48 enshrine the “public policy exception,” providing the mechanism through which an arbitral award, be it domestic or international, can be challenged and potentially set aside or refused enforcement. This critical provision acts as a safeguard, ensuring that even in the pursuit of efficient dispute resolution, the fundamental principles guiding the Indian legal system are never compromised. The very existence of an arbitration agreement, as defined in Section 7 of the Arbitration Act, is a prerequisite for arbitration, and even in instances where this foundational agreement is flawed or absent, the flexibility of the Act allows for the consideration of public policy implications, particularly when foreign parties are involved, as highlighted by Section 28. This article will delve into the nuances of this public policy exception, which is crucial to understanding the intricate interplay between party autonomy and the overarching mandate of justice in Indian arbitration.

The Double-Edged Nature of Public Policy: A Potential Detour

While intended as a vital safeguard, the public policy exception can, at times, appear as a double-edged sword, potentially undermining the very efficient arbitration promises. In a legal climate where traditional litigation is often viewed as cumbersome and best avoided, arbitration offers a streamlined alternative for resolving disputes. However, the existence of these public policy “backdoors” allows disgruntled parties to inject judicial intervention back into the process, stretching out resolution timelines. This directly clashes with the fundamental goal of the Arbitration Act: to minimize court interference and uphold the autonomy of arbitral tribunals.

Moreover, if India is to solidify its position as a premier international arbitration hub, it’s imperative that the enforceability of arbitral awards remains robust and isn’t unduly hampered by an overly expansive reading of public policy. The challenges posed by this exception aren’t novel; as far back as 1824, in Richardson v. Mellish, public policy was famously cautioned as an “unruly horse,” highlighting its unpredictable influence. Beyond its role in ensuring judicial oversight, a less frequently voiced concern against a broad public policy exception is the inherent uncertainty it introduces: there’s no absolute guarantee that a reviewing court will always adopt the most appropriate view, which can lead to inconsistent and subjective outcomes.

Excessive reliance on the public policy exception risks creating both a perception and a reality of inconsistency in arbitral results. Granting courts significant leeway to intervene could discourage prospective parties from opting for arbitration, as the entire process, despite its initial appeal, might be rendered moot at the final enforcement stage. Furthermore, in situations marked by imbalanced access to information or economic power, a dominant party, knowing these judicial interventions are possible, might find little reason to include arbitration clauses in their agreements. This could have a broader, detrimental impact on weaker parties, such as employees in disputes with their employers, by pushing them into more expensive and protracted traditional litigation. Indeed, courts in the USA have largely concurred that over-reliance on this exception would dilute the New York Convention’s primary objective of reducing hurdles to the enforceability of international arbitral awards, underscoring a global apprehension about the potential drawbacks of an unchecked public policy exception.

Conclusion: Charting the Course for Indian Arbitration

The journey of public policy in Indian arbitration has been a compelling odyssey, a constant calibration between the noble pursuit of justice and the pragmatic need for efficient dispute resolution. From the restrictive moorings of Renusagar to the expansive currents unleashed by Saw Pipes, and the subsequent legislative and judicial efforts to steer the ship back to a more predictable course, this evolution reflects a dynamic legal system striving for balance. The 2015 amendments and subsequent pronouncements like Ssangyong Engineering underscored a conscious move towards limiting judicial intervention, aiming to establish India as a truly pro-arbitration jurisdiction. This shift has been crucial in fostering an environment where party autonomy is respected and arbitral awards are treated with the finality they deserve.

However, the recent Gayatri Balaswamy¹² judgment, while reinforcing the principle of limited judicial intervention and the non-modification of awards under Section 34 (except for severable parts or clerical errors, and with a cautious approach to Article 142 powers), serves as a fresh reminder of the ongoing complexities. It highlights the judiciary’s struggle to balance the need for minimal interference with the imperative of delivering “complete justice,” even if that means navigating the fine line of modifying awards in specific, limited circumstances. The National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A. ruling further illustrates that while the pro-enforcement bias is strong, the specific circumstances of a case, particularly concerns related to the fundamental policy of Indian law, can still trigger non-enforcement.

As India continues its ambitious drive to become a global arbitration hub, the consistent and predictable application of the public policy exception will be paramount. While the pendulum has largely settled on a narrow interpretation, the occasional instances of broader application, driven by specific statutory provisions or public interest concerns, will continue to shape the landscape. The future trajectory of Indian arbitration will hinge on how effectively the judiciary and legislature can refine the contours of this exception, ensuring it remains a genuine safeguard against fundamental injustice without becoming an arbitrary “detour” that undermines the very essence of arbitration. Will the future see an even more stringent definition of public policy, or will evolving societal norms and economic realities necessitate a recalibration, perhaps leading to new facets of intervention? Only time will tell as India navigates the intricate currents of global arbitration.

Citations 

1. Renusagar Power Co. Ltd. v. General Electric Co.1994 AIR 860
2. ONGC v. Saw Pipes Ltd. AIR 2003 Supreme Court 2629
3. Arbitration and Conciliation Act, 1996 
4. Bhatia International v. Bulk Trading S.A. 2002 (4) SCC 105
5. Venture Global v. Satyam Computers, and Phulchand Exports 2010 (8) SCC 660
6. Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.2010 1 SCC 72  
7. ONGC v. WesternGeco International Ltd. AIR 2015 Supreme Court 363
8. Associate Builders v. DDA 2015 (3) SCC 49
9. Ssangyong Engineering v. National Highways Authority of India AIR 2019 Supreme Court 5041
10. Vijay Karia v. Prysmian Cavi E Sistemi SRL AIR 2020 Supreme Court 1807
11. National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A. AIR 2020 Supreme Court 2681
12. Gayatri Balasamy v. ISG Novasoft Technologies Ltd 2025 SCC OnLine SC 986

Expositor(s): Adv. Anuja Pandit