Award Can Be Said To Be Suffering From 'Patent Illegality' Only If It Is An Illegality Apparent On The Face Of It : Supreme Court

The Supreme Court observed that an award could be said to be suffering from “patent illegality” only if it is an illegality apparent on the face of the award and not to be searched out by way of re-appreciation of evidence.

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”, the bench of Justices Dinesh Maheshwari and Sanjay Kumar observed while allowing appeals filed by Reliance Infrastructure Ltd.

In this case (arising out of a dispute between State of Goa and Reliance Infrastructure Ltd. ), the Arbitral Tribunal  passed the award directing the State of Goa to pay to the claimant a sum of Rs. 278.29 crore (principal amount) together with interest for the period up to 31.10.2017; to pay further interest from 31.10.2017 at the rate of 15% per annum from the date of award until the date of full payment of the amount including interest as on the date of the award until effective payment/realization. The Commercial Court, dismissed the petition filed by the State challenging the Award. However, the Bombay High Court, partly allowing the appeal, disapproved the substantial part of the award.

In appeal before the Apex Court, various factual contentions were raised. The judgment, by referring to various decisions, discusses the scope of challenge to an arbitral award under Section 34 and the scope of appeal under Section 37 of the Act. The court made the following observations:

Award cannot be set aside with reference to the deduction drawn from construction

"As noticed, arbitral award is not an ordinary adjudicatory order so as to be lightly interfered with by the Courts under Sections 34 or 37 of the Act of 1996 as if dealing with an appeal or revision against a decision of any subordinate Court. The expression “patent illegality” has been exposited by this Court in the cases referred hereinbefore. The significant aspect to be reiterated is that it is not a mere illegality which would call for interference, but it has to be “a patent illegality”, which obviously signifies that it ought to be apparent on the face of the award and not the one which is culled out by way of a long-drawn analysis of the pleadings and evidence. Of course, when the terms and conditions of the agreement governing the parties are completely ignored, the matter would be different and an award carrying such a shortcoming shall be directly hit by Section 28(3) of the Act, which enjoins upon an Arbitral Tribunal to decide in accordance with the terms of contract while taking into account the usage of trade applicable to the transaction. As said by this Court in Associate Builders (supra), if an Arbitrator construes the term of contract in a reasonable manner, the award cannot be set aside with reference to the deduction drawn from construction. The possibility of interference would arise only if the construction of the Arbitrator is such which could not be made by any fairminded and reasonable person"

Patent illegality not to be searched out by way of re-appreciation of evidence.

"Of course, in the regular adjudicatory process, the Court may presume existence of certain facts under Section 114 of the Indian Evidence Act, 1872; and in terms of Illustration (g) thereof, the Court is entitled to draw an inference that the evidence which could be but not produced would, if produced, be unfavourable to the person who withholds it. However, in a given case, while determining the dispute by way of arbitration, whether the Arbitrator draws such adverse inference or not, is essentially a matter of appreciation 64 of evidence; and if not drawing of adverse inference is also permitted to be raised as a ground of challenge under Section 34, it would open the confines of limited interference in an award; and would carry the propensity of converting the proceedings under Section 34 and under Section 37 into the proceedings of regular appeal/revision against the award and thereby, again violating the principles that re-appreciation of evidence is not envisaged in the proceedings under Section 34 of the Act of 1996. It gets per force reiterated that an award could be said to be suffering from “patent illegality” only if it is an illegality apparent on the face of the award and not to be searched out by way of re-appreciation of evidence. The submissions as regards drawing of adverse inference are themselves adverse to the ethos of Sections 34 and 37 of the Act of 1996 and are required to be rejected.

Allowing the appeal filed by Reliance and restoring the award, the bench further observed:

"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”. We 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

Case details

Reliance Infrastructure Ltd. vs State of Goa | 2023 LiveLaw (SC) 416 | CA 3615 OF 2023 | 10 May 2023 | Justices Dinesh Maheshwari and Sanjay Kumar

Headnotes

Arbitration and Conciliation Act, 1996 ; Section 34,37 - An award could be said to be suffering from “patent illegality” only if it is an illegality apparent on the face of the award and not to be searched out by way of re-appreciation of evidence - 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 - if an Arbitrator construes the term of contract in a reasonable manner, the award cannot be set aside with reference to the deduction drawn from construction - The possibility of interference would arise only if the construction of the Arbitrator is such which could not be made by any fairminded and reasonable person (Para 18, 25, 36)

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