Patent Illegality In Setting Aside Arbitral Awards: Is India Becoming A Robust Seat For Arbitration?

The term “patent illegality” for the first time was explained in the case of ONGCv. Saw Pipes^[1] by the Supreme Court of India. Later, in 2015 on the recommendations of the 246^th report of the law commission amendment was made in Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter, Act), which subjected the term public policy of India to wider interpretation which was narrowly interpreted by the earlier judicial pronouncements. There has been a plethora of cases where the ground of patent illegality has been relied upon.

This article analyzes the scope of patent illegality and its judicial interpretation by the courts across India. We also look into the grounds considered in international jurisprudence to set aside an arbitral award and if public policy is one of them.

What is Patent Illegality?

Patently Illegal means an error of law that goes deep to the root of the matter. This error of law can mean inconsistency with common law, the constitution of the country, or a statutory provision.

The Statutory Stand

In recent years, India's policy has been focused on ease of doing business and promoting India as an investment hub. The amendment to the Act was done with the legislative intent to limit the interference of courts. An arbitral award can be set aside only if it is perverse or erroneous in law. Now, if we examine Section 34 of the Arbitration Act, there are certain limited grounds on which an award can be set aside; they are:

• Incapacity of the parties, if party to the contract is a minor or of unsound mind. Section 9 of the Act has a provision to appoint a guardian for arbitral proceedings.
• Invalidity of the Arbitration Agreement
• Notice not received by either of the parties regarding the appointment of arbitrators or of the arbitral proceedings.
• If the award deals with a dispute which is not contemplated by or fails to fall within the terms of submission to arbitration
• If the composition of the tribunal is not according to the agreement between the parties
• The nature of the dispute is such that it is not arbitrable
• Award is against public policy

All the grounds listed to set aside an arbitral award are straightforward. However, the ground "against public policy" has been subjected to interpretation through various judicial pronouncements. Section 34 (2A) was inserted post 2015 amendment to the Act stating that a domestic award can be set aside by the court if prima facie it appears that award is vitiated by patent illegality. The Supreme Court of India in Bhaven Construction v.Sardar Sarovar Narmada Nigam Ltd. highlighted the word "only" in the opening words of Section 34, stressing that an application for setting aside an arbitral award must be made in accordance with sub-sections (2) and (3) of section 34 of the Act.

Patent Illegality: rooting out of public policy

There have been a plethora of cases in India that decode its stand on public policy, giving a wider interpretation of the public policy. Supreme Court of India in Oil& Natural Gas Corporation Ltd. v. Saw Pipes Ltd held that an award would be patently illegal if it is contrary to substantive provisions of law, of the arbitration act, or terms of the contract. However, this interpretation was applied to domestic as well as international arbitral awards. After the report of the 246^th law commission, the interpretation was limited to domestic awards as clearly laid down in Section 34(2A) of the Act.

Why is the scope limited to domestic awards?

There is no international public policy that exists; the New York convention or the conventionon the recognition and enforcement of Foreign Arbitral Awards lays down conditions where the execution of awards can be refused as it goes against the public policy of either of the parties. Execution of international arbitral awards becomes difficult on the grounds of violating public policy as an award can be ordered to be executed in one country but can violate the public policy of the other.

In India, patent illegality was limited to domestic awards also because of the underlying objective of promoting business in various sectors and inviting foreign entities to invest. India is also becoming a robust seat for international arbitration with an intention to strengthen the arbitration ecosystem in the coming financial year.

Judicial timeline

A broad interpretation was given to the “public policy” in the case of Renusagar Power Electric Co. when the issue of enforcement of foreign awards rose. The Apex court gave a narrow and broad interpretation of the term public policy with respect to domestic and international awards. It was the year 1994 when the court stated that the public policy of India should be narrowly construed in the context of private international law. The foreign award could be set aside only if it was contrary to the fundamental policy of Indian law, the interest of India, or justice or morality. In 2003, in the case of ONGC v. Saw Pipes Ltd., the term “patently illegal” was defined. The Apex court held that the court could intervene and review the merits of an award if it is in contravention to the Arbitration & Conciliation Act, 1996, or found to be 'patently illegal.'

Through the years there have been many cases lately in the year 2019 in the case of Ssangyong Engineering & Construction Company Limited v. National Highways Authority of India; it was clearly stated by the court that the doctrine of patent illegality will not be applicable to international awards. Also, it was laid down in clear terms that if the tribunal deals with a matter beyond the scope of the agreement, it will be patently illegal, and the award can be set aside.

In 2021, in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd, the court clearly stated that patent illegality must stem from the root of the matter. Every error of law committed by the Arbitral Tribunal will not be covered under the blanket of patent illegality. A law that is not in the interest of public policy is not in the scope of this doctrine. Court has limitations while interfering with the arbitral award passed by the tribunal; when the arbitrator interprets the contract in a non-reasonable manner or takes an impossible view, the court can interfere. If the arbitrator concludes on the basis of no evidence or ignores vital evidence, then the doctrine can be invoked to set aside the award.

The courts have had a clear standing on patent illegality. Recently in the pronouncement of the case of Indian Oil Corporation Ltd. v. M/s Shree Ganesh Petroleum Rajgurunagar, the Supreme Court discussed cases when the doctrine of patent illegality could be invoked. There have been guidelines by the court, but in this judgment, it was clearly stated that an arbitral tribunal is created by the arbitral contract and must be guided by the same. If the tribunal fails to abide by the terms of the contract, the award will be vitiated by patent illegality.

International jurisprudence

There is no provision like the doctrine of patent illegality in India across the world. In the United Kingdom, an award can be challenged before any court on the grounds of lack of substantive jurisdiction or serious irregularity. These grounds are mandatory in nature and cannot be excluded by any agreement. In cases where the parties have not excluded the right of appeal, an award can also be appealed on any question of law.

Singapore has always displayed a pro-arbitration stance to the world. In a recent judgment of CEF and other v. CEH the Singapore court had the opportunity to bring a "no evidence rule" under the ambit of breach of natural justice, but it refused to do the same. Only limited grounds are considered to set aside arbitral awards, like the breach of natural justice and Singapore's public policy.

The 'Make in India' and 'Aatma Nirbhar Bharat' programs were propelled by the Covid-19 pandemic, and this is expected to stimulate growth and development in the coming time. India is growing to become a robust seat for arbitration through initiatives like the new International Arbitration Centre in the GIFT city of Gujrat situated at the International Financial Services Centre. As institutional arbitration is the new norm, India is shaping its policies and initiatives to meet the need and dynamics of time. Interpreting public policy and limiting the application of patent illegality over domestic arbitral awards is one such initiative. Creating a room for international arbitration in the coming time and showcasing a pro-arbitration stance to the world will promote India as a leading competitor and roll the ball in its favor.

The author is a student at Symbiosis Law School, Noida. Views are personal.