Patent Illegality As A Ground Of Judicial Intervention In Arbitration

In the case of I-Pay Clearing Services Pvt. Ltd. v. ICICI Bank Limited [3], the Supreme Court of India examined sections 31, 34(1), 34(2A), and 34(4) of the Arbitration and Conciliation Act 1996. It held that section 34(4) of the act uses the words "where it is appropriate," enabling the court to exercise its discretion and not being compelled to send the case to an arbitral tribunal. The court determined that "curable defects" can be reversed; nevertheless, there must be a “finding” on the subject at hand, not only “reasoning”. The explanation was that reasoning by itself could not correct an error in the award when the findings are absent. As a result, the Court would be precluded from using its authority under Section 34(4), as the record seems to support patent illegality.

Historical developments

There is an extensive record of judicial decisions compelling the court's involvement in the allowing or disallowing of arbitral verdicts. When India joined the New York Convention in 1960, The Foreign Awards (Recognition and Enforcement) Act 1961 supervised foreign arbitration [2], establishing the premise of refusing to accept an arbitral ruling if it is averse to the country's public policy.

The problem with the public policy approach was that there was no definitive boundary to determine what is public policy and it was different in different jurisdictions as per their culture and history. The subjective approach increased the judicial intervention in arbitration, which was against the principles of efficiency and finality.

UNCITRAL eventually adopted the model statute that the UN created in an effort to regulate all forms of international arbitration. The model law's Article 18 is devoted to the objectives of party autonomy and minimal judicial interference. The model law that served as the basis for the 1996 act accomplished the following goals: It merged earlier acts, aimed to align India's arbitration laws with those of other nations, decreased the supervisory roles of courts, and allowed for the execution of awards as court decisions.

In its report, the Law Commission of India recommended adding a clause allowing an award to be set aside on the additional grounds that there is an error that is very evident on the face of the arbitral award giving rise to a substantial question of law. This recommendation was used in the Arbitration and Conciliation (Amendment) Bill 2003, which was presented in parliament.

In addition to the limited application of public policy, patent illegality was added as a defence. This defence might be based on a basic legal error, a breach of the constitution or a law, or a contradiction with common law.

Case laws defining and determining public policy and patent illegality

The principle of public policy and patent illegality have emerged through historic Supreme Court decisions. In Renusagar Power Plant Ltd. v. General Electric Co. (1994) [4], the Supreme Court of India stated that public policy was a basis for refusing to implement an arbitral award. It established three justifications for doing so: India's fundamental policy, India's interests, and morality. This significantly extended the scope of judicial involvement with arbitral awards.

These grounds were accepted in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [5] This decision broadened the definition of "public policy" and therefore the scope of judicial actions on arbitral decisions. The Saw Pipes decision incorporated the ground of fundamental policy of India, which was not given an exhaustive definition by the court and was subject to interpretation, with the potential to be exploited owing to this lack of objective interpretation.

The foundation was defined by the court, but, within certain bounds. These included following the principles of natural justice, adopting a "judicial approach," which entails applying the judicial mind by the authorities and bodies (Ridge v. Baldwin), and that a decision that is perverse or so irrational that no reasonable person could have arrived at the same will not be sustained in a court of law. this ruling broadened the scope of public policy and patent illegality came up as a valid ground [4].

This decision was criticized for significantly expanding the scope of judicial interference. One of them was that the court violated the principle of separation of powers and increased the judicial overreach when the parliament's intention in passing the 1996 act was to decrease judicial intrusion.

In the case of Associate Builders v. DDA [6], the court laid out a test to determine the parameters of patent illegality and held that the only means to strike aside an arbitral tribunal's order for 'justice' is if the award shocks the court's conscience. It states that an arbitral tribunal must make decisions based on the wording of the agreement; nevertheless, the award will be regarded as "patently illegal". If on the prima facie reading of award , it is found that the arbitrator interpreted the agreement in such a way that no rational or fair-minded person could, this would invoke the ground of patent illegality and non-enforcement of award would be considered.

In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) [7], the Supreme Court held that patent illegality on the face of it does not need to be related to public policy.

The case of Patel Engineering Ltd. v. North Eastern Power Corporation Ltd. (2020) [8], has once again emphasized the 'patent illegality' argument included in Section 34 (2A) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). This decision's recognition and endorsement of the patent illegality standards set forth in the Associate Builders case is its most important feature. Citing the public policy theory under Section 34 (2) (b) (ii) of the Arbitration Act, the Supreme Court of India has decided that "unjust enrichment" is a basis for contesting an award. But there is a difference between not acting in compliance with a contract and misreading its terms. When settling a dispute, an Arbitral Tribunal has the jurisdiction to interpret the terms and conditions of a contract. A jurisdictional error occurs when a contract is interpreted incorrectly in a situation where arbitral problems are legitimately and legally filed to an arbitral

As much as the idea of finality is vital in the execution of arbitral awards, the premise for patent illegality is relevant since human intervention is prone to errors, and there must be some method to correct them. Some of the impetuses for declaring patent illegality lawful include upholding the rule of law, protecting the public interest, guaranteeing fairness and justice, maintaining contractual sanctity, and serving as a deterrence to arbitral misconduct.

However, it must not be exploited to maintain the sanctity of the principle of separation of powers as well as to reinforce the very underlying objective of the alternate dispute resolution system which is to avoid the long court proceedings.

In the case of I-Pay clearing servicers, the court rightly held the importance of "finding" and "reasoning" in concluding when section 34(4) of the act can be applied. An award that is given without making any findings at all is a grave mistake that goes to the heart of the matter and shocks the conscience of the court; as such, it cannot be enforced. However, the arbitration tribunal can correct any defect or omission in the award.

The author is a 3^rd year student at National Law University, Delhi .Views are personal.

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