Say the ratio out loud before you open Reasoning — recalling it unprompted is exactly what the exam pays for.
Why it matters
This is the most consequential decision in the paper's arbitration module. It widened public policy so far that setting-aside petitions became a second hearing on the merits, and the whole of the 2015 reform of s. 34 was written against it. You must be able to state the expansion, its effect, and the statutory reversal.
Facts
An award was challenged under s. 34 on the ground that it was contrary to the public policy of India, the complaint being that the arbitral tribunal had decided in a manner contrary to the applicable law and to the terms of the contract.
Held
The test of public policy in s. 34 was expanded to include an award that violates the statutory provisions of Indian law, or even the terms of the contract in some cases. Such an award is patently illegal and therefore in violation of public policy, and may be set aside.
Reasoning
Step one — public policy is read widely at the setting-aside stage. The Court distinguished the narrow meaning that the ground bears when a foreign award is being enforced from its meaning when a domestic award made under Indian law is being reviewed.
Step two — illegality as a species of public policy. If the tribunal has decided contrary to the statute that governs the contract, or has awarded what the contract forbids, the award is patently illegal; Indian public policy cannot be indifferent to that.
Step three — the practical consequence, and the criticism. The interpretation practically afforded the losing party an opportunity to re-agitate the merits of the case. That is the criticism the course records, and the reason for the reform.
Exam use
It opens: Discuss the grounds for setting aside an arbitral award and Trace the development of the public policy ground. It is also one of the three cases this paper recommends as a subject for a case comment, because it is finally decided, has a clear ratio, and has a traceable statutory afterlife.
Give the reversal in detail, because that is the current law. The 2015 amendment provides that an award is in conflict with the public policy of India only where it is induced or affected by fraud or corruption, or is in contravention with the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice; and that determining a contravention of the fundamental policy of Indian law does not entail a review of the merits of the dispute. Separately, an award may be set aside if vitiated by patent illegality appearing on the face of the award, but not merely for an erroneous application of law or by re-appreciation of evidence.
Note the reach of the narrow test. The grounds for setting aside a domestic award, including patent illegality, are not carried across to foreign awards; the public-policy control on enforcement under Part II is narrower, which is the point NTPC v. Singer and the Part II material develop.
On retrospectivity, the extent to which the 2015 changes to s. 34 operate retrospectively was settled later; this paper records that there is such a decision but does not set out its discussion of public policy and patent illegality, so do not attribute reasoning to it.
It does not decide anything about the enforcement of foreign awards, and it no longer states the law on public policy.