Report No. 176
2.26.2 (i) Substantial error of law apparent on the face of the award - proposed
Mere error of law was not a ground in purely domestic arbitration even under the old Act of 1940 unless it was apparent on the face of the award. It is not a ground in international arbitration and it is limited to 'public policy'. The elaborate discussion in Renusagar Power Co. Ltd. Vs. General Electric /Co. AIR 1994 S.C. 860 explains why error of law cannot be included within the meaning of the words 'public policy'.
While treating 'error of law' as being distinct from 'public policy', the New York Convention, 1958 referred only to 'public policy' as a ground of challenge and not error of law. The only exception was that under the head of 'public policy', the violation of certain fundamental policies was brought in. In Renu Sagar case, the Supreme Court therefore, refused to include 'error of law' as part of 'public policy'.
Exceptions were made in cases of violation of such laws like the FERA (see p 888) which were treated as part of 'fundamental policy of India' or 'interest of India'. Charging interest on interest or damages on damages was not treated as violation of public policy of India. The 'items' permitted by Renusagar are restricted to -
(i) Fundamental Policy of India
(ii) Interest of India
(iii) Justice or morality.
These alone are included in the meaning of the words 'public policy', apart from what is contained in the Explanation.
Suggestion has been made that the word 'public policy of India' must be defined and that the present Explanation in sec. 34(2) is not sufficient. Our attention is drawn to certain judgments of the High Courts, particularly one from Bombay, where a learned single Judge, after an elaborate judgment, has held that the above words are to be construed very liberally and would take within their fold, not only errors of law but all the grounds available under the 1940 Act.
This decision has not accepted Renusagar and it says that questions of law and even questions of fact, can be reviewed by the Court. Concepts of public policy as including violation of article 14 were also relied upon to hold that any arbitrary decision of the tribunal would amount to violation of 'public policy.' The Commission finds it difficult to accept this view of the Bombay High Court but leaves it to be corrected by the judicial process.
This aspect is proposed to be clarified by an Explanation in the proposed clause relating to error of law apparent on the face of the award, it is clearly stated that the question of law must arise after accepting the findings of fact as they are. This aspect is proposed to be clarified by an Explanation. According to Redfern and Hunter, (see para 9.32) there is justification for not including errors of law as a ground of attack so far as international arbitration is concerned. They said:
"There is a belief that, so far as international arbitrations are concerned, the parties should be prepared to accept the decision of the arbitral tribunal even if it is wrong, so long the correct procedures are observed. If a court is allowed to review this decision on the law or on the merits, the speed and above all, the finality of the arbitral process is lost."
Russell (1999) says (7.0001) that it is easier to justify some role for the court in cases where the parties are from England and the arbitration is to follow the normal English rules of procedure. Justice V.A. Mohta, in his recent commentary on the Arbitration and Conciliation Act, 1996 (see pp.250, 251) has referred to the divergent views on the question of court interference, in extenso.
Reference is made to the view of Lord Mustill (quoted in an article by Shri Milon Benerjee in the book 'Alternative Dispute Resolution', by Dr. P.C. Rao) to the effect that error of law should be retained. Reference is made to another article by noted Jurist Sri F.S. Nariman in the same book that error of law should not be brought into the grounds of attack of the award in the new Act. So far as 'error of law' apparent on the face of the award in respect of purely domestic awards between Indian nationals, the Commission is inclined to include this ground provided the error relates to a 'substantial question of law'.
This view is based to a large extent on section 28 of the Act and considerations for upholding the rule of law and public interest but at the same time restricting the time of appeal to 'substantial question of law'. Under section 28, the arbitral tribunal is not expected to deviate from the "substantive" law. If that be so, is there any justification for not including this ground in section 34?
In the opinion of the Commission, there is none. The courts in India, including the High Courts and the Supreme Court, are to decide disputes in accordance with law. There is, therefore, no justification in placing the arbitral tribunal on a higher pedestal and allowing it to decide according to its own whims and fancies. Awards involving crores of rupees are passed against the State, the public sector undertakings and statutory corporations.
For example, if the period of limitation for an action is three years and a claim is barred by ten years and still allowed by the arbitral tribunal, should the award be left alone? If huge damages are awarded in violation of section 73 of the Contract Act or there is violation of other provisions of that Act or the Sale of Goods Act or Interest Act, should there be no remedy at all?
If it does not follow a decision of the Supreme Court or wrongly ignores the decisions of the Supreme Court, can it not be corrected? In the opinion of the Commission, it is not possible to follow the Model Law by omitting this important ground of attack. However, this ground should be made available only for purely domestic arbitration between Indian nationals. (Of course, where a pure question of law is referred to the arbitral tribunal, this ground will not be available). However, if error of law is to be added, it should be subject to rigid conditions as under section 69 of the English Act.
While permitting this ground of 'error of law apparent on the face of the award', the Commission proposes to include very rigid standards as in section 69 of the English Act, 1996 such as (i) the error must be apparent on the face of the award and give use to a substantial question of law, (ii) its determination must necessarily affect the rights of one or more parties, (iii) the substantial question of law must have been raised before the arbitral tribunal, (iv) the party must identify the question of law clearly in the grounds, (vi) separate leave must be obtained for raising the plea.
These stringent conditions are among the various conditions fixed under English Law, following the decision of the House of Lords in the Nema Case (1982 AC 724) and the Antaios case , (1985 AC 191). At the stage of Section 34A to raise the above plea of error apparent on face of record, the court is to prima facie satisfy itself if these conditions are fulfilled. As stated earlier, States impose and can impose greater supervision over purely domestic award in which all the parties are Indian nationals.
We can give one more reason as to why different treatment is needed. In international arbitration, the parties generally approach recognized international institutions like the ICC which have a panel of expert arbitrators of international repute. The arbitrators by virtue of their selection to such an august panel are regarded very high and parties repose great confidence in them. It is not the same with purely domestic arbitration.
It is not as if in all cases retired Judges of the Supreme Court or High Courts or other experts are appointed. In purely domestic arbitrations, even lay people are appointed. Again, in cases where Government or Public sector undertakings or statutory corporations are parties, there is provision for appointment of their employees as arbitrators.
During the discussion on the Consultation Paper (Annexure-II), it was revealed that, in case where departmental officers are appointed as arbitrators, there was a feeling that they mostly favour the private contractors. In some situations, they were unduly biased in favour of their employers. Therefore, purely domestic arbitration awards cannot always be placed on the same high pedestal as international arbitration awards.
2.26.3 The Commission is conscious that any provision granting an additional ground of review, even it be for purposes of purely domestic arbitral award, can be abused leading to delay in courts. That is why the Commission is imposing several rigid conditions in this behalf as stated earlier. At the same time, the Commission cannot ignore that a substantial number of arbitration cases involve Government, public sector undertakings and statutory corporations against which huge claims are made and awards passed.
The monies involved here are all public monies. The Commission has kept in view that some awards against these bodies today are running into hundreds of crores. Therefore, some more supervision is definitely necessary so far as purely domestic awards between Indian nationals are concerned and we cannot rest content with the limited range of attack permitted in respect of international awards. At the same time, as stated above, we propose to take extreme care to see that the additional grounds are not abused.
Therefore, we propose to insert section 34A after section 34 as follows: