Supreme Court: Mere infraction of law does not make an arbitral award vulnerable

Introduction

An arbitral award may be set aside by a court in India if it is found to be in conflict with the public policy of India. Under the Arbitration and Conciliation Act, 1996 (Act), an award is considered to be in conflict with public policy only if: (i) it was influenced by fraud or corruption or violated certain procedural provisions; (ii) it contravenes the fundamental policy of Indian law; or (iii) it is inconsistent with the most basic principles of morality or justice. Importantly, the Act stipulates that the examination of whether an award violates the fundamental policy of Indian law does not extend to a review of the merits of the dispute.

One of the defining characteristics of an arbitration-friendly jurisdiction is a strong framework for award enforcement, which is often shaped by the interpretation of ‘public policy.’ In India, the scope of public policy has significantly narrowed over time, leading to a more pro-enforcement approach. This shift is evident even in cases involving complex matters such as exchange control laws and securities regulations. A recent example of this evolution can be seen in the Supreme Court (SC)ruling in OPG Power Generation Pvt. Ltd. v. Enexio Power Cooling Solutions India Pvt. Ltd., where the enforceability of arbitral awards was scrutinized in the context of public policy considerations.

Brief facts

OPG Power Generation Private Limited (OPG) and Enexio Power Cooling Solutions India Private Limited (Enexio) entered into a contract for 160 MW Coal-Based Thermal Power Project for supply, erection and commission of Air-Cooled Condenser units. In pursuance of the contract, Gita Power and Infrastructure Private Limited (Gita Power) – the holding company of OPG – issued separate purchase orders, which were later approved by OPG.

A dispute arose over outstanding payments and related claims on part of OPG to Enexio for its services, which led to arbitration clause being invoked by Enexio. The arbitral tribunal ruled in favor of Enexio, holding Gita Power, as the holding company of OPG, jointly and severally liable for the unpaid amounts. The tribunal found that Gita Power had been actively involved in the negotiations and had placed the purchase orders. Additionally, the tribunal granted Enexio the unpaid principal amount with interest but rejected the claim for liquidated damages and customs duty, stating that they were time-barred under the Limitation Act, 1963.

OPG challenged the award before a single judge of the Madras High Court, which subsequently set aside the arbitral award. However, the Division Bench of the Madras High Court reversed this decision, restoring the award and setting aside the single judge’s order. This ruling was then appealed to the SC.

Supreme Court’s ruling

The main issues raised before the SC were whether the arbitral award conflicted with the public policy of India or was tainted by patent illegality, whether Gita Power could be made jointly and severally liable for the award alongside the Appellant, and whether Enexio’s claim for the outstanding principal amount was barred by limitation.

OPG argued that the tribunal had applied different standards to the claims and counterclaims. However, the SC found no merit in this argument, stating that the tribunal had rejected the counterclaims not because they were time-barred but on their merits. Specifically, the tribunal denied the liquidated damages because Enexio was entitled to an extension for completion, and it found that customs duties were payable by the purchaser. The SC clarified that the tribunal’s interpretation of the contract terms and the parties’ conduct did not warrant interference.

On the issue of joint and several liability, the SC applied the “Group of Companies Doctrine” (to read our article on Group of Companies doctrine, please click here). It concluded that Gita Power, as part of the same group, was bound by the arbitration agreement and liable alongside OPG. Regarding limitation, the SC examined the timeline of events and the applicable provisions of the Limitation Act, 1963. It found that the limitation period began in 2016 and was extended by an acknowledgment made in a meeting in 2018, which confirmed the outstanding liability. The SC held that this acknowledgment was sufficient to extend the limitation period, even if a set-off was claimed.

On the issue of whether the arbitral award conflicted with the public policy of India and/or was vitiated by patent illegality apparent on the face of the award, the SC ruled that violation of fundamental policy of Indian law is a very narrow ground to challenge an arbitral award under the Act. The SC noted that the insertion of the word ‘fundamental’ before ‘policy of Indian law’ is deliberate. The phrase now refers to the most basic principles of natural justice. It is only in exceptional circumstances that violation of fundamental policy of Indian law can be invoked, such that mere breach of municipal law does not render the award vulnerable to challenge under the Act. The SC held that for an arbitral award to be considered contrary to the public policy of India, a mere violation of municipal laws is insufficient. There must, in addition, be a violation of the fundamental policy of Indian law, which includes laws designed to serve the public interest or promote the public good.

In the present ruling, the SC did not outline what comprises of the fundamental policy of Indian law and left it up to the judicial discretion. To guide the judicial discretion in determining violation of fundamental policy of law, following pointers were suggested by the SC:

• Violation of principles of natural justice.
• Disregarding the orders of the superior courts in India or the binding effect of the judgment of a superior court.
• Violating law of India linked to the public good or public interest.

While the above-mentioned pointers are not exhaustive, they act as illustrations for the judicial scrutiny. Additionally, it was cautioned that during such judicial scrutiny, the court cannot sit as an appellate body over the arbitral tribunal. It cannot investigate the merits of the dispute and must limit its scrutiny to the most elementary principles of justice. These elementary principles are of such nature that their violation is apparent even to a prudent man with no judicial training. When the violations shock the conscience of the court and are violative of the very fundamentals of justice, then the ground of violation of fundamental policy of Indian law can be invoked to challenge an arbitral award under the Act.

Due caution must given to the principle that in arbitration, an arbitrator is the ultimate authority on the quantity and quality of evidence, and their factual determinations should be respected. It further emphasized that if on a fair reading the award is intelligible and adequate with no gaps in its reasoning, it cannot be challenged under the Act.

Our thoughts

By delineating the boundaries of judicial oversight in arbitral proceedings, this landmark ruling reinforces the principle of minimal judicial intervention and marks a significant step in fortifying the finality of arbitral awards in Indian commercial arbitration. By holding that a mere breach of statutory provisions does not amount to a violation of the fundamental policy of Indian law under the Act, the Supreme Court’s decision affirms the pro-arbitration stance of Indian courts, fostering greater confidence in India as an arbitration-friendly jurisdiction.

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