Public Policy, Arbitrator Bias and Beyond: Impediments to Award Enforcement in India

Introduction

Recently, in the In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 case [“In Re: Interplay case”],  a seven-judge bench of the Supreme Court [“SC”] held that mere non-payment of contractual stamp duty does not render the arbitration agreement unenforceable. This judgement is significant as it overturns the precedent set in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited where the SC decided to the contrary. This decision has largely settled the issue and removed one of the major hurdles to the enforcement of arbitral awards in India. This judgment is relevant as the SC has been increasingly addressing such cases wherein challenges to the enforceability of arbitral awards on purely procedural grounds is preferred over substantive merits of the matter. Furthermore, this ruling has reiterated and strengthened the mandate of the SC to uphold the autonomy of arbitration agreements by minimising procedural obstacles, thus creating an arbitration-friendly environment in India. In this backdrop, this article elucidates the legal framework pertaining to the enforceability of arbitral awards in India, traces the jurisprudential evolution of denying enforcement based on procedural grounds such as public policy and arbitrator bias, and discusses the corresponding practical implications for stakeholders.

Legal Framework for Enforceability of Arbitral Awards in India

Section 36 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] discusses the enforcement procedure of arbitral awards. Sub-clause 1 prescribes that the award-holder has to get the award enforced just like a decree of the Civil Court under the Civil Procedure Code, 1908 [“CPC”]. Section 34 of the Arbitration Act prescribes procedural grounds under which an award can be set aside, before enforcement. These grounds include incapacity of parties, invalid arbitration agreement, lack of proper notice, decisions beyond the scope of arbitration, improper composition or procedure of the tribunal, non-arbitrable subject matter, or an award contrary to India’s public policy. Sub-clause (3) provides for a mandatory time period of three months from the date of passing the arbitral award, before which enforcement cannot be undertaken. This period has been conceptualised to allow applications to set aside or challenge the award, thus ensuring finality of the award before expending resources on its execution. Section 48 of the Arbitration Act deals with the enforcement of foreign awards and sets out similar grounds for the refusal of enforcement. A common thread binding these provisions together is the set of procedural grounds , which become pertinent when setting aside or denying enforcement. Interestingly, these grounds bear a close resemblance to those prescribed under Article V of the New York Convention and Article 36 of the UNCITRAL Model Law. This   harmonises the arbitration landscape of India with prevailing global practices. However, on the downside, there are certain intrinsic difficulties that arise in the interpretation and implementation of these provisions, which have been explored  in detail below.

Evolution of Judicial Interpretations of Procedural Grounds Affecting Enforceability of Arbitral Awards

A contentious issue in the enforcement of arbitral awards in India has been  the vague ground of public policy being used to deny enforcement. Its increased application in legal disputes has caused great unpredictability and uncertainty because of its broad scope and inconsistent judicial interpretation. One of the earliest cases that interpreted the contours of public policy is ONGC v. Saw Pipes Limited. In this decision, the SC adopted a very broad approach by expanding the ambit of public policy and bringing the concept of patent illegality under it’s ambit . This was in direct contrast to the view adopted by the SC in the Renusagar Power Plant Limited v. General Electric Company case, wherein a very narrow approach had been followed by limiting the scope of public policy to three grounds, namely national interest, fundamental policy of Indian Law, and morality & justice. The differing interpretations in these two cases are surprising, given the intervention by the 1996 Act which adopted a narrow approach. This is evident from Section 5 of the Act, which restricts judicial interference to the limited grounds explicitly set out. Although the introduction of this Act seemingly resolved the unsettled position, judicial interpretation that followed was inconsistent.

The SC in Bharat Aluminium v. Kaiser Aluminium Technical Services adopted a middle-ground approach by holding that the enforcement of international awards cannot be subject to the public policy exception under Section 34. Two years later, in the Associate Builders v. Delhi Development Authority case, the SC again upheld the broad interpretation by reading patent illegality into Section 34 while introducing the test of reasonability, thereby upholding  [A1] the broad approach earlier stipulated in ONGC v. Western Geco International Limited. The unjustified broad approach in this case led the Law Commission of India to express disapproval through the release of its 246th supplementary report. This led to the introduction of the 2015 Amendment, which, although introduced patent illegality through the incorporation of clause 2A, restricted its applicability through an explicit mention of the proviso. The Ssangyong Engineering and Construction Co. Ltd. v. NHAI case [“Sssangyong Engineering case”], decided after the 2015 amendment, upheld the narrow approach to patent illegality. The 2019 Amendment to Section 34 further reinforced this narrow interpretation. Similarly, the NHAI v. M. Hakeem case confirmed that procedural grounds should be construed narrowly. However, the SC in the recent Delhi Metro Rail Corporation Limited v. Delhi Metro Express Private Limited judgment set aside the arbitral award on grounds of patent illegality. It reasoned its judgment by stating that the Tribunal had incorrectly interpreted the termination clause of the arbitration agreement by disregarding the substantial progress made in rectifying defects. It relied on precedents such as the Sssangyong Engineering case, which had adopted the narrow approach. However, it deviated from the established jurisprudence because the award was in reality set aside due to factual differences between the SC and the Tribunal by incorrectly invoking the ground of patent illegality. This in effect resulted in an expansion in the interpretation of patent illegality, thus deviating from the seemingly settled position. This decision regurgitates the debate on the adoption of narrow and broad approaches to setting aside of awards and the denial of enforcement and raises questions regarding the approach to be adopted in the future. On the contrary, the In Re: Interplay case discussed at the beginning supports a pro-enforcement approach, aiming to prevent the denial of enforcement based solely on procedural impediments such as the non-payment of stamp duty. These inconsistent rulings reflect the imperative of a large SC bench to deliver a clear decision, analysing the impediments to the enforcement of awards and evolving a clear approach to navigate these difficulties. Thus, as it stands today, courts are generally reluctant to use technicalities to deny enforcement, although occasional deviations occur when necessary. 

This jurisprudence is relevant not only in the context of public policy but also arbitrator bias.  Arbitrator bias, explained in Section 12 of the Arbitration Act and the VoestalpineSchienen GmbH v. Delhi Metro Rail Corporation Limited case, refers to a situation where the arbitrator adjudicating a case demonstrates impartiality or lack of independence, which undermines the integrity of the arbitration process. Although not explicitly stipulated as a ground under Sections 34 and 48, it is implied through the terminology used in these provisions and can be comfortably read into the multiple grounds mentioned, such as Section 48(1)(d). In fact, in the Avitel Post Studioz Limited v. HSBC PI Holding Limited case, the SC, while explaining the concept of arbitrator bias, explicitly mentioned that it can be read into the public policy exception to enforcement prescribed under Section 48(2)(b) of the Arbitration Act. This would also align India’s arbitration framework with the New York Convention, wherein in the absence of arbitrator bias as a separate ground, courts generally interpret it as a part of public policy. Therefore, the discussion regarding narrow and wide approaches is relevant not only to public policy but also arbitrator bias. Although crucial to ensuring independence and neutrality throughout the arbitration process, an overly technical interpretation of this ground can lead to the wrongful denial of enforcement in several cases. This is because the statutory framework of reading Section 12 with the fifth and the seventh schedule of the Arbitration Act gives a very wide range of situations and relationships which are deemed to affect the independence and impartiality of arbitrators. These two schedules were added only recently by way of the 2015 Amendment to the Arbitration Act and are premised on the International Bar Association Guidelines on Conflict of Interest in International Arbitration [“IBA Guidelines”]. This addition reflects the broad interpretation that the Legislature has clearly intended. Although crucial to bringing in clarity, consistency, and alignment with global standards, such a broad approach is bound to hamper enforceability in most cases because the award can easily be challenged at least on one of the various stipulated grounds. The problem is exacerbated particularly with judicial precedents which majorly interpret this ground broadly. For example, the C and E Limited v. Gopal Das Bagri case explicitly supports the Danger and Probability of Bias Test rather than the Real Danger of Bias Test which  means that to ascertain bias, an onerous proof of bias is not required. Instead, the existence of a reasonable doubt  in itself is sufficient to render the award unenforceable. Additionally, the Kotak Mahindra Bank v. Narendra Kumar Prajapat case clearly holds that an arbitrator disqualified due to bias lacks inherent jurisdiction to pass an award, thus resulting in the unenforceability of the award passed. These decisions tilt the balance asymmetrically towards establishing bias which significantly hinders party autonomy and an efficient resolution of disputes. Although independence and neutrality is integral to the arbitral process, a balanced and moderate interpretation to this provision is the need of the hour.

A major problem with the current enforcement regime is that even if none of the stipulated procedural grounds are invoked to challenge the arbitral award, Section 36 clearly provides that enforcement has to be through a civil court, similar to how a decree of that court itself is enforced. This creates a circular fallacy in legislative drafting and intention because the very problem that legislators had intended to avoid has unintentionally returned in the form of court delays, infrastructural problems, and pendency issues. According to estimates, in 2021, there were more than 14.19 lakh execution petitions pending in lower courts. The corresponding number in higher courts is equally alarming. Additionally, the Arbitration Act mentions that an arbitral award has to be passed within eighteen months from the date of completion of pleadings, but it ironically omits any time period within which the award has to be enforced. This vitiates the very purpose of arbitration and results in outcomes similar to litigation, necessitating an Amendment clearly specifying timelines for the enforcement of awards.

Practical Evaluation and Implications for Stakeholders

Achieving a balance between denying enforcement of arbitral awards based on public policy and other procedural concerns, and upholding fundamental tenets of arbitration like party autonomy by promoting a pro-enforcement approach, is crucial for the efficacy of arbitration in India. As with the principles of natural justice, public policy and procedural grounds such as bias on the part of the arbitrator are necessary safeguards to ensure integrity and protect parties from results that are fundamentally unjust and prejudicial. They help in upholding the rule of law and are thus significant components of the arbitral process. However, an overemphasis on these procedural tenets will lead to infringement upon the foundational principles of arbitration, thus dissuading parties from electing arbitration as the applicable dispute resolution mechanism. These principles include party autonomy, minimum judicial intervention, and award finality and further support a pro-enforcement approach which immensely contributes to fostering confidence in the arbitration process. Such confidence is necessary because alternative dispute resolution is a relatively new mechanism in India which will be increasingly inculcated only if its effectiveness and integrity is apparent. This also applies to businesses seeking effective dispute resolution mechanisms, especially in an economy as rapidly growing as that of India, in which effective arbitration can attract and retain foreign investments. Therefore, for entities engaged in arbitration, a narrow application of public policy grounds provides greater certainty and stability, thus enhancing their confidence in the arbitration process. Furthermore, for investors and multinational corporations, a pro-enforcement stance assures that their arbitral awards will be upheld, reducing the risk of prolonged disputes and promoting a favorable investment climate.

Additionally, India has entered into several cross-border contracts and aims to become a global arbitration hub and a non-negotiable pre-requisite for this is upholding the core principles of arbitration, as elucidated above. Excessively using procedural grounds for refusing enforcement will have negative effects by multiplying the amount of litigation, increasing costs, delaying dispute resolution, and ultimately deterring people from using arbitration, thus adversely impacting business activities. This would also affect the interests of weaker parties who would be compelled to utilise their scarce resources to get the dispute resolved through traditional court mechanisms. It is also important to note that India already has major hurdles such as procedural delays, inadequate infrastructure, and a shortage of experienced arbitrators. Denying enforcement on top of these challenges only exacerbates the problems for parties and makes arbitration an ineffective alternative to litigation. Therefore, a balance has to be struck where, while the need to subject serious procedural or substantive violations to judicial scrutiny should not be overlooked, the arbitral award should generally be enforced. This will ensure that arbitration remains a viable, efficient, and trusted mode of dispute resolution, aligning India’s arbitration landscape with the best practices around the world, and enhancing its attractiveness as an arbitration-friendly jurisdiction.

Conclusion

The Indian judiciary has lately tilted towards giving greater effect to the pro-enforcement approach rather than placing extreme emphasis on procedural requirements, as is evident from the stance of the SC in the decision discussed at the beginning of this article. Similarly, the Legislature through the recent introduction of the Arbitration and Conciliation (Amendment) Bill, 2024 to amend the Arbitration Act has further taken a step in the right direction to improve efficiency and minimise judicial intervention by simplifying the enforcement procedure of emergency arbitration awards, introducing audio-visual proceedings, and reducing time periods for the grant of interim orders. This is a welcome move because although crucial to delivering fairness, integrity, and justice, the institution of arbitration cannot be sacrificed at the altar of placing undue emphasis on procedural irregularities. In the backdrop of rapid industrialisation and commercialisation in the twenty-first century, judicial interpretation will have to strive towards achieving an appropriate balance to ensure that arbitration remains a reliable, effective, and respected mechanism for dispute resolution

*Manav is a 4th year student from NALSAR University of Law, Hyderabad.