SSANGYONG ENGINEERING & CONSTRUCTION CO. LTD. v. NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI)

The Judgment of the Court was delivered by R. F. NARIMAN, J. 1. Leave granted.

2Copy pinpoint2. The respondent, National Highways Authority of India [“NHAI”], invited bids for construction of a four-lane bypass on National Highway 26 in the State of Madhya Pradesh. The appellant’s bid was accepted vide its letter of acceptance dated 30.12.2005, for a total contract value of INR 219,01,16,805/-. The appellant before us is a D company registered under the laws of the Republic of Korea, whereas the respondent is a Government of India undertaking, responsible for construction of National Highways throughout the territory of India. The components used in execution of work for which price adjustment was payable to the appellant are labour, plant and machinery, petroleum, oil and lubricant (POL), cement, steel, bitumen, and other local materials. E Price adjustment for four of these components, i.e., cement, steel, plant and machinery, and other local materials was agreed to be calculated as per a formula given in sub-clause 70.3 of the contract. The relevant portion of sub-clause 70.3 states as under: “ii. Adjustment for Cement Component F Price adjustment for increase or decrease in the cost of cement procured by the contractor shall be paid in accordance with the following formula: Vc = 0.85 x Pc x Ri x (C1 - C0) 100 C0 G Where, Vc = increase or decrease in the cost of work during the month under consideration due to change in rates of component. C0 = the all India average wholesale price index for cement H on the day 28 days prior to the closing date of submission of bids,

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 537 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

as published by Ministry of Industrial Development, Government A of India, New Delhi. C1 = the all India average wholesale price index for cement on the day 28 days prior to the last day of the period to which a particular interim payment certificate is related, as published by Ministry of Industrial Development, Government of India, New B Delhi. Pc = percentage of Cement component.” Insofar as the component C0 is concerned, the date which is 28 days prior to the last submission of bids is 29.09.2005, which is the base date for calculation of price adjustment, since it is common ground that C the date of submission of the bid is 27.10.2005.

3Copy pinpoint3. The price adjustment was being paid to the appellant every month in terms of the agreed formula under sub-clause 70.3 by using the Wholesale Price Index [“WPI”] published by the Ministry of Industrial Development, which followed the years 1993-94 = 100 [“Old Series”]. D However, with effect from 14.09.2010, the Ministry of Industrial Development stopped publishing the WPI for the Old Series and started publishing indices under the WPI series 2004-05 = 100 [“New Series”]. It is important to note that even under this New Series, the WPIs for the previous years beginning from April, 2005 were also being published by the Ministry. This being so, as both the indices C1 and Co were available to the appellant under the New Series for calculating price adjustment, the appellant raised its bills accordingly. It is undisputed that payments of 90% of the monthly bills on this basis were made for the period September, 2010 to February, 2013. On 15.02.2013, the respondent issued a Policy Circular [“Circular”], in which a new formula for determining indices was used by applying a “linking factor” based on the year 2009-

10. However, this Circular expressly stated: “Thus, payment on account of price adjustment may be made by adopting the above process subject to the condition that the contractors furnish undertaking / affidavit that this price adjustment is acceptable to them and they will not make any claim, whatsoever, on this account in future after this payment.”

4Copy pinpoint4. After this Circular, the respondent stated that the Circular would have to be applied to the contract in question, as a result of which, a linking factor would have to be provided by which the Old Series was H

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A connected to the New Series. The appellant never accepted this and knocked at the doors of the High Court of Madhya Pradesh through a writ petition in which it challenged the validity of the Circular. However, the High Court vide its order dated 03.04.2013 disposed of the writ petition with the observation that there exists a dispute resolution mechanism through the Dispute Adjudication Board, after which B arbitration is also provided, and as the appellant had an efficacious alternative remedy, it was relegated to the same. The respondent then asked the appellant to give its consent to receive monthly payment under the Circular. The appellant submitted a conditional undertaking dated 17.05.2013, in which it was clearly stated: C “The above undertaking is without prejudice to the Contractor’s right to challenge the said Circular dated 15.02.2013 as per provisions of contract and other legal remedies available to the Contractor before the appropriate forum.”

5Copy pinpoint5. The appellant then approached the Delhi High Court vide an D application under Section 9 of the Arbitration and Conciliation Act, 1996 [“1996 Act”], for interim protection against deduction and recoveries sought to be made by the respondent by applying the said Circular. The Delhi High Court, by its order dated 31.05.2013, restrained the respondent from implementing the said Circular retrospectively.

6Copy pinpoint6. Meanwhile, the aforesaid dispute was referred to the Dispute Adjudicating Board as envisaged under sub-clause 67 of the contract. The Dispute Adjudicating Board, by its majority recommendation dated 31.10.2013, recommended a certain linking factor and then arrived at the figures of price adjustment in the aforesaid four materials by applying such linking factor. However, one of the members of the Dispute Adjudicating Board gave a dissenting note in favour of the appellant, recommending that in view of the express terms of the contract, the provisions contained in the impugned Circular cannot be applied for calculation of price adjustment. Aggrieved by the recommendations of the Dispute Adjudicating Board, the appellant issued a notice of dissatisfaction dated 19.11.2013, and referred the dispute to an arbitral tribunal consisting of three members. The appellant raised a claim of INR 2,01,42,827/- towards unpaid price adjustment for the period September 2010 up to May 2014, plus INR 1,00,86,417/- for interest on the aforesaid unpaid amount. The dispute that was thus referred to arbitration was a narrow one, namely, as to whether price adjustment

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 539 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

would continue under the terms of the contract, or whether the Circular A dated 15.02.2013, applying the linking factor, would have to be applied. Two out of three members of the arbitral tribunal, by their award dated 02.05.2016 made at New Delhi, after noting the arguments of both sides, held that the Circular could be applied as it was within contractual stipulations, as has been held by the Dispute Adjudicating Board, and B hence, rejected the appellant’s claim. While doing so, the majority award applied certain government guidelines of the Ministry of Commerce and Industry, as per which it was stated that the establishment of a linking factor to connect the Old Series with the New Series is imperative, and therefore, required. The appellant’s argument that the linking factor is de hors the contract and not at all required was, therefore, rejected. C The majority award further made it clear that these guidelines are available on a certain website, as they were not on record. Paragraph 13 of the guidelines was then referred to, and applying the arithmetic conversion method, which is one of the three methods referred to in the said paragraph, a linking factor was applied in accordance with the D formula prescribed in the said method which is as follows: “Arithmetic conversion method: y = cx or c = y/x Where y is average value of indices of 12 months for the Old Series and x for the New Series; c being conversion factor. E Meaning thereby that relation between y and x is linear. Average of 12 months for x is taken 100.” Thus, the final majority award, based on the aforesaid linking factor, was as follows: F “9. Award 9.1. Based on the findings above, we hold that introducing linkage factor is imperative and required for conversion of indices from the base 2004-05 series to the earlier series base 1993-94 as basis for determination of price adjustment. Linking factors for four G items of work/materials involved in price adjustment, shall be as under: Cement 1.528 Steel 2.365 H

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A Plant and Machinery 1.840 Other Materials 1.873 9.2. The final amount of price adjustment shall be worked out on the basis of above-mentioned linkage factors. After deducting the amount already paid to the Claimant, the amount payable to them B against their claim shall be determined and the same shall be paid by the Respondent to the Claimant. 9.3. This amount shall also attract interest @ 10% per annum compounded monthly from due date of payment to the date of award, viz. 02.05.2016. C 9.4. Further interest @ 12% per annum, simple interest, shall be payable to the Claimant from 02.05.2016 onwards till the date of payments. No future interest however shall be payable in case the amounts are paid within 90 days of the date of the award, that is by 02.08.2016.” D A dissenting award was given by Shri Dilip Namdeo Potdukhe, in which the learned dissenting arbitrator expressly stated that neither the Circular nor the guidelines could be applied as they were de hors the contract between the parties. Accordingly, the dissenting award awarded the claim of the claimant-appellant in full. E

7Copy pinpoint7. A Section 34 petition which was filed by the appellant was rejected by the learned Single Judge of the Delhi High Court, by a judgment and order dated 09.08.2016, in which it was held that a possible view was taken by the majority arbitrators which, therefore, could not be interfered with, given the parameters of challenge to arbitral awards. F The learned Single Judge also went on to hold that the New Series published by the Ministry could be applied in the case of the appellant as the base indices for 2004-05 under the New Series were available. Having so held, the learned Single Judge stated that even though the view expressed in the dissenting award is more appealing, and that he preferred that view, yet he found that since the majority award is a possible view, G the scope of interference being limited, the Section 34 petition was dismissed. A Section 37 appeal to the Division Bench of the Delhi High Court yielded the same result, by the impugned judgment dated 03.04.2017.

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 541 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

8Copy pinpoint8. Smt. Rashmeet Kaur, learned Advocate appearing on behalf of A the appellant, first submitted that Section 34(2)(a)(iv) of the 1996 Act was attracted to the facts of the present case as the majority award contained decisions on matters beyond the scope of the submission to arbitration. The learned counsel argued that this was a jurisdictional error, and a new contract was substituted by the majority award amounting to B a novation of the old agreement and the old formula contained in the agreement, which would be a decision on a matter beyond the scope of the submission to arbitration. She also argued that Section 34(2)(b)(ii) of the 1996 Act would also be attracted as the award was in conflict with the public policy of India, being contrary to the fundamental policy of Indian law as well as the most basic notions of justice. According to her, the rewriting of the terms of the contract ought to shock the conscience of the Court, as a new contract was foisted on one of the parties unilaterally. For this, she cited various judgments. She also argued that the principles of natural justice were violated and, therefore, Section 34(2)(a)(iii) would also be attracted. She argued that the government guidelines were never produced before the arbitrators, and the arbitrators applied the said guidelines behind the back of the parties, thus, resulting in breach of Section 34(2)(a)(iii) of the 1996 Act. Finally, though she argued the ground of patent illegality, this argument was given up when it was pointed out by the Court that this ground, which obtains under Section 34(2A) of the 1996 Act, would not be available in the case of an international commercial arbitration that is decided in India. Shri Mukul Rohatgi, learned Senior Advocate, supplemented the submissions of Smt. Rashmeet Kaur.

9Copy pinpoint9. On the other hand, Shri S. Nandakumar, learned counsel appearing on behalf of the respondent, argued that applying the new formula with the base index of 2004-05 would make the contract unworkable, as a result of which, it was imperative to have a linking factor. According to the learned counsel, the appellant itself applied a linking factor when the Tribunal asked it to do so, may be without prejudice to its other contentions. In any case, this was a matter of interpretation of the agreement in which the arbitrators’ view is final, as has been correctly held by the learned Single Judge and the Division Bench. He also cited some judgments in support of this proposition. According to him, therefore, this appeal should be dismissed.

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A Applicability of the Arbitration and Conciliation (Amendment) Act, 2015

10Copy pinpoint10. Since the Section 34 petition in the present case is dated 30.07.2016, an important question as to the applicability of the parameters of review of arbitral awards would arise in this case. More particularly, B radical changes have been made by the Arbitration and Conciliation (Amendment) Act, 2015 [“Amendment Act, 2015”] with effect from 23.10.2015 – in particular, in the “public policy of India” ground for challenge of arbitral awards. The question which arises is whether the amendments made in Section 34 are applicable to applications filed under Section 34 to set aside arbitral awards made after 23.10.2015. This Court, C in Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287 [“BCCI”], has held that the Amendment Act, 2015 would apply to Section 34 petitions that are made after this date. Thus, this Court held: “75. Shri Viswanathan then argued, relying upon R. Rajagopal D Reddy v. Padmini Chandrasekharan [R. Rajagopal Reddy v. Padmini Chandrasekharan, (1995) 2 SCC 630], Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. [Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356], S EDCO Forex International Drill Inc. v. CIT [SEDCO Forex International Drill E Inc. v. CIT, (2005) 12 SCC 717] and Bank of Baroda v. Anita Nandrajog [Bank of Baroda v. Anita Nandrajog, (2009) 9 SCC 462 : (2009) 2 SCC (L&S) 689] , that a clarificatory amendment can only be retrospective, if it does not substantively change the law, but merely clarifies some doubt which has crept into the law. For this purpose, he referred us to the amendments made in Section F 34 by the Amendment Act and stated that despite the fact that Explanations 1 and 2 to Section 34(2) stated that “for the avoidance of any doubt, it is clarified”, this is not language that is conclusive in nature, but it is open to the court to go into whether there is, in fact, a substantive change that has been made from the earlier G position or whether a doubt has merely been clarified. According to the learned Senior Counsel, since fundamental changes have been made, doing away with at least two judgments of this Court, being Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] and Western Geco [ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12], H

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 543 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

as has been held in para 18 in HRD Corpn. v. GAIL (India) A Ltd. [HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471], it is clear that such amendments would only be prospective in nature. We do not express any opinion on the aforesaid contention since the amendments made to Section 34 are not directly before us. It is enough to state that Section 26 of the Amendment Act makes it B clear that the Amendment Act, as a whole, is prospective in nature. Thereafter, whether certain provisions are clarificatory, declaratory or procedural and, therefore, retrospective, is a separate and independent enquiry, which we are not required to undertake in the facts of the present cases, except to the extent indicated above, namely, the effect of the substituted Section 36 of the Amendment C Act.” xxx xxx xxx “78. The Government will be well-advised in keeping the aforesaid Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s D Press Release dated 7-3-2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner, such as the important amendments made to Sections 28 and 34 in particular, which, as has been stated by the Statement of Objects and E Reasons, “… have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act”, and will now not be applicable to Section 34 petitions filed after F 23-10-2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23-10-2015. This would mean that in all matters which are in the pipeline, despite the fact that Section 34 proceedings have been initiated only after 23-10-2015, yet, the old law would G continue to apply resulting in delay of disposal of arbitration proceedings by increased interference of courts, which ultimately defeats the object of the 1996 Act. [These amendments have the effect, as stated in HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471 of limiting the grounds of challenge to awards as follows: (SCC p. 493, para 18) H

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A “18. In fact, the same Law Commission Report has amended Sections 28 and 34 so as to narrow grounds of challenge available under the Act. The judgment in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 has been expressly done away with. So has the judgment in ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263. Both Sections 34 and B 48 have been brought back to the position of law contained in Renusagar Power Plant Co. Ltd. v. General Electric Company, 1994 Supp (1) SCC 644, where “public policy” will now include only two of the three things set out therein viz. “fundamental policy of Indian law” and “justice or morality”. C The ground relating to “the interest of India” no longer obtains. “Fundamental policy of Indian law” is now to be understood as laid down in Renusagar, 1994 Supp (1) SCC 644. “Justice or morality” has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the Court as understood in Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204. Section 28(3) has also been amended to bring it in line with the judgment of this Court in Associate Builders, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204, making it clear that the construction of the terms of the contract is primarily for the arbitrator to decide unless it is found that such a construction is not a possible one.”] It would be important to remember that the 246th Law Commission Report has itself bifurcated proceedings into two parts, so that the Amendment Act can apply to court proceedings commenced on or after 23-10-2015. It is this basic scheme which is adhered to by Section 26 of the Amendment Act, which ought not to be displaced as the very object of the enactment of the Amendment Act would otherwise be defeated.” (emphasis supplied)

11Copy pinpoint11. There is no doubt that the amendments made in Explanations 1 and 2 to Section 34(2)(b)(ii) have been made for the avoidance of any doubt, which language, however, is not found in Section 34(2A). Apart from the anomalous position which would arise if the Section were to be applied piecemeal, namely, that Explanations 1 and 2 were to have retrospective effect, being only to remove doubts, whereas sub-section

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 545 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

(2A) would have to apply prospectively as a new ground, with inbuilt exceptions, having been introduced for the first time, it is clear that even on principle, it is the substance of the amendment that is to be looked at rather than the form. Therefore, even in cases where, for avoidance of doubt, something is clarified by way of an amendment, such clarification cannot be retrospective if the earlier law has been changed substantively. B Thus, in Sedco Forex International Drill, Inc. and Ors. v. Commissioner of Income Tax, Dehradun and Anr., (2005) 12 SCC 717 [“Sedco”], this Court held: “17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant C assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation D can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan E Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.” F

12Copy pinpoint12. There is no doubt that in the present case, fundamental changes have been made in the law. The expansion of “public policy of India” in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 [“Saw Pipes”] and ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 [“Western Geco”] has been done away with, and a new ground of G “patent illegality”, with inbuilt exceptions, has been introduced. Given this, we declare that Section 34, as amended, will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date. H

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A Changes made by the Amendment Act, 2015

13Copy pinpoint13. It is first necessary to survey the law insofar as it relates to the ground of setting aside an award if it is in conflict with the public policy of India, as it existed before the Amendment Act, 2015. In Associate Builders v. Delhi Development Authority, (2015) 3 SCC B 49 [“Associate Builders”], this Court referred to the judgment in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 [“Renusagar”], as follows: “18. In Renusagar Power Co. Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General Electric Co., 1994 C Supp (1) SCC 644], the Supreme Court construed Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961: “7. Conditions for enforcement of foreign awards.—(1) A foreign award may not be enforced under this Act— D xxx xxx xxx (b) if the Court dealing with the case is satisfied that— xxx xxx xxx (ii) the enforcement of the award will be contrary to the E public policy.” In construing the expression “public policy” in the context of a foreign award, the Court held that an award contrary to (i) The fundamental policy of Indian law,

F (ii) The interest of India, (iii) Justice or morality, would be set aside on the ground that it would be contrary to the public policy of India. It went on further to hold that a contravention of the provisions of the Foreign Exchange G Regulation Act would be contrary to the public policy of India in that the statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation (see SCC p. 685, para 75). Equally, disregarding orders passed by the superior courts in India could also be a contravention of the H

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 547 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

fundamental policy of Indian law, but the recovery of compound interest on interest, being contrary to statute only, would not contravene any fundamental policy of Indian law (see SCC pp. 689 & 693, paras 85 & 95).” To this statement of the law, this Court added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian Law [see paragraph 27].

14Copy pinpoint14. It is important to note that Sections 34(2)(b) and 48(2)(b) of the 1996 Act, before their amendment in 2015, stated as follows: “34. Application for setting aside arbitral award.— C

xxx xxx xxx (2) An arbitral award may be set aside by the court only if– xxx xxx xxx D (b) The court finds that– (i) The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) The arbitral award is in conflict with the public policy of E India. Explanation.–Without prejudice to the generality of sub- clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected F by fraud or corruption or was in violation of section 75 or section 81. xxx xxx xxx” “48. Conditions for enforcement of foreign awards.— G xxx xxx xxx (2) Enforcement of an arbitral award may also be refused if the Court finds that– xxx xxx xxx H

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A (b) The enforcement of the award would be contrary to the public policy of India. Explanation.–Without prejudice to the generality of clause (b) of this section, it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of B India if the making of the award was induced or affected by fraud or corruption. xxx xxx xxx” It will thus be seen that whether the ground of “public policy of India” is used to set aside an award under Section 34, or to refuse recognition and enforcement of a foreign award under Section 48, Section 34(2)(b) ought to have been construed in the same manner as Section 48(2)(b).

15Copy pinpoint15. However, this Court, in Saw Pipes (supra), added yet another ground, namely, that of “patent illegality” to the three grounds mentioned in Renusagar (supra) in order to set aside an award under Section 34 of the 1996 Act. This ground was added in the following terms: “31. …… [Patent] 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.”

16Copy pinpoint16. Given this interpretation of the law, insofar as Section 34 was concerned, this Court, in DDA v. R.S. Sharma and Co., (2008) 13 F SCC 80, summarised the law as it stood at that point of time, as follows: “21. From the above decisions, the following principles emerge: (a) An award, which is (i) contrary to substantive provisions of law; or G (ii) the provisions of the Arbitration and Conciliation Act, 1996; or (iii) against the terms of the respective contract; or (iv) patently illegal; or H (v) prejudicial to the rights of the parties;

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 549 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

is open to interference by the court under Section 34(2) of the A Act. (b) The award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or B (c) justice or morality. (c) The award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. (d) It is open to the court to consider whether the award is C against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India. ……”

17Copy pinpoint17. Yet another expansion of the phrase “public policy of India” contained in Section 34 of the 1996 Act was by another judgment of this D Court in Western Geco (supra), which was explained in Associate Builders (supra) as follows: “28. In a recent judgment, ONGC Ltd. v. Western Geco International Ltd. [(2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12], this Court added three other distinct and fundamental juristic principles which must be understood as a part and parcel of the E fundamental policy of Indian law. The Court held: (SCC pp. 278- 80, paras 35 & 38-40) “35. What then would constitute the ‘fundamental policy of Indian law’ is the question. The decision in ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629] does not elaborate that aspect. F Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression ‘fundamental policy of Indian law’, we may refer G to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to H

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A any civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a ‘judicial approach’ in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge. xxx xxx xxx

38. Equally important and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi- E judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a F view one way or the other. Non-application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law.

39. No less important is the principle now recognised as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person

SSANGYONG ENG. & CONST. CO. LTD. v. NATIONAL 551 HIGHWAYS AUTH. OF INDIA (NHAI)[R. F. NARIMAN, J.]

40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.” E (emphasis in original)

29. It is clear that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or F objective.

30. The audi alteram partem principle which undoubtedly is a fundamental juristic principle in Indian law is also contained in Sections 18 and 34(2)(a)(iii) of the Arbitration and Conciliation Act. These sections read as follows: G “18. Equal treatment of parties.—The parties shall be treated with equality and each party shall be given a full opportunity to present his case. xxx xxx xxx H

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A 34. Application for setting aside arbitral award.— xxx xxx xxx (2) An arbitral award may be set aside by the court only if— B (a) the party making the application furnishes proof that— xxx xxx xxx (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;”

31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where: (i) a finding is based on no evidence, or (ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or E (iii)ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.

32. A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held: (SCC p. 317, para 7) “7. … It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.” In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10 : 1999 SCC (L&S) 429], it was held: (SCC p. 14, para 10)

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“10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with.”

33. It must clearly be understood that when a court is applying the “public policy” test to an arbitration award, it does not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Once it is found that the arbitrator’s approach is not arbitrary or capricious, then he is the last word on facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594 : (2012) 1 SCC (Civ) 342], this Court held: (SCC pp. 601-02, para 21) E

“21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted. Even the minority view was that the second respondent was liable as claimed by the first respondent, but the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-law 248, in a claim against a non-member, had no jurisdiction to decide a claim against another member. The finding of the majority is that the appellant did the transaction in the name of the

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A second respondent and is therefore, liable along with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act, it is not possible to re- examine the facts to find out whether a different decision can be arrived at.”

B 34. It is with this very important caveat that the two fundamental principles which form part of the fundamental policy of Indian law (that the arbitrator must have a judicial approach and that he must not act perversely) are to be understood.”

18Copy pinpoint18. It is at this stage that certain fundamental changes were made C in the law pursuant to the 246th Report of the Law Commission of India [“Law Commission Report”] of August 2014. The Law Commission Report first suggested an amendment to the Preamble of the 1996 Act as follows: “Amendment to the Preamble D After the words aforesaid “Model Law and Rules” the following be inserted: “And WHEREAS it is further required to improve the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation, in order to provide a fair, expeditious and cost-effective means of dispute resolution;” [NOTE: This amendment is proposed in order to further demonstrate and reaffirm the Act’s focus on achieving the objectives of fairness, speed and economy in resolution of disputes through arbitration.]” The Law Commission Report, when it came to setting aside of domestic awards and recognition or enforcement of foreign awards, prescribed certain changes to the 1996 Act as follows: “SETTING ASIDE OF DOMESTIC AWARDS AND G RECOGNITION / ENFORCEMENT OF FOREIGN AWARDS

34. Once an arbitral award is made, an aggrieved party may apply for the setting aside of such award. Section 34 of the Act deals with setting aside a domestic award and a domestic award resulting H

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from an international commercial arbitration whereas section 48 A deals with conditions for enforcement of foreign awards. As the Act is currently drafted, the grounds for setting aside (under section 34) and conditions for refusal of enforcement (section 48) are in pari materia. The Act, as it is presently drafted, therefore, treats all three types of awards – purely domestic award (i.e. domestic B award not resulting from an international commercial arbitration), domestic award in an international commercial arbitration and a foreign award – as the same. The Commission believes that this has caused some problems. The legitimacy of judicial intervention in the case of a purely domestic award is far more than in cases where a court is examining the correctness of a foreign award or C a domestic award in an international commercial arbitration.

35. It is for this reason that the Commission has recommended the addition of section 34 (2A) to deal with purely domestic awards, which may also be set aside by the Court if the Court finds that such award is vitiated by “patent illegality appearing on the face of the award.” In order to provide a balance and to avoid excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such “an award shall not be set aside merely on the ground of an erroneous application of the law or by re- appreciating evidence.” The Commission believes that this will go a long way to assuage the fears of the judiciary as well as the other users of arbitration law who expect, and given the circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards. This would also do away with the unintended consequences of the decision of the Supreme Court in ONGC vs. Saw Pipes Ltd, (2003) 5 SCC 705, which, although in the context of a purely domestic award, had the unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards, given the statutory language of the Act. The amendment to section 28(3) has similarly been proposed solely in order to remove the basis for the decision of the Supreme Court G in ONGC vs. Saw Pipes Ltd, (2003) 5 SCC 705 – and in order that any contravention of a term of the contract by the tribunal should not ipso jure result in rendering the award becoming capable of being set aside. The Commission believes no similar H

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A amendment is necessary to section 28 (1) given the express restriction of the public policy ground.

37. In this context, the Commission has further recommended the restriction of the scope of “public policy” in both sections 34 and 48. This is to bring the definition in line with the definition propounded by the Supreme Court in Renusagar Power Plant D Co Ltd v General Electric Co, AIR 1994 SC 860 where the Supreme Court while construing the term “public policy” in section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961 held that an award would be contrary to public policy if such enforcement would be contrary to “(i) fundamental policy of Indian E law; or (ii) the interests of India; or (iii) justice or morality”. The formulation proposed by the Commission is even tighter and does not include the reference to “interests of India”, which is vague and is capable of interpretational misuse, especially in the context of challenge to awards arising out of international commercial arbitrations (under S 34) or foreign awards (under S 48). Under F the formulation of the Commission, an award can be set aside on public policy grounds only if it is opposed to the “fundamental policy of Indian law” or it is in conflict with “most basic notions of morality or justice”.” (emphasis supplied) G

19Copy pinpoint19. Consequently, changes were suggested in Sections 28, 34, and 48 of the 1996 Act. The amendment to Section 28 was prescribed in the following terms: “Amendment of Section 28

H 16. In section 28,

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xxx xxx xxx A (ii) In sub-section (3), after the words “tribunal shall decide” delete the words “in accordance with” and add the words “having regard to” [Note: This amendment is intended to overrule the effect of ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, B where the Hon’ble Supreme Court held that any contravention of the terms of the contract would resu in the award falling foul of Section 28 and consequently being against public policy.]” Similarly, amendment of Section 34 was prescribed as follows: C

“Amendment of Section 34

18. In section 34, (i) In sub-section (1), after the words “sub-section (2)” add the words “, subsection (2A)”. D (ii) In sub-section (2), after the word “Explanation.—” delete the words “Without prejudice to the generality of sub-clause (ii), it is hereby declared, for” and add the word “For” and after the words “the avoidance of any doubt,” add the words “it is clarified” and after the words “public policy of India” E add the word “only” and after the word “if” delete the word “-” and add the word “:” and add the sub-clause “(a)” before the words “the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81” and add the word “; or” after the words “violation of section 75 or section 81” and add sub clause “(b) it is in contravention with the fundamental policy of Indian law; or” and add sub-clause “(c) it is in conflict with the most basic notions of morality or justice.” [NOTE: The proposed Explanation II is required to bring the standard for setting aside an award in conformity with the decision of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 and Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433, for awards in both domestic as well as international commercial arbitrations. Ground (c) reflects H

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22. In section 48, (i) In sub-section (2), in the “Explanation.—”, delete the words “Without prejudice to the generality of clause (b), it is hereby declared, for” and add the word “For” and after the words “avoidance of any doubt,” add the words “it is clarified” and G after the words “the public policy of India” add the word “only” and after the word “if” delete “-” and “;” and insert sub-clause “(a)” before the words “the making of the award” and delete “.” And add “;” after the words “by fraud or corruption” and add sub-clauses “(b) it is in contravention H

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with the fundamental policy of Indian law; (c) it is in conflict A with India’s most basic notions of morality or justice.” xxx xxx xxx”

20Copy pinpoint20. After Western Geco (supra) was delivered by this Court, a Supplementary Report of February 2015 [“Supplementary Report”] was made by the Law Commission of India, in which the Law Commission B stated: “10. The 246th Report of the Law Commission and the decision in Western Geco. 10.1. The Law Commission, in the 246th Report, provided for the same narrow standard, namely that a mere violation of law of India would not be a violation of ‘public policy’ in cases of international commercial arbitrations held in India. It suggested substantial amendments to Section 34 of the Act, with an endeavour to ensure that the Renusagar position applies to all foreign awards and all awards passed in international commercial arbitrations. With respect to domestic arbitrations, the Commission recommended that the “patent illegality” test be retained, although it be construed more narrowly than under the Saw Pipes regime. In this regard, the following provisions were added to Section 34(2)(b)(ii) and a new provision, Section 34(2A) was introduced. E These provisions are stated as follows: S. 34(2)(b)(ii) the arbitral award is in conflict with the public policy of India. Explanation.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India only F if: (a) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; (b) it is in contravention with the fundamental policy of Indian law; or G

(c) it is in conflict with the most basic notions of morality or justice. (2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by H

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A the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of the award. Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re- appreciating evidence. B 10.2. The above amendments were suggested on the assumption that other terms such as “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed. 10.3. However, a month after the submission of the 246th Report C in August 2014, the term “fundamental policy of India” was construed widely by a three-judge bench of Supreme Court in ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 in September to include an award that “no reasonable person would have arrived at”. This permitted the review of an arbitral D award on merits on the basis of it violating public policy. The Supreme Court’s decision was followed by a subsequent two- judge bench in Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49 dated 25.11.2014. In the words of Supreme Court in Western Geco:

E 35. What then would constitute the “fundamental policy of Indian law” is the question. The decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] does not elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. F Without meaning to exhaustively enumerate the purport of the expression “fundamental policy of Indian law”, we may refer to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the G principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a “judicial approach” in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the H

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court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.

38. Equally important and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi- judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law.

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A reasonableness. Decisions that fall short of the standards of reasonableness are open to challenge in a court of law often in writ jurisdiction of the superior courts but no less in statutory processes wherever the same are available.

40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest. (emphasis in original) Therefore, among others, the Wednesbury principle of reasonableness has now been incorporated into the public policy test under Section 34, as it is deemed to be part of “fundamental policy of Indian law.” 10.4. Such a power to review an award on merits is contrary to the object of the Act and international practice. As stated in the Statement of Objects and Reasons of the 1996 Act itself, one of the principal objects of that law was “minimization of judicial intervention” [The 1996 Act, Statement of Objects and Reasons, paragraph 4(v)]. (emphasis supplied) 10.5. As the Supreme Court’s judgment in Western Geco (supra) would expand the Court’s power rather than minimise it, and given that it is also contrary to international practice, a clarification needs to be incorporated to ensure that the term “fundamental policy of Indian law” is narrowly construed. If not, all the amendments suggested by the Law Commission in relation to construction of the term “public policy” will be rendered nugatory, as the H

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applicability of Wednesbury principles to public policy will certainly open the floodgates. 10.6. This will have four major deleterious effect, being (a) a further erosion of faith in arbitration proceedings amongst individuals and businesses in India and abroad; (b) a reduction in popularity of India as a destination for international and domestic commercial arbitration; (c) increased investor concern, amongst domestic and foreign investors, about the efficacy and speed of dispute resolution and potential for judicial interference; and, (d) an incidental increase in judicial backlog. In this regard, the following amendment to the draft is suggested, by inserting Explanation 2 to Section 34(2)(b)(ii) of the Act: C

“For the avoidance of doubt the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”

21Copy pinpoint21. Pursuant to the Law Commission Report, the 1996 Act was amended by the Amendment Act, 2015 with effect from 23.10.2015. The Statement of Objects and Reasons of the Arbitration and Conciliation (Amendment) Bill, 2015 is set out as follows: “xxx xxx xxx

2. The Act was enacted to provide for speedy disposal of cases relating to arbitration with least court intervention. With the passage of time, some difficulties in the applicability of the Act have been noticed. Interpretation of the provisions of the Act by courts in some cases have resulted in delay of disposal of arbitration proceedings and increase in interference of courts in arbitration matters, which tend to defeat the object of the Act. With a view to overcome the difficulties, the matter was referred to the Law Commission of India, which examined the issue in detail and submitted its 176th Report. On the basis of the said Report, the Arbitration and Conciliation (Amendment) Bill, 2003 was introduced in the Rajya Sabha on 22-12-2003. The said Bill was referred to the Department-related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice for examination and report. The said Committee, submitted its Report to Parliament on 4-8-2005, wherein the Committee recommended that since many provisions of the said Bill were contentious, the H

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A Bill may be withdrawn and a fresh legislation may be brought after considering its recommendations. Accordingly, the said Bill was withdrawn from the Rajya Sabha.

3. On a reference made again in pursuance of the above, the Law Commission examined and submitted its 246th Report on B “Amendments to the Arbitration and Conciliation Act, 1996” in August, 2014 and recommended various amendments in the Act. The proposed amendments to the Act would facilitate and encourage Alternative Dispute Mechanism, especially arbitration, for settlement of disputes in a more user-friendly, cost effective and expeditious disposal of cases since India is committed to improve its legal framework to obviate in disposal of cases.

4. As India has been ranked at 178 out of 189 nations in the world in contract enforcement, it is high time that urgent steps are taken to facilitate quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered and reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration, so as to encourage investment and economic activity.

5. As Parliament was not in session and immediate steps were required to be taken to make necessary amendments to the E Arbitration and Conciliation Act, 1996 to attract foreign investment by projecting India as an investor friendly country having a sound legal framework, the President was pleased to promulgate the Arbitration and Conciliation (Amendment) Ordinance, 2015. xxx xxx xxx” F (emphasis supplied)

22Copy pinpoint22. Section 28(3), before the Amendment Act, read as follows: “28. Rules applicable to substance of dispute.— xxx xxx xxx G (3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”

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Section 28(3), after amendment, reads as follows: A “28. Rules applicable to substance of dispute.— xxx xxx xxx (3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade B usages applicable to the transaction.” Section 34(2)(b)(ii), after amendment, reads as follows: “34. Application for setting aside arbitral award.— xxx xxx xxx C (2) An arbitral award may be set aside by the Court only if— xxx xxx xxx (b) the Court finds that— xxx xxx xxx D (ii) the arbitral award is in conflict with the public policy of India. Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,— E (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of F Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy G of Indian law shall not entail a review on the merits of the dispute. xxx xxx xxx” Sub-section (2A) of Section 34 was also added, which reads as follows: H

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A “34. Application for setting aside arbitral award.— xxx xxx xxx (2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent B illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

C xxx xxx xxx” Correspondingly, Section 48 was also amended to bring the unamended Section 48 in line with the amendments made in Section 34, except that sub-section (2A) of Section 34 is missing in Section 48 as the said Section deals with recognition and enforcement of foreign awards. D Section 48, post amendment, reads as follows: “48. Conditions for enforcement of foreign awards.— xxx xxx xxx (2) Enforcement of an arbitral award may also be refused if the Court finds that— E xxx xxx xxx (b) the enforcement of the award would be contrary to the public policy of India. Explanation 1.—For the avoidance of any doubt, it is clarified F that an award is in conflict with the public policy of India, only if,— (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or G (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. H

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Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. xxx xxx xxx”

23Copy pinpoint23. What is clear, therefore, is that the expression “public policy of India”, whether contained in Section 34 or in Section 48, would now mean the “fundamental policy of Indian law” as explained in paragraphs 18 and 27 of Associate Builders (supra), i.e., the fundamental policy of Indian law would be relegated to the “Renusagar” understanding of this expression. This would necessarily mean that the Western Geco C (supra) expansion has been done away with. In short, Western Geco (supra), as explained in paragraphs 28 and 29 of Associate Builders (supra), would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court’s intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in paragraph 30 of Associate Builders (supra).

24Copy pinpoint24. It is important to notice that the ground for interference insofar as it concerns “interest of India” has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the “most basic notions of morality or justice”. This again would be in line with paragraphs 36 to 39 of Associate Builders (supra), as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground.

25Copy pinpoint25. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paragraphs 18 and 27 of Associate Builders (supra), or secondly, that such award is against basic notions of justice or morality as understood in paragraphs 36 to 39 of Associate Builders (supra). Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment Act only so that Western Geco (supra), as understood in Associate Builders (supra), and paragraphs 28 and 29 in particular, is now done away with. H