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Patent Illegality In Setting Aside Arbitral Awards: Is India

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The Arbitration and Conciliation Act, 1996 limits or seizes the role of courts in arbitral
proceedings. Section 34 of the Act provides the scope of interference by courts as a
recourse against the arbitral award passed.
The term “patent illegality” for the first time was explained in the case of ONGCv. Saw
Pipes (https://indiankanoon.org/doc/919241/)[1] by the Supreme Court of India.
Later, in 2015 on the recommendations of the 246th report of the law commission
amendment was made in Section 34 of the Arbitration and Conciliation Act, 1996
(hereinafter, Act), which subjected the term public policy of India to wider
interpretation which was narrowly interpreted by the earlier judicial pronouncements.
There has been a plethora of cases where the ground of patent illegality has been
relied upon.

This article analyzes the scope of patent illegality and its judicial interpretation by the
courts across India. We also look into the grounds considered in international
jurisprudence to set aside an arbitral award and if public policy is one of them.

What is Patent Illegality?

Patently Illegal means an error of law that goes deep to the root of the matter. This
error of law can mean inconsistency with common law, the constitution of the
country, or a statutory provision.

The Statutory Stand

In recent years, India's policy has been focused on ease of doing business and
promoting India as an investment hub. The amendment to the Act was done with the
legislative intent to limit the interference of courts. An arbitral award can be set aside
only if it is perverse or erroneous in law. Now, if we examine Section 34 of the
Arbitration Act, there are certain limited grounds on which an award can be set aside;
they are:

Incapacity of the parties, if party to the contract is a minor or of unsound mind. Section 9 of the Act has
a provision to appoint a guardian for arbitral proceedings.
Invalidity of the Arbitration Agreement
Notice not received by either of the parties regarding the appointment of arbitrators or of the arbitral
proceedings.
 If the award deals with a dispute which is not contemplated by or fails to fall within the terms of
submission to arbitration
If the composition of the tribunal is not according to the agreement between the parties
The nature of the dispute is such that it is not arbitrable
Award is against public policy

All the grounds listed to set aside an arbitral award are straightforward. However, the
ground "against public policy" has been subjected to interpretation through various
judicial pronouncements. Section 34 (2A) was inserted post 2015 amendment to the
Act stating that a domestic award can be set aside by the court if prima facie it
appears that award is vitiated by patent illegality. The Supreme Court of India in
Bhaven Construction v.Sardar Sarovar Narmada Nigam Ltd
(https://indiankanoon.org/doc/188959631/). highlighted the word "only" in the
opening words of Section 34, stressing that an application for setting aside an
arbitral award must be made in accordance with sub-sections (2) and (3) of section
34 of the Act.

Patent Illegality: rooting out of public policy

There have been a plethora of cases in India that decode its stand on public policy,
giving a wider interpretation of the public policy. Supreme Court of India in Oil&
Natural Gas Corporation Ltd. v. Saw Pipes Ltd
(https://indiankanoon.org/doc/919241/) held that an award would be patently illegal
if it is contrary to substantive provisions of law, of the arbitration act, or terms of the
contract. However, this interpretation was applied to domestic as well as
international arbitral awards. After the report of the 246th law commission, the
interpretation was limited to domestic awards as clearly laid down in Section 34(2A)
of the Act.

Why is the scope limited to domestic awards?

There is no international public policy that exists; the New York convention or the
conventionon the recognition and enforcement of Foreign Arbitral Awards
(https://uncitral.un.org/en/texts/arbitration/conventions/foreign_arbitral_awards#:~:text=
Convention's principal aim is,same way as domestic awards.) lays down conditions
where the execution of awards can be refused as it goes against the public policy of
either of the parties. Execution of international arbitral awards becomes difficult on
the grounds of violating public policy as an award can be ordered to be executed in
one country but can violate the public policy of the other.

In India, patent illegality was limited to domestic awards also because of the
underlying objective of promoting business in various sectors and inviting foreign
entities to invest. India is also becoming a robust seat for international arbitration
with an intention to strengthen the arbitration ecosystem in the coming financial year.

Judicial timeline

A broad interpretation was given to the “public policy” in the case of Renusagar
Power Electric Co (https://indiankanoon.org/doc/86594/). when the issue of
enforcement of foreign awards rose. The Apex court gave a narrow and broad
interpretation of the term public policy with respect to domestic and international
awards. It was the year 1994 when the court stated that the public policy of India
should be narrowly construed in the context of private international law. The foreign
award could be set aside only if it was contrary to the fundamental policy of Indian
law, the interest of India, or justice or morality. In 2003, in the case of ONGC v. Saw
Pipes Ltd (https://indiankanoon.org/doc/919241/)., the term “patently illegal” was
defined. The Apex court held that the court could intervene and review the merits of
an award if it is in contravention to the Arbitration & Conciliation Act, 1996, or found
to be 'patently illegal.'

Through the years there have been many cases lately in the year 2019 in the case of
Ssangyong Engineering & Construction Company Limited v. National Highways
Authority of India (https://indiankanoon.org/doc/95111828/); it was clearly stated by
the court that the doctrine of patent illegality will not be applicable to international
awards. Also, it was laid down in clear terms that if the tribunal deals with a matter
beyond the scope of the agreement, it will be patently illegal, and the award can be
set aside.

In 2021, in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd
(https://indiankanoon.org/doc/7627665/), the court clearly stated that patent
illegality must stem from the root of the matter. Every error of law committed by the
Arbitral Tribunal will not be covered under the blanket of patent illegality. A law that is
not in the interest of public policy is not in the scope of this doctrine. Court has
limitations while interfering with the arbitral award passed by the tribunal; when the
arbitrator interprets the contract in a non-reasonable manner or takes an impossible
view, the court can interfere. If the arbitrator concludes on the basis of no evidence or
ignores vital evidence, then the doctrine can be invoked to set aside the award.

The courts have had a clear standing on patent illegality. Recently in the
pronouncement of the case of Indian Oil Corporation Ltd. v. M/s Shree Ganesh
Petroleum Rajgurunagar (https://indiankanoon.org/doc/153664247/), the Supreme
Court discussed cases when the doctrine of patent illegality could be invoked. There
have been guidelines by the court, but in this judgment, it was clearly stated that an
arbitral tribunal is created by the arbitral contract and must be guided by the same. If
the tribunal fails to abide by the terms of the contract, the award will be vitiated by
patent illegality.

International jurisprudence

There is no provision like the doctrine of patent illegality in India across the world. In
the United Kingdom, an award can be challenged before any court on the grounds of
lack of substantive jurisdiction or serious irregularity. These grounds are mandatory
in nature and cannot be excluded by any agreement. In cases where the parties have
not excluded the right of appeal, an award can also be appealed on any question of
law.
Singapore has always displayed a pro-arbitration stance to the world. In a recent
judgment of CEF and other v. CEH (http://arbitrationblog.practicallaw.com/singapore-
court-of-appeal-partially-sets-aside-arbitral-award-for-breach-of-the-fair-hearing-rule-
and-declines-to-adopt-the-no-evidence-rule-as-part-of-singapore-law/#:~:text=In a
recent set aside,and breach of natural justice.) the Singapore court had the
opportunity to bring a "no evidence rule" under the ambit of breach of natural justice,
but it refused to do the same. Only limited grounds are considered to set aside
arbitral awards, like the breach of natural justice and Singapore's public policy.

The 'Make in India' and 'Aatma Nirbhar Bharat' programs were propelled by the Covid-
19 pandemic, and this is expected to stimulate growth and development in the
coming time. India is growing to become a robust seat for arbitration through
initiatives like the new International Arbitration Centre in the GIFT city of Gujrat
situated at the International Financial Services Centre. As institutional arbitration is
the new norm, India is shaping its policies and initiatives to meet the need and
dynamics of time. Interpreting public policy and limiting the application of patent
illegality over domestic arbitral awards is one such initiative. Creating a room for
international arbitration in the coming time and showcasing a pro-arbitration stance
to the world will promote India as a leading competitor and roll the ball in its favor.

The author is a student at Symbiosis Law School, Noida. Views are personal.

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