Introduction

This Article broadly targets the theme of public policy and its evolving contours under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”). The year 2025 proved to be particularly significant in this regard, with Courts not merely reiterating settled principles but actively redefining the limits of judicial intervention in challenge proceedings. As reflected in the decisions surveyed below, several key decisions were delivered on various issues falling within the ambit of public policy considerations. However, any survey of the most consequential judgments of the year would remain incomplete if one particular decision was not touched upon briefly – the Gayatri Balasamy[1] judgment.

The majority opinion in Gayatri Balasamy had decisively upheld a Court’s power to modify an arbitral award under limited circumstances while dealing with a challenge under Section 34 of the Act. While the broader implications of this decision have been extensively discussed over the year, its relevance in the present Article lies in the fact that one of the decisions examined herein had expressly relied upon Gayatri Balasamy and partially set aside an award, an exercise of power which the Supreme Court explicitly upheld.

In addition to surveying key decisions on public policy, this Article also draws attention to a clear lacuna within the Act, wherein certain orders passed by Arbitral Tribunals fall outside the existing challenge framework. This stems from the fact that Section 34 of the Act restricts its applicability to arbitral “awards” and Section 37 of the Act only contemplates appeals to a limited set of orders.

A Line between Extortion and Legitimate Commercial Practice: Usurious Interest Rates as a Ground for Setting Aside Arbitral Awards

Sri Lakshmi Hotel Pvt. Ltd. & Anr. v. Sriram City Union Finance Ltd. & Anr., Civil Appeal No. 13785 of 2025 [Supreme Court]

Brief Facts:

This Civil Appeal arose from an Appeal under Section 37 of the Act, which was dismissed. In the original arbitral award, the Tribunal passed an award directing the Appellants to pay a certain sum along with a post-award interest of 24% from the date of filing of the statement of claims till the date of its realization. It is important to note that the 24% interest rate was originally stipulated in both the Loan Agreements entered into between the parties. The Appellants contended that a 24% interest rate was usurious and against public policy since various RBI guidelines have repeatedly stressed the importance of keeping customer welfare in mind by discouraging the charging of usurious interest rates.

Holding:

The Court was tasked with examining Section 31(7)(a) of the Act, wherein, under this provision, the Arbitral Tribunal had the freedom to determine a pre-award interest rate applicable from the date on which the cause of action arose to when an award is made.

It was ultimately held that the Arbitral Tribunal has the absolute freedom to determine an interest rate it deems reasonable under clause (a). But, despite the freedom exercisable under clause (a), the Court relied on HLV Ltd. v. PBSAMP Projects Pvt. Ltd.,[2] to observe that this discretion is only exercisable when parties do not specify a rate in the Agreement. And when parties contractually agree upon an applicable interest rate, the Tribunal must give effect to that rate.

While entering into risky transactions, Banks usually resort to charging a high interest rate for securing the debt and to place themselves in a beneficial position in case of a default. Therefore, since these rates reflect the lender’s risk of default due to highly competitive and uncertain market conditions, the interest rate of 24% cannot be held to be against public policy. Public Policy does not just refer to a violation of any statute, but to fundamental principles on which Indian law is founded. For an interest rate to be challenged under this ground, it must be so unreasonable and perverse that it must shock the conscience of the Court.

This is a significant judgment because even under Section 51 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), if a creditor charges an extortionate interest rate in a loan, the Adjudicating Authority can set aside the entire transaction as void and disentitle such creditors from any relief provided for under the IBC. An example of such a transaction would be the short-term loans granted in the Anamika Singh[3] case. In its order, the NCLAT had set aside those short- term loans as the applicable interest rates charged were 40% to 60%, a range that was clearly extortionate in nature. The Sri Lakshmi Hotel judgment had upheld a 24% rate to be commercially sound and not against public policy, but had left open future challenges in cases where the interest rates charged are extremely perverse. Therefore, it would be interesting to examine future challenges surrounding extortionate interest rates before the Courts at the Section 34 stage and whether they would be considered as contrary to fundamental principles on which Indian law is founded, especially considering the treatment of such rates under the IBC.

A Promise to Make an Effort: Enforceability of ‘Shall Endeavour’ Clauses in Contracts

Regus South Mumbai Business Centre Pvt. Ltd. v. Marie Gold Realtors Pvt. Ltd., Commercial Arbitration Petition No. 439 of 2024 [Bombay H.C]

Brief Facts:

The Petition was filed under Section 34 of the Act. The dispute concerned a Management Agreement, where the Petitioner presented a Business Plan comprising indicative figures with respect to the estimated outflow of costs and inflow of turnover. The Agreement contained a clause stating that the Petitioner “shall endeavour” to achieve and exceed the estimated Net Turnover as projected in the Business Plan. There was also another clause stating that the Petitioner “shall endeavour” to minimize costs and maximize the Gross Turnover as stated in the Business Plan.

Holding:

The primary issue examined by the Court is the enforceability of ‘shall endeavour’ clauses. While referring to certain international precedents such as Astor Management,[4] the Arbitrator had upheld its enforceability, and the Petitioner sought to contend this since the ‘fundamental policy of Indian law’ entails that an Arbitral Tribunal must apply laws applicable to India. In furtherance of this argument, it was submitted that to date, there have been no Indian judgments discussing the enforceability of such clauses. Hence, it was contended that reliance on foreign judgments on this issue would be violative of the same.

However, the Court noted that the law on such clauses had been discussed before in the Supreme Court judgment of NBCC India,[5] and that the Apex Court interpreted such clauses in construction contracts to mean an enforceable obligation. Drawing from the same, the Arbitral Tribunal had correctly appreciated a distinction between the concepts of ‘breach on account of non-achieving projected figures’ and failing to endeavour to achieve the same. And since the Petitioner failed to make every possible effort in achieving what was projected, there was a breach in the Management Agreement.

Disregarding the Alter Ego: Ignoring the Principle of Separate Legal Entity conflicts with the Fundamental Policy of India

Sarvana Prasad v. Endemol India Pvt. Ltd. and Anr., 2025 SCC OnLine Bom 2565 [Bombay H.C]

Brief Facts:

In this matter, the Arbitral Tribunal had directed both Innovative Film Academy Pvt. Ltd. (“Innovative”) and the Appellant (its sole member) to deposit the disputed amount in a fixed deposit, while also directing both entities to comply with other reliefs. This Petition was filed under Section 37(2)(b) of the Act.

Holding:

Since Innovative was a One Person Company (‘OPC’), its very structure depended on having just one shareholder. This was a conscious departure from traditional company law principles, which mandated at least two individuals to form a company. Additionally, an OPC is, for all purposes, a company, meaning that it is a separate legal entity from its members. The Impugned Order had ignored this essential principle, distinguishing corporate entities from others such as partnerships and sole proprietorships. And in doing so, it has directed the Petitioner to deposit the disputed amount, without even providing reasons for why the shareholder and the company are to be treated one and the same. If a shareholder is made personally liable for the business of the OPC, then it renders the very framework of an OPC redundant.

The Court expressly noted that ignoring the principle of separate legal entity and piercing the corporate veil in the absence of any reason would be in direct conflict with the fundamental policy of India. Owing to this fact, the Impugned Order was set aside to the extent that it imposed any personal obligations on the Petitioner.

Another judgment was delivered by the Bombay High Court in the case of Proteus Ventures,[6] which operated on similar lines. In that case, the fundamental ground of challenge under Section 34 of the Act was the fact that the Arbitral Award made the LLP and its designated partners liable for the debts owed by the partnership. While the award was ultimately upheld, the liability of the partners was severed from it owing to the separate legal entity principle. Both the Proteus Ventures and Sarvana Prasad judgments derived the power to partially set aside an arbitral award from the Gayatri Balasamy judgment, as earlier discussed.

Plugging the Gap: Mode of Challenging Orders under Section 38(2) of the Arbitration and Conciliation Act, 1996

Marvel Sigma Homes Pvt. Ltd. v. Sanjay Jasubhai Desai and Ors., W.P. No. 3319 of 2024 [Bombay H.C]

Brief Facts:

The Petitioner approached the Court by challenging an Order passed by the Arbitral Tribunal terminating the arbitral proceedings under Section 38(2) of the Act, owing to the non-payment of Arbitral Fees.

Holding:

It was held that an Arbitral Tribunal has the authority to pass an order under Section 38(2) in situations where a party fails to deposit amounts towards arbitral fees; however, the main aspect dwelt on was the non-availability of any remedy for the Petitioners/Applicants to challenge such orders under the Act. This was due to the fact that a challenge under Section 34 only contemplates the challenge of “awards”, and Section 37 contemplates only a specific set of orders that can be appealed against. A similar vacuum also exists in the case of orders passed under Section 32(2)(c) of the Act.

After examining this vacuum, the Court held that an aggrieved party has the option to knock on the doors of the Court under Section 14 of the Act, and since there is no remedy available under the Act itself, the Courts are forced to incorporate such solutions. Section 14 could apply since it contemplates aggrieved parties being able to file applications before the Court when an arbitrator terminates their mandate by being unable to perform their functions (de jure or de facto).

Illegality From Natural Resources: Examining the Public Trust Doctrine’s Role in Setting Aside Arbitral Awards

Union of India v. Reliance Industries Limited, 2025 SCC OnLine Del 841 [Delhi H.C.]

Brief Facts:

This matter arose from an appeal filed under Section 37 of the Act, wherein a Single Judge of this Court dismissed an application under Section 34 of the same. The Appellants had entered into a ‘Production Sharing Contract’ with the Respondent and Niko Limited, for the exploration and production of natural gas. Certain disputes arose since ONGC (which held an adjoining block through another Production Sharing Contract with the Appellants) had alleged that the

Respondents were unjustly enriched through the migration of natural gas from ONGC’s block, as the gas reservoirs between them were interconnected.

Holding:

The Court had examined the issue of patent illegality under Section 34 of the Act in the context of Article 297 of the Constitution of India (“Constitution”), as the dispute involved a vital natural resource. As per Article 297, the Union of India is a depository holding all the natural resources of India as a Trustee, on behalf of and for the people of India. Therefore, any extraction of natural resources is subject to the express permission of the Government, and this is in line with the ‘Public Trust Doctrine’, an established environmental law principle.[7] It was clearly recorded in this decision that private entities like the Respondents are wholly bound by Article 297 of the Constitution.

Moreover, since the Appellants had never given explicit permission for the Respondents to utilize and extract the migrated gas, it amounts to a violation of the public trust doctrine in the absence of such authorization. The Respondents had extracted natural resources beyond what the Production Sharing Contract stipulated, and this interfered with the Appellant’s power to use the said resources in a manner they deemed fit for the benefit of the people of India. The Court also held that while dealing with public resources, the Respondents cannot consider silence from the Appellant’s end as implied consent to derive any benefit beyond the block allocated.

For the Arbitral Tribunal to ignore the ramifications of the Respondent’s breach and label their acts as insignificant amounts to a clear contravention of the substantive laws of India and the fundamental laws of the land. The Respondents not only benefited from extracting huge amounts of migrated gas belonging to the ONGC block, but were also enriched from the profits made in doing so. And this was done at a cost of a natural resource that ultimately belonged to the public, thereby resulting in losses to the public exchequer. Hence, the Court set aside the award on public policy considerations as a violation of the Public Trust Doctrine, which is contrary to the fundamental law of the land and is therefore patently erroneous.

This judgment was key in highlighting that not just breaches in the terms of a contract, but also fundamental constitutional provisions and established doctrines would result in the setting aside of an Arbitral Award if such considerations were outrightly ignored.

Conclusion

The decisions surveyed in the Article evidently reflect that public policy issues involve serious discussions on domestic practices and whether errors in the arbitral award are so perverse as to actually justify intervention. Judicial restraint lies at the core of justifying interference, especially when transactions reflect commercial reasonableness. Taken together, the judgments surveyed still reflect the high threshold of public policy while simultaneously evolving its application by factoring in the commercial realities behind such contracts, as long as fundamental and constitutional values of Indian law are not done away with.

*Vyapak Desai, Counsel – International Disputes & Investigations, Vyapak Desai Law Chambers

**Ruben Zachariah, Student

[1] Gayatri Balasamy v. ISG Novasoft Technologies Limited, (2025) 7 SCC 1

[2]HLV Ltd. v. PBSAMP Projects Pvt. Ltd., 2025 INSC 1148

[3]Smt. Anamika Singh and Ors. v. Shinhan Bank and Ors., 2020 SCC OnLine NCLAT 1041

[4]Astor Management AG and Anr. v. Atalaya Mining Plc and Ors., Inc. 1994 Cardswell BC 158

[5]NBCC India Ltd. v. Shri Ram Trivedi, (2021) 5 SCC 273

[6]Proteus Ventures LLP and Ors. v. Archilab Designs, Commercial Arbitration Petition (L) No. 28606 of 2024

[7]M.C. Mehta v. Kamal Nath, (1997) 1 SCC 388