Supreme Court clarifies the narrow scope of ‘public policy’ for challenge of Indian Award

The Supreme Court of India recently in Associate Builders v. Delhi Development Authority (2014 (4) ARBLR 307(SC)) dealt with some of the key issues involving challenge of an arbitral award in an arbitration seated in India and clarified the scope of ‘public policy’ under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”).

The Supreme Court, while looking into the scope of ‘public policy’ as a ground for setting aside an arbitral award under Section 34(2)(b)(ii) of the Act relied on certain landmark judgments including DDA v. R.S. Sharma and Co. ((2008) 13 SCC 80) and summarized the law as follows:

  • an award is open to interference by the court if it is:
  1. contrary to substantive provisions of law;
  2. the provisions of the Act;
  3. against the terms of the relevant contract;
  4. patently illegal; or
  5. prejudicial to the rights of the parties.
  • the award could be set aside if it is contrary to:
  1. fundamental policy of Indian law;
  2. the interest of India; or
  3. justice or morality,

on the ground that it would be contrary to public policy of India, and also elucidated the scope of the above mentioned points.

  • when a court is applying the ‘public policy’ test to an arbitral award, it does not act as a court of appeal and consequently ‘errors of fact’ cannot be corrected unless the arbitrators approach is arbitrary or capricious. It is a welcome decision so far as the term ‘public policy’ had been clarified in order to provide guidance on the level of judicial interference sought to be made under Section 34 of the Act.