S. 34 Arbitration Act |Mere Violation Of Law Won't Make Arbitral Award Invalid, Fundamental Policy Of Law Must Be Violated : Supreme Court

The Supreme Court recently explained the scope for judicial interference in arbitral awards under section 34 the Arbitration and Conciliation Act on the ground of violation of public policy, highlighting that it is very limited, particularly after the 2015 amendment.A bench of Chief Justice of India DY Chandrachud, Justice JB Pardiwala, Justice Manoj Misra observed that mere violation of law is not enough to interfere with an award, but it must conflict with the most fundamental aspects of public policy, justice.“The expression “in contravention with the fundamental policy of Indian law” by use of the word 'fundamental' before the phrase 'policy of Indian law' makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country.”Public Policy of IndiaThe Court noted that after the 2015 amendment to the Act, the phrase “in conflict with the public policy of India” was accorded a restricted meaning under Section 34(2)(b)(ii) of the Arbitration Act. Mere contravention of Indian law does not make an award invalid. The contravention must involve a fundamental policy of Indian law. “for an award to be against public policy of India a mere infraction of the municipal laws of India is not enough. There must be, inter alia, infraction of fundamental policy of Indian law including a law meant to serve public interest or public good.”The Court said that under Explanation 1 of Section 34(2)(b)(ii), the award must violate 'fundamental' principles that are essential to the administration of justice in India, for example, breach of natural justice, disregarding binding judgments of superior courts, or violations of laws linked to public good or public interest.Justice and MoralityExplanation 1 of Section 34(2)(b)(ii), an award can be set aside if it conflicts with the “most basic notions of justice or morality”. The Court highlighted that the 2015 amendment qualified “justice” with "most basic notions," limiting the scope of intervention by courts. The Court emphasized that this ground should be invoked only in exceptional circumstances where there is a breach of fundamental principles of justice that a prudent person, whether judicially trained or not, would recognize as violated.“Suffice it to observe, they ought to be such elementary principles of justice that their violation could be figured out by a prudent member of the public who may, or may not, be judicially trained, which means, that their violation would shock the conscience of a legally trained mind. In other words, this ground would be available to set aside an arbitral award, if the award conflicts with such elementary/ fundamental principles of justice that it shocks the conscience of the Court.”The Court noted that "morality" in judicial contexts has been primarily limited to sexual morality. If morality were to extend beyond this, it would apply to agreements that, while not illegal, conflict with societal norms. The Court clarified that interference based on morality would occur only if the matter "shocks the court's conscience."Patent IllegalityThe Court explained that patent illegality (Section 2A of the Act) is a specific ground for setting aside domestic arbitral awards (but not for international commercial arbitrations). The term refers to an award that contains errors apparent on the face of the award, such as violations of substantive provisions of Indian law or terms of the contract. However, reappreciation of evidence or mere errors in applying the law do not constitute patent illegality. An award can only be set aside if the illegality goes to the root of the matter.The Court reiterated that courts do not sit in appeal over arbitral awards, and interference is permitted only on the limited grounds set out in Section 34 of the Arbitration Act. An arbitrator is the master of evidence, and as long as the award is based on a possible view of the facts, it should be respected, the Court observed.“A possible view by the arbitrator on facts is to be respected as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon. It is only when an arbitral award could be categorized as perverse, that on an error of fact an arbitral award may be set aside…Further, a mere erroneous application of the law or wrong appreciation of evidence by itself is not a ground to set aside an award as is clear from the provisions of sub section (2-A) of Section 34 of the 1996 Act”, the Court held.The Court also discussed the scope of interference with an arbitral award on ground of insufficient, or improper/erroneous, or lack of reasons, and whether implied terms can be read into...

S. 34 Arbitration Act |Mere Violation Of Law Won't Make Arbitral Award Invalid, Fundamental Policy Of Law Must Be Violated : Supreme Court

Amisha Shrivastava

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