We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
16 July 2020
In the recent case of Patel Engineering Ltd v North Eastern Electric Power Corporation Ltd (Special Leave Petition (C) 3584-85 of 2020), the Supreme Court reaffirmed the principles of the much-litigated ground of patent illegality as a challenge to an arbitral award and fortified the principles of perversity.
The patent illegality ground was formally introduced to the Arbitration and Conciliation Act 1996 by way of the Arbitration and Conciliation (Amendment) Act 2015 (2015 Amendment Act), which came into force on 23 October 2015. Before the 2015 Amendment Act, the scope of this ground of challenge was set out in various Supreme Court decisions stemming from Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd ((2003) 5 SCC 705). This article examines the genesis of patent illegality and tracks its trajectory from Oil & Natural Gas Corporation.
In Oil & Natural Gas Corporation, the Supreme Court had to consider whether the courts have jurisdiction under Section 34 of the Arbitration and Conciliation Act to set aside an arbitral tribunal's award which is patently illegal.(1) The Supreme Court held that if a patently illegal award was allowed to operate, it would only promote injustice. Accordingly, it held that Section 34(2)(b)(ii) of the act, which provides that an award can be set aside if it conflicts with Indian public policy, should be interpreted more widely than in Renusagar Power Co Ltd v General Electric Co (AIR 1994 SC 860).(2) However, mindful of the likely misuse of this new doctrine, the Supreme Court qualified that the illegality must go to the root of the matter and that if the illegality is of a trivial nature (eg, a mere factual error or an alleged incorrect interpretation of a contract),(3) the award will not be in contravention of public policy.
The court held that an award will be patently illegal if:
Having expanded the scope of 'public policy' beyond what was contemplated in the act, Oil & Natural Gas Corporation was a step away from India's pro-arbitration stance.
In its subsequent decision in Associate Builders v Delhi Development Authority ((2015) 3 SCC 49), the Supreme Court elaborated on this issue and reiterated the meaning and principles of patent illegality set out in Oil & Natural Gas Corporation. However, the court sounded a note of caution with regard to whether an award which contravenes a contract will be patently illegal by holding that the construction of the terms of a contract is primarily up to the arbitrator, unless the arbitrator construes the contract in such a way that no fair-minded or reasonable person would come to the same conclusion. While a restriction of the Oil & Natural Gas Corporation interpretation may have been expected, Associate Builders only clarified its scope with regard to the courts' intervention in the interpretation of a contract.
Oil & Natural Gas Corporation, in which the Supreme Court clarified that the scope of interference at the enforcement stage can be limited, concerned a domestic award. However, in Phulchand Exports Limited v OOO Patriot ((2011) 10 SCC 300), the court accepted the position that the interpretation of public policy as set out in Oil & Natural Gas Corporation also applied to foreign awards under Section 48(2)(b) of the act. As a result, enforcement of foreign awards could be resisted if they were patently illegal.
It took the Supreme Court just under two years to overturn this position. In Shri Lal Mahal Ltd v Progetto Grano Spa ((2014) 2 SCC 433), it held that enforcement of a foreign award will be refused under Section 48(2)(b) only if it fulfils the categories set out in Renusagar, as the scope of interference in foreign awards is much narrower compared with domestic awards.
In line with Lal Mahal, the Law Commission suggested certain statutory changes to avoid a similar interpretation of public policy being accorded to domestic and foreign awards, given that Sections 34 and 48 of the act were similarly phrased. In its 246th report, issued in August 2014,(4) the Law Commission recommended that patent illegality be added to Section 34(2A) as an independent ground.
Following the Law Commission's recommendations, the 2015 Amendment Act came into force, giving statutory effect to Section 34(2A) of the act.(5)
Subsequently, in Ssangyong Engineering and Construction Company Limited ((2019)15 SCC 131), the Supreme Court clarified the law set out in Associate Builders and elaborated on the principle of perversity. The court held that patent illegality cannot be used as a backdoor entrance to what was left out of "the fundamental policy of Indian law" provided for in Section 34 of the act. In other words, a contravention of a statute which is not linked to public policy or public interest and therefore does not fall within the ambit of a violation of fundamental policy cannot be said to fall within the ambit of patent illegality. Ssangyong, while holding that a mere contravention of the substantive law of India by itself is no longer a ground to set aside an arbitral award, upheld the other grounds elaborated in Associate Builders.
More recently, the rationale for an award from the perspective of a reasonable person was discussed in Patel Engineering, in which the Supreme Court provided a working example of the patent illegality test. The court discussed perversity and re-established the principle set out in Associate Builders and Ssangyong that an award will likely be set aside if a reasonable person would be unlikely to take the same view as the arbitrator.
Having emerged from the stable of public policy, patent illegality is now a separate and self-sufficient tool for challenging domestic awards under Section 34 of the Arbitration and Conciliation Act. This doctrine now wholly embodies the ground of perversity and requires the examination of an award from the perspective of a reasonable person.
As there is still a lack of objectivity in determining whether a domestic award is patently illegal, the courts must tread carefully. However, as far as enforcement of foreign awards is concerned, it is clear that the patent illegality ground does not apply as a consequence of Lal Mahal and the 2015 Amendment Act. This should go a long way in strengthening India's pro-arbitration standing in the international arena.
For further information on this topic please contact Nandini Khaitan or Shreya Singh at Khaitan & Co by telephone (+91 11 4151 5454) or email (firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
(4) Available here.
(5) An arbitral award arising out of arbitration other than international commercial arbitration may also be set aside by the courts if the court finds that the award is vitiated by patent illegality appearing on the face of the award. However, an award cannot be set aside merely on the ground of an erroneous application of the law or reappreciation of evidence.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.