Law Commission’s report redefines the ‘public policy’ clause in Arbitration & Conciliation Act

The Law Commission, headed by Justice A.P. Shah, has recommended that some key changes be incorporated into the Arbitration and Conciliation Act, 1996 in order to revise the current understanding of the term ‘public policy’ in the context of Arbitration- both domestic and international. The amendments will seek to redefine the ‘public policy’ clause after considering the recent Supreme Court pronouncements on the matter and their impact on arbitrations, within and outside India.

As per the commission’s latest recommendations, the current Section 34(2)(b)(ii) is sought to be replaced with a new provision which states that an award is to be treated as illegal for being in contravention with the ‘public policy’ if the award was granted in violation of sections 75 or 81, or was a product of fraud or corruption; or if it is in conflict with the fundamental policy of Indian law; or it contravenes the most fundamental notions of morality or justice. According to the Law Commission, in other cases, it will not be proper to set aside the arbitral award on the basis of contravention of ‘public policy’.

Further, the commission suggested that an arbitral award, which is not a result of an international arbitration, is possible to be set aside by a court of law, if the court finds that the impugned award is coupled by a prima facie ‘patent illegality’. However, a proviso adds, that the award will not be set aside, merely on the rationale that the application of law was erroneous or on the re-appreciation of evidence.

Earlier, the law commission had formulated and submitted a report to the government on Arbitration and Reconciliation Act, in August 2014. However, post a recent apex court judgment on the issue, the law commission has restudied and revised the August 2014 report and has submitted a modified version on Friday.

The ratio behind the amendment to the Act has been suggested in order to promote foreign direct investment vis-à-vis simplifying the procedures for international commercial arbitrations. Since, the Act itself has been enacted keeping in mind the various foreign acts and conventions, such as the NewYork Convention, UNCITRAL etc. The procedures adopted under the Act also reflect a resemblance to procedures under various foreign statutes. The report observed that since foreign investors prefer the familiarity of local courts and arbitration instead of litigation. Consequently, several legal systems including the Indian legal sector also aims to provide a pro-arbitration and pro-investment climate in the country.

The Law Commission was referring to the report of the UK government that legal services in the country were valued at nearly 21 billion in terms of their contribution to the economy in 2011, a major portion of which is accounted from domestic and international arbitration given the fact that London is one of the world’s foremost and greatly preferred locations for arbitration.

by Siddhartha Singh.