'Patent Illegality' A Ground Available To Set Aside Domestic Arbitral Awards Made After 2015 Amendment : SC [Read Judgment]

The Supreme Court has observed that an arbitral award can be set aside under Section 34 of the Arbitration and Conciliation Act if it is patently illegal or perverse.

The bench comprising of Justices R. Banumathi, Indu Malhotra and Aniruddha Bose observed that ground of patent illegality is a ground available under the statute for setting aside a domestic award made after the 2015 amendment to the Arbitration and Conciliation Act. The award in the instant case was made on March 29, 2016.

If the decision of the arbitrator is found to be perverse, or, so irrational that no reasonable person would have arrived at the same, or, the construction of the contract is such that no fair or reasonable person would take, or, that the view of the arbitrator is not even a possible view, the award could be termed as patently illegal.

In this case, the applications filed by North Eastern Electric Power Corporation Ltd. (NEEPCO) under Section 34 of the Arbitration and Conciliation Act, 1996 before the Additional Deputy Commissioner (Judicial), Shillong challenging the three arbitral awards against it were dismissed. The appeal against these orders were allowed by the High Court, which set aside the award.

While confirming the High Court view, the Apex Court dealt with the history of 'Patent illegality' ground. It observed that such a ground for setting aside a domestic award was first expounded in the judgment of Saw Pipes Ltd. Later the ground of "patent illegality" for setting aside a domestic award has been given statutory force in Section 34(2A) of the 1996 Act, it noted. It further observed:

"The present case arises out of a domestic award between two Indian entities. The ground of patent illegality is a ground available under the statute for setting aside a domestic award, if the decision of the arbitrator is found to be perverse, or, so irrational that no reasonable person would have arrived at the same; or, the construction of the contract is such that no fair or reasonable person would take; or, that the view of the arbitrator is not even a possible view. 23. In the present case, the High Court has referred to the judgment in Associated Builders (supra) at length in paragraph (42) of its judgment dated 26.02.2019 and arrived at the correct conclusion that an arbitral award can be set aside under Section 34 if it is patently illegal or perverse. This finding of the High Court is in conformity with paragraph (40) of the judgment of this Court in Ssangyong Engineering (supra)." 

The ground of "patent illegality" for setting aside a domestic award has been given statutory force in Section 34(2A), which was inserted as per the 2015 Amendment to the Arbitration and Conciliation Act.

In Ssangyong Engineering and Construction Company , the SC noted that a new ground of "patent illegality" was introduced which would apply to applications under Section 34 made on or after 23.10.2015 (the date on which the 2015 amendment came into force).

Case no.: SPECIAL LEAVE PETITION (C) NOS. 3584-85 OF 2020

Case name: PATEL ENGINEERING LTD. vs. NORTH EASTERN ELECTRIC POWER CORPORATION LTD.

Counsel: Sr. Advocates Harish Salve, Neeraj Kishan Kaul, Huzefa Ahmadi and SG Tushar Mehta

Coram: Justices R. Banumathi, Indu Malhotra and Aniruddha Bose 

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