Public-Private Arbitrations in India: Are Democratic Norms Protected?

By: Ansh Desai and Hetashri Khajanchi (Gujarat National Law University, Gandhinagar)


A recent RTI filed by The Indian Express, demanding information pertaining to details of expenditure arising out of the Commonwealth Games disputes, led to the government disclosing that nearly Rs. 7 crores were paid by the government to arbitrators. This is amplified by the fact that at present, there are at least fifty pending disputes related to various contracts with private parties that are worth nearly worth Rs. 700 crores, and that the costs could rise exponentially if an award mandating the government to pay compensation is issued. Another popular example of wasteful costs in dispute resolution of public-private partnerships in India would be that of the National Highway Authority of India (“NHAI”). It has been reported that NHAI is facing arbitration cases of over Rs. 11,000 crores with various private developers, of which approximately 1300 disputes amounting to Rs. 9,200 crores are in favour of the road developers. There are plenty more similar disputes that involve the state or other public entities, with huge amounts of taxpayers’ money and potential public interest hanging in the balance. Many would argue that such disputes arising out of public-private partnerships are inextricably linked to the economic welfare of people and the decision making of governmental policy.

Many public entities, when “contracting out” certain duties to private actors opt for arbitration due to the flexibility and expeditiousness it provides.  Such public-private partnerships gained traction a couple of decades ago not only in India, but also on a global scale. Furthermore, with the collapse of the non-arbitrability doctrine across different jurisdictions, an increasingly non-interventionist outlook has been crystallized by Indian courts which has resulted in broadening the domain of the arbitration sphere considerably. This vast scope of arbitration coupled with the rise of the contracting states means that governments are increasingly relying on arbitration to resolve disputes arising from contracts. This is evident from the fact that major PPP guidelines in India, like the Defence Procurement Procedure, the Defence Procurement Manual and the PPP Toolkit prescribe arbitration as the primary mode of dispute resolution.

Considering that private actors frequently end up being delegated public duties, and norms like public interest and accountability lie at the heart of such partnerships, especially when such partnerships pertain to national security, defence, infrastructure, health, etc., the question is whether the Indian regime is prudent for upholding such norms in cases of public-private arbitrations, considering that arbitrators primarily source their authority for commercial contracts, unlike judges of national courts who legitimize their authority from national sovereignty and democratic procedure.

NATURE OF ARBITRATION REGIME IN INDIA WITH RESPECT TO PUBLIC-PRIVATE ARBITRATIONS

When public entities enter into a contract with private actors, the contract acquires a “cooperative paradigm” as compared to a hierarchical structure where the government is supreme. In this regard, it becomes important for the dispute resolution process to account for the same and differentiate between arbitrations that take place solely between private actors, and public-private arbitrations. Public interest, accountability and transparency do not play a major role in arbitration amongst private actors, but they do hold importance when any public entity is involved. The Arbitration and Conciliation Act, 1996 (“the Act”) of India is based on the UNCITRAL Model Law. Unfortunately,   neither of the two draw a distinction between a purely intra private arbitration and a public-private arbitration. As a consequence, Indian arbitration regime does not draw a contrast between public-private arbitrations and a purely private arbitration in matters such as adducing of evidence, appointment of arbitrators, and confidentiality and therefore, the role of the Court does not change with regard to an arbitration proceeding depending solely on whether it involves a public actor.

If a question regarding public interest arises whilst an arbitration proceeding is underway, there is no provision in the Act for courts to take notice of the same on its own accord. It can do so only on an application filed by either of the parties for an anti-arbitration injunction, the law pertaining to which is extremely polarized in India. Kvaerner Cementation, National Aluminium, and most recently, Bina Modi gave utmost supremacy to the principle of kompetenz-kompetenz enshrined in Section 16 and held that civil courts do not have the jurisdiction to decide questions of arbitrability and cannot rule on the jurisdiction of the arbitral tribunal. On the other hand, a line of judgments like SBP & Co v Patel Engineering Ltd and McDonald’s affirmed the inherent jurisdiction of civil courts to entertain anti-arbitration injunctions, albeit in exceptional circumstances only. With regard to foreign-seated arbitration, Modi Entertainment laid down principles for granting an anti-arbitration injunction, none of which are dependent on a public entity involved or public interest being implicated. Nevertheless, in absence of a streamlined jurisprudence and the restrictive scope of judicial intervention, the only recourse that can be taken is after the award has already been made i.e. in the enforcement stage or setting aside proceedings.

There are other elements that the Act does not cover, the determination of which is left for case-law to establish. For example, there is presently no coherence in deciding what kinds of disputes are arbitrable. The Supreme Court in Booz Allen distinguished between arbitrable and non-arbitrable disputes depending on whether they gave rise to rights in rem and rights in personam, only the latter being arbitrable. While Booz Allen laid down a rights-based test, Rakesh Malhotra laid down a remedy-based test; a dispute would be considered arbitrable depending on whether the tribunal is competent by virtue of its nature to grant the remedy sought.

Quite recently, in Avitel Post Studioz Ltd v HSBC PI Holdings, the Court held that allegations of fraud or mala fide conduct made against the State or any of its instrumentalities giving rise to public law questions would be non-arbitrable and amenable to the writ jurisdiction of courts. However, to illustrate what issues would not fall within the public domain, the Court also said that allegations like diversion of funds, impersonation and false representations would be regarded as internal disputes purely inter se the parties. Therefore, it seems that the bar to attract this exception to arbitrability is also set quite high. Furthermore, with the present restrictive approach on maintainability of writ jurisdiction in arbitration matters involving a public entity, it would be interesting to see how courts apply Avitel vis-à-vis the past jurisprudence. Hence, courts have not comprehensively considered public interest as the basis of non-arbitrability.

CONTRAST BETWEEN THE STANDARDS APPLICABLE TO JUDICIAL REVIEW OF ADMINISTRATIVE ACTION AND POWER OF THE COURT TO REVIEW AN ARBITRAL AWARD

Once an arbitral award is issued, it can be set aside or refused enforcement only if there is some form of irregularity in the procedure adopted, or if it is deemed to be against the “public policy” of India. Courts have dabbled with the question of public policy since long, resulting in a series of judgments that have construed the same narrowly. The Act itself clarifies that “public policy” should stand to mean the “fundamental policy of Indian law” or matters affecting “justice and morality” of India. Cruz City, Shri Lal Mahal, and Renusagar held that the threshold of an award obstructing public policy is set very high, meaning that an award would be deemed to be contrary to public policy only when the “substratal policy of law” is affected without going into the merits of the award.

Contrast this with the standards applicable to judicial review of administrative action. Even though the power of the courts to scrutinize government contracts is limited and can be done only on the basis of the Wednesbury test of unreasonableness, arbitrariness, blatant irregularity or impropriety, the scope of judicial review is still expansive compared to the power of the courts to review an award, as courts are empowered to judge government contracts based on public interest wherever the need arises.

Even the writ jurisdiction of the Supreme Court under Article 32 and High Courts under Article 226 of the Constitution of India cannot be invoked in government contractual disputes as it is maintainable only if there is a public law element involved. However, such discretion can rarely be exercised when the contract contains an arbitration clause. Even in the enforcement stage after the award has been issued, if either of the parties chooses to challenge it by filing a writ instead of following the statutory procedure, it is well-settled that since the Act provides for a procedure to challenge an award, the writ jurisdiction of the courts cannot be invoked without first exhausting that remedy.

CONFIDENTIALITY CONCERNS

According to the newly-inserted Section 42A, the arbitration proceedings shall be kept confidential at all times except when disclosure is necessary for the implementation and enforcement of the award, notwithstanding any law in force at the time. As opposed to the “implied confidentiality” test laid down by English, Singaporean and Swiss courts, where disclosure requirements or confidentiality claims are looked into on a case to case basis rather than following a blanket rule of mandated confidentiality, this section gives the general rule of confidentiality in arbitration a statutory force, and thus, makes it mandatory at all times. This potentially threatens the idea of a public entity being accountable and transparent to the public.

The importance of legitimate public interest being a ground for disclosure in public-private arbitrations was laid down in the Australian High Court case of Esso Australia Resource Ltd v Plowman where the Court held that the public has a right to obtain information about the affairs of the public authorities as it directly affected their interests. However, with the insertion of Section 42A, the legislature has removed any room for exceptions, including public interest, and provided for confidentiality in all arbitration proceedings as a matter of compulsion. The only exception provided is disclosure that is necessitated for the purpose of enforcement or implementation of the contract.

Furthermore, government authorities and public entities are liable to make all records and documents public under the Right to Information Act, 2005. The non-obstante clause effectively overrides such a duty on part of a public entity that is involved in an arbitration proceeding.

CONCLUSION

It is evident that there are some glaring issues with public-private arbitrations in India with regard to protecting public interest as well as upholding democratic norms. Keeping public authorities outside the purview of the arbitral sphere entirely, like France, is not recommended since most public procurement guidelines prefer arbitration as the primary dispute resolution method. It would be unwise to argue that arbitration does not provide a speedier and more flexible mode of dispute resolution than litigation, and that all cases of public-private disputes necessarily implicate public interest.

While one method of protecting public interest in public-private arbitrations would be to expand the scope of “public policy” under Sections 34 and 48, the same is not desirable as it would result in opening the floodgates of litigation. The only way of moving forward would be to balance non-interventionism with an approach that guards public interest in such arbitrations. In this regard, an exceptional review only targeted towards public-private arbitration awards that involves application of standards similar to those of judicial review of administrative action may suffice. Furthermore, to uphold the norms of accountability and transparency, Section 42A and its application to public-private arbitration proceedings has to be reconsidered. Even if the legislation is not amended, courts need to adopt a jurisprudence that considers accountability and public interest as important exceptions to the rule of confidentiality.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s