Under the Arbitration & Conciliation Act 1996, the arbitral award was given a high measure of sanctity and could be challenged U/S 34 of the Act on very limited grounds. These grounds were basically procedural, such as incapacity of parties, invalidity of the arbitration agreement, lack of proper notice of appointment of arbitrators or arbitral proceedings, lack of jurisdiction, non-contractual composition of arbitral tribunal or arbitral procedure, and non-arbitrability of the subject matters of dispute.  An award could also be set aside on the grounds of fraud or corruption or for violation of Section 75 and Section 81, which related to confidentiality and non disclosure of evidence in earlier conciliation proceedings.

An award could also be set aside if it was in conflict with the public policy of India, which was the only ground under which an award could be challenged on merits. Thus the scope of judicial scrutiny of an award U/S. 34 was very limited. Under the earlier Act of 1940 an award could be set aside on 3 grounds, viz:

1. that an arbitrator or umpire had mis-conducted himself or the proceedings;
2. that an award had been made after the issue of an order by the Court superseding the arbitration;
3.  that an award had been improperly procured or was otherwise invalid.

The 1996 Act has done away with the principle of mis-conduct as also “effect of legal proceedings”.  The statement of objects and reasons of the 1996 Act provides that one of the main objectives of the Act was to give more power to the arbitrators and reduce the supervisory role of the court in the arbitral process. Consequently, by and large, Indian courts have disfavoured interference with arbitral awards and have shown a definite inclination to preserve the award as far as possible. Courts have held that they do not sit in appeal over the award and review the reasons given by the arbitrator. There was a general opinion that the 1996 Act was a distinct improvement over the earlier Act and was largely favourable to maintaining the sanctity of arbitral awards.

This position received a rough jolt by the decision of the Supreme Court in the Saw Pipes case, 2003(5) SCC 705. In this case the Supreme Court expanded the scope of “public policy” to include setting aside an award if it was “patently illegal”. This case has been subjected to criticism by various quarters. Firstly, it has expanded the scope of “public policy” rather than keeping it limited, as laid down in earlier judgments.  It is not easy to discern what “public policy” is and various courts have held that “public policy” is an unruly horse. Secondly, what is “patently illegal” is itself not clear. To find out whether an award is “patently illegal” or not, the court has to make a judicial scrutiny of the arbitral award on merits. “Patently illegal” is another unruly horse and may not always be related to “public policy”.

The Supreme Court itself has been trying to water down the Saw Pipes case. For instance, in McDermott International Inc. vs Burn Standard Co. Ltd. (2006) 2 ArbLR 498, S. B. Sinha J stated
“The 1996 Act makes a provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. the court cannot correct error of the arbitrator again if it is desired. So, scheme of the provisions aims at keeping the supervisory role of the court at minimal level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finally offered by it.”

Similarly, various High Courts have also recognized that there is a very limited scope of judicial review of arbitral awards, for instance Shushila N Rungta vs Mita M. Sheth,2005 (suppl) Arb LR 575, Courts have held that the challenge to the award U/S 34 cannot be construed as an appeal against the award.  In Maharashtra Small Scale industries Development Corporation vs Snehadeep Structures (P) Ltd. 2008 2 Arb LR 175, it has been held that it is not permissible for the court to correct the error of the arbitrator or grant relief which is the subject of the dispute in the arbitration. Recently, in Sumitomo Heavy Industries Ltd. vs ONGC which was decided on 28th July 2010, the Supreme Court has laid down that:

 “It is true that if there is an error apparent on the face of the award or where the umpire had exceeded his jurisdiction or travelled beyond the reference, the Court can interfere . if the conclusion of the arbitrator is based on a possible view of the matter, the Court is not expected to interfere with the award.. the High Court has erred in so interfering. Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator… “

In the case of Indian Oil Corporation vs Langkawi Shipping Ltd. 2004 (3) Arb.  LR 508, the Bombay High Court held that to accept literal construction of Saw Pipes case would be to radically alter the statutorily and judicially circumscribed limits to the Court’s jurisdiction to interfere with arbitration awards. The legislature is also initiating corrective measures to restore the status of “public policy” to the position prior to the Saw Pipes case. Recently, the Ministry of Law & justice has issued a Consultation Paper, on proposed amendments to the Arbitration & Conciliation Act 1996.  In the said Consultation Paper it is proposed to eliminate the concept of “patent illegality” from the concept of “public policy”.

The Law Ministry has recommended inserting Explanation-II to Sec. 34 of the Act, as follows:

“Explanation II : For the purposes of this section “an award is in conflict with the public policy of India” only in the following circumstances, namely:
When the award is contrary to the:-

1. fundamental policy of India; or
2. interests of India; or
3. justice or morality.