The Supreme Court in a recent judgment in the matter of OPG Power Generation Private Ltd. v. Enexio Power Cooling Solutions India Pvt. Ltd. & Anr discussed what constitutes a ‘conflict with public policy’ with reference to Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act).[1]
The case pertains to a challenge laid by the appellant (OPG) to an arbitral award pronounced in 2020 in a dispute that arose between the parties. The issue in the case arose, amongst other things, with regards to whether the arbitral award is in conflict with the public policy of India, or/and is vitiated by patent illegality.
The court took note of the 2015 amendment of the A&C Act under which two new Explanations were added to Section 34 of the act. Sub-clause (ii) and (iii) of Explanation 1 to Section 34(2)(b)(ii) are of relevance here. Explanation 1 clarifies that an arbitral award is in conflict with public policy of India if:
- It is in contravention with the Fundamental Policy of Indian Law [Explanation 1(ii)]
The Supreme Court clarified that the expression “in contravention with the fundamental policy of Indian law” has a narrower scope than simply violating Indian law. The court explained that by adding the word ‘fundamental’ before ‘policy of Indian law’, the scope of what can be considered a violation is significantly narrowed. A mere violation of the law is insufficient to challenge an award. To qualify as a violation of the fundamental policy of Indian law, the award must contravene fundamental principles that are essential for the administration of justice and enforcement of law in India. This includes violations like disregarding the principles of natural justice, ignoring binding judgments from superior courts, or violating laws that are tied to public good or public interest.
The court further stressed that ‘fundamental policy’ refers to core principles that are essential to the function of the legal system, distinguishing them from mere statutory violations. An award can only be set aside if it contravenes these foundational principles.
- It is in conflict with the Most Basic Notions of Morality or Justice [Explanation 1(iii)]
Further, the Supreme Court explained that under Explanation 1 to Section 34, the test for determining whether an arbitral award is in conflict with the public policy of India is not simply its conformity with the law but whether it conflicts with the “most basic notions of justice.” The court emphasizes that defining these ‘most basic notions’ is challenging since justice varies based on perspectives and circumstances, and is thus, highly subjective. The court states that the insertion of the term ‘most basic notions’ before ‘justice’ in the 2015 amendment was intentional, narrowing the scope of what constitutes a conflict with public policy. These principles are not intended to be expansively interpreted but should be limited to violations that shock the consciousness of the court. These ‘most basic notions’ refer to principles so elementary that their violation would be evident and shocking to both judicially trained minds and a prudent layperson. This provides a stricter standard to challenge awards aligning with the legislative intent to limit judicial interference.
This standard reflects the need for caution in overturning arbitral decisions while ensuring that the most fundamental concepts of fairness are protected. Furthermore, it clarifies the boundaries for public policy challenges in arbitration awards, and reduces the scope of unnecessary judicial intervention, streamlining the process under Section 34.
[1] (2024) 9 S.C.R. 490.