Concurrent status of Patent Illegality in Indian Jurisprudence
EVOLUTION OF CONCEPT OF PATENT ILLEGALITY UNDER ARBITRATION AND CONCILIATION ACT, 1996 AND ITS PRESENT STATUS
What is Patent Illegality?
Patent illegality is fundamental error committed in an arbitral award which is irrational, illogical and perverse which goes to the root of the matter which no fair-minded or reasonable person could commit and which is visibly apparent on the face of it even by an ordinary sane person.
Patent Illegality has not been explicitly defined in the Arbitration & Conciliation Act, 1996 after the 2015 Amendment Act, however, it has been introduced as one of the grounds to set aside the Arbitral Award. The term "patent" implies that the illegality must be evident or manifest on the face of the award itself. It should not require extensive examination or investigation to ascertain the illegality.Mere errors of law or misinterpretation of contractual terms by the arbitrator may not amount to patent illegality unless they are so egregious that they violate fundamental principles of law.
The concept of patent illegality as a ground for setting aside arbitral awards was introduced by Indian courts to address situations where the award was so fundamentally flawed that it exhibited irrationality, perversity and contrary to logical principles.
Evolution of concept of Patent Illegality:
In Renusagar Power Plant Ltd. v. General Electric co. (1994) the Supreme Court of India noted that public policy was a ground for refusal of enforcement of an award. It laid down three grounds for the same, namely: fundamental policy of India, interest of India, and the morality. These three grounds were accepted as valid in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [(2003] 3 SCC 705] by the Supreme Court.In this context, the ground of ‘fundamental policy of the Indian state’ was referred to in both decisions but has never been expounded upon by the court.
The concept of Patent Illegality was introduced by Apex court in the matter of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [(2003] 3 SCC 705] and held that an award would be ‘patently illegal’ if it is contrary to the substantive provisions of law, or provisions of the Act, or terms of the contract.
The Court in the matter of Oil & Natural Gas Corporation Ltd. v Western Geco International ltd. (September, 2014) stated that the Saw Pipes decision had included fundamental policy of India and that in the opinion of the Court without conferring an exhaustive meaning, fundamental policy meant: first, adopting a ‘judicial approach’ which involves the application of judicial mind by the authority and bodies (Ridge v Baldwin), second, adhering to the principles of natural justice and third, that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a Court of law. This decision widened the scope of public policy and consequently patent illegality.
The Arbitration & Conciliation Act, 1996 was introduced which narrowed the scope of interference of court which was widened by Western Geco decision. Section 5 of the Indian Arbitration Act 1996, which mirrors the provisions of Article 5 of the UNCITRAL Model Law (‘Model law’), prohibits court interference unless provided for in the Act. Section 34 of the Indian Arbitration and Conciliation Act 1996 (‘Indian Arbitration Act’), which is also a replica of the Model Law, provides for recourse against the award “only by an application for setting aside under Section 34”. Nowhere does the Act prescribe the power to the Court to interfere with the award.
The court observed in the matter of Associate Builders v. DDA, (2015) 3 SCC 49: (2015) 2 SCC (Civ) 204] that the division bench in its decision has overstepped the boundaries as it has concentrated on the fact-finding issues. The court stated that the Division Bench obviously exceeded its jurisdiction in interfering with a pure finding of fact forgetting that the Arbitrator is the sole Judge of the quantity and quality of evidence before him. The division bench questioned the formula used by the arbitral tribunals to decide the arbitral awards which was a pure question of fact, the court also observed that no court have the jurisdiction to do ‘rough and ready justice’ in such cases because the only possible way of setting aside the order of the arbitral tribunals for ‘justice’ is when the award is such that it shocks the conscience of the court. Another issue that was raised by the learned counsel for the respondents was that the claims of the contractor are overlapping to which court agreed with the viewpoint of the single judge of the High Court that ‘the consequence of delay may have more than one ramifications.
The Apex Court considered patent illegality if there was contravention of the substantive law of India would result in the death knell of an arbitral award. However, this must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is really a contravention of Section 28(1)(a) of the Act. The Apex court further held that a contravention of the Arbitration Act itself would be regarded as a patent illegality- for example if an arbitrator gives no reasons for an award in contravention of section 31(3) of the Act, such award will be liable to be set aside. The Apex Court further held that in all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. Though, construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do.
For a better understanding of the role ascribed to courts in reviewing arbitral awards while considering applications filed under Section 34 of the 1996 Act, it would be relevant to refer to a judgment of this Court in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) AIRONLINE 2019 SC 329 wherein R.F. Nariman, J. has in clear terms delineated the limited area for judicial interference, taking into account the amendments brought about by the 2015 Amendment Act. The Apex Court held that there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality. Secondly, it was also made clear that reappreciation 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. That a mere contravention of the substantive law of India, by itself, was no longer a ground available to set aside an arbitral award. However, if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award. Though, the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take then this would amount to patent illegality. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A) of the Act. The Apex Court also 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 and thus would amount to patent illegality.
The Supreme Court of India, in its judgment dated 22.05.2020, in Patel Engineering Ltd. v. North Eastern Power Corporation Ltd. (2020), SCC Online SC 466 has once again exposited the 'patent illegality' ground, appearing in Section 34 (2A) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). The most significant part of this judgment is the recognition and re-affirmation given to the test of patent illegality, as set out in Paragraph (42.3) of the Supreme Court's judgment in Associate Builders and which was reiterated in Paragraph (40) of Ssangyong Engineering. The aforementioned test of 'patent illegality' lays down that any contravention of Section 28 (3) of the Arbitration Act, is deemed to be a sub-head of patent illegality. According to it, an arbitral tribunal must decide in accordance with the terms of the contract, but if an Arbitrator construes a term of the contract in such a way that it could be said to be something that no fair minded or reasonable person could do, the same will render the award 'patently illegal'. The Supreme Court of India further held that 'unjust enrichment' is also a ground to challenge an Award, flowing from the public policy doctrine under Section 34 (2) (b) (ii) of the Arbitration Act.
Recommended by LinkedIn
In the matter of Delhi Airport Metro Express Pvt. Ltd. vs. DMRC (2021), CA 5629/2021, the Apex Court reiterated a similar opinion regarding patent illegality in Section 34. It opined that patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression ‘patent illegality’. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression ‘patent illegality’. What is prohibited is for courts to re-appreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression ‘patent illegality.
In matter of Indian Oil Corporation vs. M/s Shree Ganesh Petroleum Rajguru Nagar (2022), CA 837-838/ 2022, the Apec Court held that an arbitral tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted. An award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract.However, a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. An Arbitral Tribunal is entitled to interpret the terms and conditions of a contract, while adjudicating a dispute. An error in interpretation of a contract in a case where there is valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within jurisdiction.The Court does not sit in appeal over the award made by an Arbitral Tribunal. The Court does not ordinarily interfere with interpretation made by the Arbitral Tribunal of a contractual provision, unless such interpretation is patently unreasonable or perverse. Where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award, only because the Court is of the opinion that another possible interpretation would have been a better one. Under no circumstance can any court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of Section 34 of the 1996 Act, as has been noted earlier in this judgment. The role of the Arbitrator was to arbitrate within the terms of the contract. He has no power apart from what the parties had given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction.An Arbitral Tribunal is not a court of law. It cannot exercise its power ex debito justitiae.
The Apex Court in the matter of Reliance Infrastructure Ltd. vs. State of Goa (2023), CA No. 3615/2023 held that the narrow scope of “patent illegality” cannot be breached by mere use of different expressions which nevertheless refer only to “error” and not to “patent illegality”. It held that they are impelled to reiterate what has been stated and underscored by this Court in Delhi Airport Metro Express (supra) that restraint is required to be shown while examining the validity of arbitral award by the Courts, else interference with the award after reassessing the factual aspects would be defeating the object of the Act of 1996. This is apart from the fact that such an approach would render several judicial pronouncements of this Court redundant if the arbitral awards are set aside by categorizing them as “perverse” or “patently illegal” without appreciating the contours of these expressions. The narrow scope of “patent illegality” cannot be breached by mere use of different expressions which nevertheless refer only to “error” and not to “patent illegality”. In the passing, they held that they cannot help noticing that in the impugned judgment, the High Court though referred to the principles laid down by this Court in Ssangyong Engineering (supra) but then, reproduced an analysis by a learned Single Judge of the High Court and proceeded to decide the matter with reference to the passages so extracted. With respect, we are of the view that enunciation of this Court ought to have been examined by the Division Bench of the High Court while dealing with the matter at hand, rather than relying on the analysis by a learned Single Judge of the High Court. We say no more in this regard, essentially because the latter decisions of this Court like those in Delhi Airport Metro Express and Haryana Tourism Limited were not available before the High Court at the time of passing of the impugned judgment and order dated 08.03.2021. Nevertheless, the principles expounded by this Court in Associate Builders and Ssangyong Engineering (supra) were available and the matter was required to be dealt with in reference to those principles. Leaving this aspect at that, suffice it would be to observe for the present purpose that the impugned judgment and order dated 08.03.2021, insofar it interferes with the findings and the conclusions of the award in question, cannot be sustained and is required to be set aside.
What is the latest scope of Patent Illegality?
Patent Illegality has been introduced under Section 34(2A) of Arbitration Amendment Act, 2015. An award can be considered patently illegal if:
An award may not be considered patently illegal if:
Conclusion:
In conclusion, the grounds for setting aside an arbitral award on the basis of patent illegality represent a critical aspect of the interface between rule of law and arbitration. When an arbitral award contravenes public policy or involves activities deemed illegal or perverse, such as patent illegality, parties may seek recourse through judicial intervention to set aside the award.
The determination of patent illegality as a basis for setting aside an arbitral award requires a thorough examination of various legal principles, including the scope of contract, applicable laws and regulations, and the specific circumstances of the arbitration proceedings. Courts play a pivotal role in ensuring that arbitral awards align with fundamental legal norms with minimum interference as per Section 34 and do not undermine the integrity of the arbitral statute.
As stakeholders navigate the complexities of patent illegality in arbitration, it is imperative to promote transparency, fairness, and accountability in the arbitral process. Parties should engage in robust arbitration agreements that anticipate potential conflicts involving interpretation of contract and establish clear mechanisms for resolving disputes. Moreover, arbitrators should possess the requisite expertise to adjudicate arbitration -related issues effectively and ensure the equitable protection of contractual rights.
In essence, the adjudication of patent illegality in the context of setting aside arbitral awards underscores the delicate balance between promoting arbitration as a preferred method of dispute resolution and safeguarding against abuses that undermine the rule of law. By fostering dialogue, cooperation, and adherence to legal norms, stakeholders can enhance the credibility and efficacy of arbitration while upholding the integrity of the contractual system.