The Centrotrade Decision: A Two-edged Sword?

This decision is the first major ruling where the Indian Supreme Court has been called upon to clarify the interpretation of the public policy exception after the passing of the 2015 Arbitration and Conciliation Amendment Act.  It is also the first time the court had to rule on the validity of a two-tier arbitration clause. With the Centrotrade decision[1] the court, when dealing with a foreign award, seems to have done two things. Firstly, it ruled that a two tier arbitration would not be contrary to Indian public policy and secondly, when defining the scope of public policy, it ignored the words of the statute and resurrected an old definition which had been done away with in previous case law.

Brief overview of facts

The facts of the case are quite interesting. The case involved an American supplier who entered into an agreement to sell copper to an Indian buyer. The agreement had an arbitration clause which provided the option of having a two tiered arbitration. Subsequently a dispute arose, at which point the supplier invoked the arbitration clause. The arbitration tribunal seated in India made a NIL award. The supplier who was dissatisfied with the award then approached the second tribunal seated in London. The buyer at this point approached Indian courts claiming that a two tier arbitration would be contrary to Indian public policy. In the meanwhile, the arbitral tribunal seated in London made an award in favour of the supplier.

Why this decision is interesting

The Indian Arbitration Act does not explicitly encompass two tier arbitrations; therefore, there was previously a doubt as to their validity under Indian law. The Indian court clarified that parties have a right to two-tier arbitration as this is akin to a private ‘appeal’ which is not precluded under Indian law. It justified its reasoning on grounds that India is party to the Working Group on international contract practices (third session) which in its report strongly supports the right of parties to choose to appeal arbitral awards before a second arbitral tribunal.

Crucially, party autonomy was cited as a major reason for upholding two-tier arbitrations.  The court, in line with its arbitration friendly reasoning, identified party autonomy as ‘the backbone’ of arbitration. In its opinion the option of seeking a judicial remedy does not preclude parties from instead choosing a private appellate process. It held that the statute is not intended to ‘throttle the autonomy of the parties or preclude them from adopting…appellate arbitration.’ The finality of the first award, which is protected by statute, does not therefore preclude a second award.

The most interesting part of this decision, however, relates to the public policy exception. The buyer had claimed that a two-tier arbitration system would be against Indian public policy as it would contravene the fundamental principles of Indian law. In answering this question the court looked at the meaning of the Arbitration Act. In line with its respect for party autonomy it chose to strictly interpret the wording of the Act so that it would not preclude a two-tier arbitration. The court refused to ‘misconstrue’ the act in such a way as to make a two-tier arbitral process contrary to its ‘fundamental principles’.

Controversially, however, the court supported its decision by referring to an earlier DDA ruling.[2] Under Indian law, public policy is given a broader construction for domestic awards. For domestic awards, compliance with public policy is assessed not only through a three-pronged test (which will be explained in the next part), but also through an analysis of whether the award is ‘patently illegal’. In this case, while deciding on the validity of a foreign arbitral award, the court used the test which was meant for domestic awards and included ‘patent illegality’ and ‘interest of India’ within the scope of the public policy exception. Such a construction is not envisioned by either the statute or the most recent case law.

Implications of the Ruling

This case has wide ranging implications for the future practice of arbitration in India. At a time when the Indian legislature and courts are trying to make Indian an arbitration-friendly country, the Supreme court has taken a step in the right direction by ensuring the primacy of party autonomy. This first-of-its-kind ruling by the Indian apex court ensures that parties have the freedom to include a two-tier/appellate mechanism within their arbitration agreements.

The flip side of the judgment can, however, be seen in the court’s interpretation of the public policy exception. In the past, one of the main grounds for challenging arbitral awards was the public policy exception. It was often misused by the losing party in arbitral proceedings to approach courts to delay enforcement proceedings. Indian courts often had difficulty in ‘striking the right balance between party autonomy and a fair trial’.[3]

In order to counter the expansive interpretation of public policy given by the courts, the Law Commission of India in its Report suggested amendments to the Arbitration Act. In line with these recommendations the 2015 Act amended Section 48 of the 1996 Indian Arbitration Act to restrictively define the scope of the public policy exception. The amendment was inspired by the Renusagar case[4] which laid down the three-pronged test. The section explicitly provides that, with relation to foreign awards, the public policy exception only includes i) fundamental principles of Indian law, ii) morality and justice, and iii) fraud or corruption in the making of the award.

By choosing to ignore the words of the statute, and also the three-pronged test, and instead acknowledging that the public policy exception includes the additional grounds of ‘interest of India’ and ‘patently illegality’, the Supreme Court in the Centrotrade decision has brought about much uncertainty and has turned the clock back on the progress made in restricting the scope of the exception. If not re-evaluated, this decision can open the floodgates for many more challenges to arbitral awards in the years to come.

Nihal DSouza is a Research Assistant at Bonn University, and a doctoral candidate at the International Max Planck Research School for Successful Dispute Resolution.