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According to the 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, an arbitral award can be set aside by the court if it is against the 'public policy of India'. The term 'public policy' is not explicitly defined in the Act, but it can generally be understood to refer to the 'policy of law' or those actions that obstruct justice, violate statutes, or go against good morals. 

However, the Arbitration and Conciliation (Amendment) Act, 2015, introduced major changes to section 34. The 2015 amendment clarified that an award can only be set aside on the ground that it is against the public policy of India if, and only if -

(i) The award was induced or affected by fraud or corruption or was in violation of section 75 or section 81;

(ii) It is in contravention to the fundamental policy of Indian law;

(iii) It is in conflict with basic notions of morality and justice;

Explanation 2 of section 34(2) states – "For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian Law shall not entail a review on the merits of the dispute."

Landmark Cases:

Before the Amendment of 2015:

In the case of Renusagar Power Co. Ltd. v. General Electric Co, AIR 1994 SC 860, a pre-1996 Act case involving enforcement of an ICC Award, the Supreme Court provided an explanation of the term "public policy" as it appears in section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961. The Court stated that in order to be considered in violation of public policy, the enforcement of a foreign award must involve more than just a violation of Indian law. The Court also held that the enforcement of a foreign award would be refused if such enforcement is contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

In the subsequent case of Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd, AIR 2003 SC 2629, the Supreme Court significantly expanded the scope of interpretation of the term 'public policy', stating that when considering an application under section 34 to set aside an award, the Court acts as an appellate or revision court, giving it wide powers. Additionally, the Court added a new ground – patent illegality – under which an arbitral award can be set aside.

In the case of ONGC Ltd. v. Western Geco International Ltd, 2014 (9) SCC 263, the Supreme Court was deciding the question of what constitutes the "Fundamental policy of Indian Law." The court noted that a previous ruling, Saw Pipes, did not provide a clear definition of this term. The court then laid out several principles to guide their decision. These principles include: 1) the use of a judicial approach in determining the rights of citizens, which means decisions cannot be made in an arbitrary, capricious or whimsical manner, 2) following principles of natural justice, including considering all relevant facts, and 3) ensuring that decisions are not irrational or so unreasonable that a reasonable person would not have reached the same conclusion.

In the case of Associate Builders v Delhi Development Authority, 2014 (4) ARBLR 307, the Supreme Court addressed the scope of interpretation of basic notions of morality and justice. The court stated that "the expression 'justice' when it comes to setting aside an award under the public policy ground can only mean that an award shocks the conscience of the court. It cannot possibly include what the court thinks is unjust on the facts of a case for which it then seeks to substitute its view for the Arbitrator's view and does what it considers to be 'justice'."

After the Amendment of 2015:

Since the amendment of 2015, the Courts have mostly avoided giving a wide interpretation to "public policy" or interfering with the merits of the case.

The Hon'ble Supreme Court in Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors (2018) 1 SCC 656 observed that – "The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the AAC Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor it can examine the merits of claim by entering in factual arena like an Appellate Court."

In the case of MMTC v. M/s Vedanta Ltd, (2019) 4 SCC 163, the Supreme Court ruled that under Section 34 of the 1996 Act, the court does not have the authority to review or appeal an arbitral award. However, the court may interfere with the award on limited grounds, such as if it conflicts with India's public policy. After the 2015 amendment, which inserted Explanation-1 to Section 34(2), the court's ability to interfere with an award was restricted to the limitations already laid down under Section 34.

The Supreme Court In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India,(2019) 15 SCC 131 observed that the interpretation of the term 'public policy' has been narrowed down following the 2015 amendments to the Act. The Court clarified that "under no circumstance can any court interfere with an arbitral award on the ground that justice has not been done in the opinion of that court. This would be an entry into the merits of the dispute, which is contrary to the ethos of Section 34 of the Act."

The Delhi High Court in Steel Authority of India v. Primetals Technologies India Pvt. Ltd, 2020 (3) ArbLR 578 (Delhi) stated that the construction and interpretation of the terms of a contract between two parties should be solely determined by the arbitrator and should not be interfered with by the courts under the scope of public policy. In evaluating an award based on the test of 'public policy', the courts do not act as a court of appeal.

In Government of India v. Vedanta Limited, 2020 SCC Online SC 749, the Supreme Court relied on the interpretation of public policy in the Renusagar case and stated that 'public policy' includes fundamental policy, the interests of India, justice, and morality. The Court also held that a tribunal's erroneous interpretation of a contractual provision cannot be used as a ground to challenge the award on its merits.

References:

https://blog.ipleaders.in/public-policy-india-matters-related-arbitration/

http://www.legalservicesindia.com/article/1224/Public-Policy-under-Arbitration-Law.html

https://www.mondaq.com/india/arbitration--dispute-resolution/903068/role-of-public-policy-under-the-arbitration-and-conciliation-act-1996-for-setting-aside-an-arbitral-award

https://www.mondaq.com/india/trials-amp-appeals-amp-compensation/1241606/public-policy--scope-of-judicial-interference-under-section-34-of-the-arbitration-and-conciliation-act-1996-arbitration-and-conciliation-amendment-act-2015