The Test of Patent Illegality: As The Said Act), Made by The Arbitration and Conciliation

THE TEST OF PATENT ILLEGALITY
The term “patent illegality” was explained in detail and

brought within the scope of public policy of India for the first
time by the Apex Court in ONGC Vs. SAW Pipes [(2003) 5 SCC
705]. However with the amendments to Section 34 of the
Arbitration & Conciliation Act, 1996 (hereinafter referred to
as the said Act), made by the Arbitration and Conciliation
Shilpa Shah
Amendment Act, 2015, with effect from 23rd October, 2015, Senior Partner
the expansion of the term public policy of India as E: [email protected]
interpreted by Courts previously has been done away with.
The Law Commission examined and submitted its 246th
Report on "Amendments to the Arbitration and Conciliation
Act, 1996" in August, 2014 and recommended various
amendments in the said Act. The proposed amendments
were intended to facilitate and encourage Alternative
Dispute Mechanism, especially arbitration, for settlement of
disputes in a more user-friendly, cost effective and
expeditious disposal of cases since India is committed to
improve its legal framework to obviate in disposal of
cases.The 246th Report of the Law Commission
recommended considerable changes to Section 34 of the
said Act. The 246th Law Commission Report proposed
amendments to the said Act, narrowing down the grounds of
challenge the Arbitral Award, apart from providing for
appointment of independent, impartial and neutral
arbitrators, amongst several other amendments. The
judgment in ONGC’s case stated supra along with the
judgment in ONGC v. Western Geco International Ltd. (2014)
9 SCC 263 : (AIR 2015 SC 363) has been expressly done away
with. Both Sections 34 and 48 of the said Act have been
brought back to the position of law contained in Renusagar
Power Plant Co. Ltd. v. General Electric Co. (1994) Supp (1)
SCC 644 : (AIR 1994 SC 860), where "public policy" will now
include only two of the three grounds set out therein, i.e.,
"fundamental policy of Indian law" and "justice or morality"
in addition to the ground where making of the award was
induced or affected by fraud or corruption or was in violation
of Section 75 or Section 81 as provided in Section 34 of the
amended Act . The ground relating to "the interest of India" stated in the said Judgment is
no longer available as valid ground. "Fundamental policy of Indian law" is now to be
understood as laid down in Renusagar (supra). Meaning of "Justice or morality" has been
tightened and is now to be understood as only basic notions of justice and morality i.e., such
notions as would shock the conscience of the Court as understood in Associate Builders v.
Delhi Development Authority (2015) 3 SCC 49 : (AIR 2015 SC 620). The main object of the
amendment of 2015 is to speed up the arbitration process and to minimize the intervention
of the Courts which would ultimately ease doing business in India.
By the amendment of 2015, Explanation as appearing in clause (b) in sub-section (2) of

Section 34 of the said Act has been substituted by the new Explanations and Sub-Section 2A
has been inserted in Section 34 of the said Act. Amended clause (b) (ii) of Section 34 (2)
reads as follow :
“(ii ) the arbitral award is in conflict with the public policy of India.
Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict
with the public policy of India, only if,—
(i) the making of the award was induced or affected by fraud or corruption or was in
violation of section 75 or section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.—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.”
Newly inserted sub-Section 2A read as follow;

“(2A) An arbitral award arising out of arbitrations other than international commercial
arbitrations, may also be set aside by the Court if the Court finds that the award is vitiated
by patent illegality appearing on the face of the award.
Provided that an award shall not be set aside merely on the ground of an erroneous
application of the law or by reappreciating evidence.”
Amendment of 2015 clearly defines the term public policy of India and has introduced a new
ground, namely Section 34(2A) for setting aside domestic arbitral awards on the ground of
patent illegality but the term patent illegality has not been defined. This ground will be
applicable only to arbitrations taking place in India and not to International Commercial
Arbitrations as can be make out from the wording of the section which says “other than
International commercial arbitration”.
The Apex Court in the case of Ssangyong Engineering & Construction Co. Ltd. Vs. National
Highways Authority of India (NHAI) (AIR 2019 SC 5041) has exhaustively dealt with the
expression patent illegality and which acts of the Arbitral Tribunal would come within the
purview of patent illegality. It is made clear by virtue of the amendment of 2015 as well as
the Apex Court that the said expression can no longer form a part of the elaborated
definition of public policy given by the Courts previously.
The Apex Court in Ssangyong Engineering’s case stated supra has held that the additional
ground made available for setting aside a domestic arbitral award under Sub-section (2A),
added by the Amendment Act, 2015, to Section 34, refers to such illegality as goes to the
root of the matter but which does not amount to mere erroneous application of the law. For
the sake of clarity, the Court has held that the contravention of a statute not linked to public
policy or public interest, which is not subsumed within the fundamental policy of Indian law
cannot be brought in by the backdoor when it comes to setting aside an award on the
ground of patent illegality.
It is clear from the amendment of 2015 that re-appreciation of evidence, which is what an
appellate court is permitted to do, cannot be permitted under the ground of patent illegality
appearing on the face of the award.
Previously, the Apex Court in the case of Associated Builders had held that “Patent Illegality”
would include: a) fraud or corruption; b) contravention of substantive law, which goes to
the root of the matter; c) error of law by the arbitrator; d) contravention of the Act itself; e)
where the arbitrator fails to consider the terms of the contract and usages of the trade as
required under Section 28(3) of the said Act; and f) if arbitrator does not give reasons for his
decision. The Apex Court in Ssangyong Engineering’s case stated supra has relied upon the
findings given in the case of Associate Builders referred to supra, to some extent and has
held that if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the
said Act, that would certainly amount to a patent illegality on the face of the award.
The Court further relying upon the said judgement has held that a finding based on no
evidence at all or an award which ignores vital evidence in arriving at its decision would be
perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding
based on documents taken behind the back of the parties by the arbitrator would also
qualify as a decision based on no evidence inasmuch as such decision is not based on
evidence led by the parties, and therefore, would also have to be characterised as perverse.
As it appears to be obvious from language of Section 34 (2A) the Apex Court in Ssangyong
Engineering’s case stated supra has also stated that the ground of patent illegality under
Section 34(2A) of the said Act, would not be available in the case of an international
commercial arbitration. The aforesaid aspects are a bird’s view of the Apex Court’s decision
in Ssangyong Engineering’s case in so far as the applicability of patent illegality is concerned.
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The Test of Patent Illegality: As The Said Act), Made by The Arbitration and Conciliation

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THE TEST OF PATENT ILLEGALITY

The term “patent illegality” was explained in detail and

By the amendment of 2015, Explanation as appearing in clause (b) in sub-section (2) of

Newly inserted sub-Section 2A read as follow;

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