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

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

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."

(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

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."

(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:

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).