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Unravelling The Ground Of 'Patent Illegality' For Setting Aside Arbitral Awards

Sidharath Goyal
15 Sep 2019 4:43 AM GMT
Unravelling The Ground Of Patent Illegality  For Setting Aside Arbitral Awards
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'While the institution of patent illegality sub-ground under 'public policy' under section 34(2)(b)(ii) of the 1996 Act for setting aside a domestic arbitral award has been an exercise of judicial creativity, the Parliament ought to have defined the 'patent illegality' ground while amending the 1996 Act through the 2015 Amendment Act'.
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While the Arbitration and Conciliation Act, 1996 ('1996 Act') as originally enacted did not include the ground of 'patent illegality' for setting aside domestic arbitral awards under section 34 of the said Act, however, the Arbitration and Conciliation (Amendment) Act, 2015 ('2015 Amendment Act') after coming into effect from 23rd October 2015 now provides parties an additional and distinct ground for setting aside a domestic arbitral award.

Since the legislature did not define what constitutes 'patent illegality' while inserting the said ground in the 1996 Act, this article traces the genesis of this ground by the Supreme Court, its subsequent statutory inclusion in the 1996 Act as a distinct ground by the 2015 Amendment Act with certain limitations, and the current interpretation given to the said ground by the Supreme Court in the case of Ssangyong Engineering & Construction Co. Ltd. v. National HighwaysAuthority of India
[1] ('Ssangyong').

In 2003, the Supreme Court, while interpreting the ground of 'public policy' under section 34(2)(b)(ii) of the 1996 Act for setting aside a domestic arbitral award, for the first time introduced 'patent illegality' as a sub-ground under the 'public policy' ground in ONGC Ltd. v. Saw Pipes Ltd.
[2] ('Saw Pipes case') stating: "22. … Therefore, in a case where the validity of award is challenged, there is no necessity of giving a narrower meaning to the term "public policy of India". On the contrary, wider meaning is required to be given so that the "patently illegal award" passed by the Arbitral Tribunal could be set aside."

The Supreme Court then went on to illustrate what would constitute patent illegality in the following terms-

"Take for illustration a case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act which specifically provides that "Arbitral Tribunal shall decide in accordance with the terms of the contract". Further, where there is a specific usage of the trade that if the payment is made beyond a period of one month, then the party would be required to pay the said amount with interest at the rate of 15 per cent. Despite the evidence being produced on record for such usage, if the arbitrator refuses to grant such interest on the ground of equity, such award would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2) specifically provides that the arbitrator shall decide ex aequo et bono (according to what is just and good) only if the parties have expressly authorised him to do so. Similarly, if the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of "patent illegality"."
[3]

Thus, the Supreme Court in para 31 of the Saw Pipes Case held that an award could be set aside if it is against the public policy of India i.e. if it is contrary to:

"(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality; or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy."

Subsequently, the Supreme Court in 2014 in paras 42.1 to 42.3 of Associate Builders v. Delhi Development Authority
[4] distilled what constituted patent illegality in the Saw Pipes Case under the following three subheads viz.,

(i) contravention of the substantive law of India

(ii) contravention of the Arbitration Act itself and

(iii) contravention of Section 28(3) of the Arbitration Act which mandates the Arbitral Tribunal to decide the case in accordance with the terms of the contract, taking into account the usages of the trade applicable to the transaction.

In respect of the third sub-head, the Supreme Court provided a caveat in Para 42.3 of the above judgment i.e., "if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. 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 can do."

The Arbitration and Conciliation (Amendment) Act, 2015

The 2015 Amendment Act inserted a new sub-section '2A' to section 34 of the 1996 Act, which in addition to statutorily recognizing the 'patent illegality' ground for setting aside a domestic arbitral award made it an independent and distinct ground from the 'public policy' ground under section 34. The proviso to the newly inserted clause further provided that an award 'shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence'. The intention behind inserting this proviso has been to avoid excessive intervention by the judiciary in arbitral awards under this ground.
[5]

Further, the 2015 Amendment Act amended section 28(3) of the 1996 Act to remove the basis of the Saw Pipes Case wherein any contravention of a term of the contract by the arbitral tribunal would ipso jure result in rendering the arbitral award prone to be set aside on the ground of patent illegality.
[6] While the unamended section 28(3) read as: "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", the newly amended section 28(3) reads: "While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction".

Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, 

Recently, in May 2019, the Supreme Court while taking into account the 2015 Amendment Act in the SsangyongCase has interpreted the patent illegality ground in the following terms:

(1) With respect to the first sub-head of patent illegality i.e. contravention of substantive law of India, the Supreme Court in para 40 has held that a mere contravention of the substantive law of India, by itself, is no longer a ground available for setting aside an arbitral award since after the insertion of the proviso to the new inserted sub-section 2A "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".

(2) As far as second sub-head of patent illegality which pertains to contravention of the Arbitration Act is concerned, the Supreme Court in para 40 held that it "would remain, for 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."

(3) The third sub-head of patent illegality i.e. contravention of section 28(3) of the 1996 Act has been expanded by the Supreme Court in Ssangyong Case as it now includes within its fold all arbitral awards which are perverse since they constitute illegality appearing on the face of the award. The Supreme Court opines in para 43 of the Ssangyong Case 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 characterized as perverse."

Further, in case "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"
[7], then the arbitral award can be set aside under this head.

(4) A fourth sub-head of patent illegality has been impliedly created by the Supreme Court in the Ssangyong Case viz., arbitral award suffering from jurisdictional error, in the following terms:

"If an arbitrator is alleged to have wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error which could be corrected on the ground of "patent illegality"
[8].

Jurisdictional error has been previously defined by the Supreme Court in MSK Projects (I) (JV) Ltd. v. State of Rajasthan
[9] as follows: "17. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error."

Concluding remarks

While the institution of patent illegality sub-ground under 'public policy' under section 34(2)(b)(ii) of the 1996 Act for setting aside a domestic arbitral award has been an exercise of judicial creativity, the Parliament ought to have defined the 'patent illegality' ground while amending the 1996 Act through the 2015 Amendment Act and inserting the said ground through a new sub-section 2A. The Supreme Court while filling the void created by the legislature, in the author's opinion, has gone overboard. For instance, the expansion of the third sub-head of patent illegality which will now include all perverse arbitral awards would require courts to look into the evidence tendered before the arbitral tribunal and set aside the award if it is found to be perverse. This is against the proviso to the newly inserted sub-section 2A which provides that an award shall not be set aside merely on the ground of reappreciation of evidence.

This is troublesome as the intention behind inserting the said proviso is to curtail excessive judicial intervention and to ensure quick disposal of challenges to arbitral awards and by going antithetical to the legislative intention the Ssangyong case has opened a Pandora's box since not only will there be an increase in the number of challenges to domestic arbitral awards under section 34(2A) on the ground of perversity before the courts but also the courts will have to go through voluminous evidence in order to find out the perversity in a challenge to a arbitral award, leading to wastage of precious judicial time and prolongation in disposal of setting aside challenges.

Secondly, the implied creation of the fourth sub-head of patent illegality ground viz., awards suffering from jurisdiction error would make section 34(2)(a)(iv) redundant. Section 34(2)(a)(iv) provides that an arbitral award may be set aside by the Court if it "deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration". Thus, the implied ground of jurisdictional error (where the Arbitrator wanders outside the contract and deals with matters not allotted to him) created by the Supreme Court in Ssangyong Case is squarely covered by section 34(2)(a)(iv).

The Supreme Court has repeatedly held that "it is well-settled principle of interpretation of the statute that it is incumbent upon the court to avoid a construction, if reasonably permissible on the language, which will render a part of the statute devoid of any meaning or application. The courts always presume that the legislature inserted every part thereof for a purpose and the legislative intent is that every part of the statute should have effect. The legislature is deemed not to waste its words or to say anything in vain and a construction which attributes redundancy to the legislature will not be accepted except for compelling reasons."
[10] Therefore, the Supreme Court should have been more circumspect while impliedly creating a fourth sub-head under the patent illegality ground.

Sidharath Goyal is an Advocate practising at the Punjab and Haryana High Court.  

[1] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, https://www.livelaw.in/top-stories/sec34-arbitration-act-unilateral-addition-to-contract-by-arbitral-tribunal-violates-most-basic-notions-of-justice-sc-144900

[2] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 70.

[3] Ibid, para 22.

[4] Associate Builders v. Delhi Development Authority, 2014 SCC OnLine SC 937.

[5] See, Law Commission's 246 Report, para 35.

[6] See, Law Commission's 246 Report, para 35.

[7] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India,  , para 41. https://www.livelaw.in/top-stories/sec34-arbitration-act-unilateral-addition-to-contract-by-arbitral-tribunal-violates-most-basic-notions-of-justice-sc-144900

[8] Ibid, para 69, also see para 40.

[9] MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573.

[10] Visitor, AMU v. K.S. Misra, (2007) 8 SCC 593 at page 598.

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