Introduction
Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter “A&C Act”) provides that an arbitral award is subject to being challenged and can be set aside on certain grounds by the court. The 2015 Amendment added sub-section 2A to Section 34 which lays down patent illegality as an additional basis for annulment of an arbitral award. The relevant extract of the provision has been laid below:
34. Application for setting aside arbitral award. —
(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.
‘Patent Illegality’ in the simplest terms means an error of law that is emphatically evident. This error of law can mean inconsistency with the constitution of the country, the statutory provision, or the contract itself.
In this article, the authors have discussed the ambit of patent illegality as an additional ground for setting aside an arbitral award, the jurisprudence of other countries in this regard, and the limited scope of this ground to domestic arbitral awards. Further, the authors have tried to trace the development of the jurisprudence on the added ground by referring to a few landmark judgments by the apex court. We have then given a glimpse of international jurisprudence on similar footing as that of patent illegality in India. In the next segment, me and my co-author have critically analysed the reason behind the differentiation drawn by the legislature in keeping the ground of patent illegality limited to domestic awards only.
Interpretation of ‘Patent Illegality’ by the Indian Courts
The Arbitration and Conciliation (Amendment) Act 2015 has included ‘patent illegality’ as another ground by adding sub-section 2A to Section 34 on awards arising out of arbitrations that are not classified as international commercial arbitrations. Such inclusion was made on the recommendations of the Law Commission of India given in its 246th Report, 2014. It proposed an addition of a new ground for setting aside of arbitral awards specifically in domestic arbitration cases. The Commission’s report was based upon the judgment of the apex court in Oil & Natural Gas Corporation Ltd. v SAW Pipes Ltd (“ONGC”). However, the Act does not provide an explicit definition of the term. The court in the ONGC case opined that the award could be set aside if it is in contravention to (a) the fundamental policy of Indian law; (b) the interest of the nation; or (c) justice or morality, or (d) additionally, if it is patently illegal. This was the first time the judiciary expounded patent illegality as a ground while giving a broader interpretation to the “public policy” under Section 34. However, the Bench did not get into its definition.
Subsequently, in 2011, the Apex Court in Phulchand Exports Ltd. vs. OOO Patriot dealt and affirmed that ‘patent illegality’ under ‘public policy’ should be looked into whilst enforcing a foreign award under A&C Act, 1996. However, in 2013, the said 2011 judgement was overruled by the Apex Court in Shri Lal Mahal Ltd v Progetto Grano Spa. Herein, the Hon’ble Court through Justice RM Lodha (who was also the author of the Phulchand case) declined to allow ‘patent illegality’ as a ground for challenging foreign arbitral award.
In Associate Builders v Delhi Development Authority, the court concluded that patent illegality includes: (i) The presence of fraudulent or corrupt practices (ii) Contravention to the substantive law going to the root of the matter (iii) The Arbitrator’s error of law (iv) Contrary to the Arbitration and Conciliation Act of 1996 (v) Failure of the arbitrator to provide reasoning for his judgment (vi) contravention of Section 28(3) of the A&C Act.
In Ssangyong Engineering & Construction Co. Ltd. v National Highways Authority of India (“Ssangyong Engineering”), the Supreme Court determined that the term ‘patent illegality’ pertains to an illegality that affects the core aspects of the matter and does not merely include erroneous application of the law. Similarly, in Patel Engineering Ltd. v North Eastern Electric Power Corporation Ltd., the Apex Court observed that in the following scenarios an arbitral award can be set aside on the basis of patent illegality:
1. if the decision of the arbitrator is found to be perverse, or, so irrational that no reasonable person would have arrived at the same or;
2. the construction of the contract is such that no fair or reasonable person would take or;
3. that the view of the arbitrator is not even a possible view.
In Reliance Infrastructure Ltd. v State of Goa, the Supreme Court reiterated once again that a patent illegality in an arbitral award can only be deemed as such if it is visibly evident within the award itself, and not through a re-evaluation of the presented evidence. Moreover, the stringent boundaries of the term ‘patent illegality’ cannot be surpassed by simply utilizing different phrases that, nonetheless, solely pertain to the concept of ‘error’ and do not encompass the notion of ‘patent illegality’.
The Delhi High Court while pronouncing the judgment in the matter of Zakir Hussain v Sunshine Agrisystem Pvt Ltd gave some important insights on the ground of ‘Patent Illegality’. In this case, the petitioner agreed to store carrots of the respondent in its cold storage. A dispute arose between the parties when the petitioner dumped the carrots stored by the respondent. The petitioner moved an application seeking to bring on record certain documentary evidence in support of its case; these included certain communications with the government department regarding the rotten state of carrots stored in the cold storage facility. However, the arbitrator dismissed the application. Aggrieved by the award, the petitioner challenged it under Section 34 of the A&C Act. The Court examined whether the tribunal was correct in refusing to allow the petitioner to bring additional evidence on record. It held that an arbitrator should not refuse to take on record any additional material evidence merely on the grounds of certain procedural grounds such as non-payment of costs by the party tendering such evidence. It held that failure of the arbitrator to take on record important additional evidence merely on procedural issues would be a ground to set aside the award. It held that such a decision would not just be violative of the principles of natural justice but also amount to patent illegality.
Based on the analysis of the decisions by Supreme Court of India, it is clear that the court dealing with an application under Section 34 cannot re-appreciate evidence like an appellate court even on the grounds of patent illegality. It can be inferred that appropriate courts now possess the authority to set aside an arbitral award that appears to be based on irrational reasoning, under the category of ‘Patent Illegality’ decided by the tribunal. As it appears obvious from the language of Section 34(2A) and the Apex Court’s pronouncement in Ssangyong Engineering (supra), the ground of patent illegality would not be available in the case of international commercial arbitration.
Why the ground under Section 34(2A) restricted to Domestic Awards only?
One of the interesting observations that one comes through while reading the text of Section 34 (2A) is that this ground is exclusively available for an award resulting from a commercial arbitration conducted within domestic jurisdiction only and is unavailable in case of an award resulting from that of an international commercial arbitration. This highlights the limited scope of the subsection.
One way to answer this question could be the soundness of arbitral awards in India which has been a source of concern, creating problems for the involved parties. If it is so then does this reflect a lack of faith in the domestic arbitration process or doubts about the rationality of domestic arbitral awards? Has the judiciary and legislature taken recent actions to alleviate the burden of post-award proceedings on courts? Some may argue that this differentiation should not be there in the law of a country as it may result in highlighting a bad image of the domestic arbitration practice within India and thus this should be done away with.
One other view through which this differentiation can be explained is that the legislature wanted to promote International commercial arbitration and thus this exclusion in challenging of an international arbitration award on the ground mentioned under section 34(2A). The provision is not available for international commercial arbitrations, and the reason for this distinction lies in the difference in the nature of these two types of arbitrations. Domestic commercial arbitrations are conducted pursuant to the provisions of the Indian Arbitration and Conciliation Act, which is a domestic law, whereas international commercial arbitrations are conducted under international treaties and conventions, for example, the Convention concerning the Recognition and Enforcement of Foreign Arbitral Awards held in New York, SIAC Rules and others.
The reason for not providing the ground of patent illegality for international commercial arbitrations is that it could potentially undermine the finality and enforceability of such awards. The International Conventions and Rules provide for restricted or narrow bases for setting aside an international commercial arbitral award, which does not include patent illegality. This is because these aims to promote international arbitration and facilitate the acknowledgment and implementation of foreign arbitral awards, and any additional grounds for setting aside could lead to increased uncertainty and unpredictability in the enforcement of such awards.
Moreover, in interpreting the public policy in the two jurisdictional arbitrations namely, domestic and international arbitration, differentiation should be made due to the differences in the legal systems and policies involved. It is crucial to prevent domestic policies from influencing the result of international arbitration, and public policy in international arbitration must be construed in alignment with global interpretations to ensure consistency and foreseeability in the enforcement of foreign awards. Obstacles to foreign arbitral awards impede international trade and hinder economic development. Hence, the primary objective may be to foster business growth across multiple sectors and attract foreign investment.
These may be the reasons behind this differentiation, but it would be an interesting aspect on which Indian Courts may come up with their own set of reasonings in the near future as India is witnessing a boon in commercial arbitration.
One other important aspect to be considered here is the outcome of a series of judgments by the Hon’ble Supreme Court of India where the confusion about whether the provisions given in Part I of the Act which relates to domestic arbitration can also be applied to international arbitrations. Cases like Venture Global Engineering v Satyam Computer Services and Another as well as Bhatia International v Bulk Trading S.A. created havoc in arbitration jurisprudence. In these cases, the court permitted the use of Part-I (Sections 9 & 34) of the Arbitration Act to the foreign-seated international arbitration. These judgments resulted in interpretations by the court that were contrary to the spirit of the 1996 Act. In 2012, Bharat Aluminium Co. (BALCO) v Kaiser Aluminium Technical Services Inc. gave way to Arbitration law in India to become a seat-centric law. In BALCO judgment court held that the applicability of part I of the Act, including section 9 will depend upon the seat of arbitration. The court held that when the seat of arbitration is in India, only then Part I would apply. If this were the case, then it can be established that the amendment to Sec. 34 is against the ratio of these judgments as it provides for a ground that is limited to domestic arbitration only. Thus, an inference can be drawn that the apex court also extends this ground of patent illegality to international arbitration as well.
Conclusion
As the 1996 Act greatly limited the scope of judicial intervention and left parties free to resolve disputes through arbitration intending to promote the finality and enforceability of arbitration awards, which are crucial to the credibility of arbitration. However, the incorporation of ground for patent illegality into Section 34 of the Arbitration Act of 1996 relating to domestic commercial arbitration has raised concerns and doubts among legal practitioners. The term ‘patent illegality is not defined in law, which can lead to ambiguity and subjectivity in its interpretation and application. This lack of clarity has sparked debate among legal experts on the basis for separating court intervention grounds in domestic commercial arbitrations. Arguably, the introduction of ‘patent illegality’ as another basis for court intervention in domestic commercial arbitration appears to be inconsistent with the goal of reducing court intervention in arbitration. The term is ambiguous, open to various interpretations, and could jeopardize the finality and enforceability of arbitral awards. It is further argued that the inclusion of this ground may lead to higher levels of court intervention and uncertainty for parties involved in domestic commercial arbitrations.
Author(s)
Saket Bhalotia
Associate Consultant (Legal) at KPMG
Bhavika Agrawal
Associate at Titus & Co. Advocates