Patent Illegality- A Ground To Set Aside Domestic Arbitration Award

Author: Aaksha Sajnani United World School of Law, Ahmedabad

It is not a surprise to many, that the Courts in India are having a huge backlog of cases. The Arbitration & Conciliation Act, 1996 was introduced in India with an aim to reduce the burden of the court and to provide a fast track mechanism for dispute resolution. Section 8 of the Arbitration & Conciliation (Amendment) Act, 2019 states that wherein an arbitration agreement exists between the parties to a dispute, the court has to refer the parties to Arbitration. Additionally, Section 5 specifically provides that there shall be no judicial interference except when authorized by law. In the case of Magma Leasing and Finance Ltd. v. Potluri Madhavi Lata[1], the Supreme Court held that the court is left with no alternative once the conditions of Section 8 are satisfied. However, under Section 34 of the Arbitration & Conciliation Act, 1996, the courts had the power to interfere in the dispute after the award was passed. Clause (2) (b) of the said Section provides the courts’ authority to set aside an arbitration award that is against the public policy of India. The term “public policy” has been interpreted in various judgments by the Supreme Court of India. In Renusargar Power Co. Ltd. v. General Electric Co[2], it was held that an award is against the public policy of India if it is affected by fraud or corruption, is against the fundamental policy of India or against natural justice. Nevertheless, The Supreme Court of India first introduced the concept of “patent illegality” as a ground to set aside a domestic arbitration award in ONGC v. Saw Pipes[3]. Patent illegality refers to a domestic arbitration award that is unreasonable, perverse, and contradicting the provisions of law. This term was further elaborated in ONGC Ltd v. Western GECO Ltd.[4] With the introduction of Patent Illegality in India, the courts were further bombarded with suits that were challenging the validity of the arbitration award because the term “Patent illegality” was a loose end.  This created a strong need to lay down a specific provision that aids in fulfilment of the purpose of arbitration law in India and provides weightage to the arbitration awards passed by the arbitration tribunals. Thereafter, in Associate Builders v Delhi Development Authority[5], it was held that the court can interfere in the arbitration award only if it shakes the conscience of the court. Eventually, The Arbitration & Conciliation (Amendment)Act, 2015 took away the power of the court to interfere in the arbitration award by adding Sub-Section 2-A in Section 34 of the Act. It provides that the court cannot examine the awards on merits or errors in the application of law, unless the award is arbitrary and unreasonable on the face of it or goes to the root of the matter, thereby strengthening Section 5 of the Act. After the amendment, the court refrained itself from interfering in arbitration matters. However, in the recent judgments Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI)[6] and Patel Engineering v. North Eastern Electric Power Corporation Ltd. (NEEPCO)[7], the Supreme Court stated that Patent illegality is a ground to set aside an arbitration award after the 2015 amendment.

  1. Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI)

The judgment yet again interpreted the term “public policy” and its scope as a ground to set aside an arbitration award. Moreover, it deals with the prospective applicability of the 2015 amendment.

  1. Facts of the case:

Ssangyong Engineering & Construction Co. entered into a contract with the National Highways Authority of India (NHAI) to construct 4 lanes bypass road on NH-26 in Madhya Pradesh. The contract mentioned that the compensation on the increased prices of the items used in construction will be as per the Wholesale Price Index (WPI) considering 1993-94 as the base year. However, later the NHAI passed a circular stating that the base year for such agreements shall be taken as 2004-05. Aggrieved by this circular, the parties-initiated arbitration proceedings for the resolution of the said dispute. The majority opinion (2/3) of the bench stated that the said circular is not in contravention of the contract and rejected the claim of the appellant. Resented by the arbitration award the appellant challenged it before the Delhi High Court contending that it is against public policy. The court upheld the award and rejected the petition stating that the arbitration tribunal has provided the majority opinion in the award and the court will not interfere in the said dispute. Thereafter, the appellant filed an appeal before the Supreme Court of India.

  1. Judgment

The Supreme Court held that unilaterally issuing a circular without the consent of the party is contradictory to the fundamental policy as well as the basic notion of justice. The court set aside the arbitration award stating that it is against the public policy and falls under “patent illegality”. The 2015 amendment does not bar the court from setting aside an arbitration award; instead, it limits the power of the court to an extent. It provides that wherein the arbitration award is unreasonable on the face of it and disrupts the basic notions of justice, the court can set aside the award. Therefore, patent illegality is a ground to set aside an arbitration award under Section 34 (2A) of the Arbitration and Conciliation Act, 2015. Moreover, the court asserted the judgment of BCCI v. Kochi Cricket [8] which held that the 2015 amended arbitration act is applicable prospectively and shall apply only to the applications filed after 23.10.2015. Hence, the Supreme Court allowed the applicant’s claim.

  1. Patel Engineering v. North Eastern Electric Power Corporation Ltd. (NEEPCO)

  2. Facts of the case:

The North Eastern Power Corporation Ltd aggrieved by the order of arbitration tribunal on Packages- I, II, and III approached the Additional Deputy Commissioner of Shillong under Section 34 of the Arbitration & Conciliation (Amendment) Act, 2015. The application was rejected and the arbitration award was upheld. Thereafter the appellant filed an appeal before the Meghalaya High Court to set aside the arbitration award. Yet again the appeal was dismissed by the High court on the ground that the arbitration award is reasonable in nature and the ground of patent illegality cannot be applied in the present case. The appellant filed a SLP before the Supreme Court of India challenging the Judgment of the High Court.

  1. Judgment:

The Supreme Court affirmed the Judgment of the High Court and held that the High court has discussed all the contentions of the parties at length in the light of Associate builder[9] and Ssanyong case[10], and is unerring in stating that patent illegality is a ground available to courts under Section 34 (2A) of the Arbitration & Conciliation (Amended) Act 2015. However, this ground is available only if the arbitration award is unreasonable from the root of it and perverse. However, in the present case, no reasonable person could have arrived on a different judgment on the matter of dispute. Any other interpretation of the clauses mentioned in the contract would have been irrational or perverse. Therefore, the petitioner failed to prove any error in the arbitration award. The Supreme Court upheld the Judgment dated 26.09.2019 of the Meghalaya High Court.

Hence, Patent illegality has been a ground to set aside an arbitration award ever since the Saw Pipes [11] However, it has evolved with time in such a way that this ground does not disrupt the entire purpose of arbitration but at the same time provides power to the court to set aside a domestic arbitration award if it is unreasonable and irrational on the face of it under Section 34 (2A) of the Arbitration and Conciliation (Amendment) Act, 2015. The recent judgments of the Supreme Court of India affirm the same.

[1] [2009] 10 SCC 103

[2] [1994] AIR 860 (SC)

[3] [2003] 5 SCC 705

[4] [2015] AIR 363 (SC)

[5] [2015] AIR 620 (SC)

[6] [2019] SCC OnLine SC 677

[7] SUPREME COURT OF INDIA, SPECIAL LEAVE PETITION [C] NOS. 3584-85 OF 2020

[8] [2018] 6 SCC 287

[9]  Supra 5.

[10] Supra 6.

[11] Supra 3.

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