'Perversity' Or 'Patent Illegality' Not Grounds To Refuse Enforcement Of Foreign Arbitration Award: Supreme Court

The Supreme Court observed that perversity of an award is not a ground to refuse enforcement of a foreign award under Section 48 of the Arbitration and Conciliation Act, after 2015 amendment.

The Court held that the ground of "patent illegality" is only available to set aside domestic arbitration awards made under Part 1 of the Arbitration and Conciliation Act and will not apply to international commercial awards.

"The ground of "patent illegality appearing on the face of the award" is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations.", the bench comprising Justices RF Nariman and BR Gavai observed.

Background

The court made these observations in an appeal filed by Gemini Bay Transcription Pvt. Ltd. against a Bombay High Court judgment which held that the foreign award is enforceable against them, even though they were non signatories to the Arbitration Agreement.

In this case, an Award was passed by International Arbitration Tribunal in the matter of dispute between Integrated Sales Services Ltd. ["ISS"], a company based in Hong Kong and DMC Management Consultants Ltd [DMC]. The award was also made binding on certain entities which were not signatories to the agreement. DMC filed an application for enforcement of this foreign award before the single bench of Bombay High Court. The Single Judge held that the agreement and the arbitration clause cannot be enforced against persons who are non-signatories, even though such non-signatories may participate in the arbitration, as no acquiescence or estoppel can apply to issues relatable to jurisdiction. The single judge held that award would not be enforceable against Gemini Bay Transcription Pvt. Ltd. GBT and Arun Dev Upadhyaya since were not parties to the arbitration agreement. In appeal, the Division Bench, setting aside the single bench judgment, observed that none of the grounds contained in Section 48 would apply so as to resist enforcement of the foreign award in this case. 

Thus GBT approached the Apex Court by filing an appeal. One of the contentions raised was that the Award suffers from patent illegality.

Perversity no longer a ground to refuse enforcement of foreign award

Taking note of the 2015th amendment and the judgment in Ssangyong Engg. & Construction Co. Ltd. v. NHAI,, the court observed that perversity as a ground to set aside an award in an international commercial arbitration held in India no longer obtains after the 2015 amendment to the Arbitration Act, 1996. 

Section 34 of the Act provides that the arbitral award if is in conflict with the public policy of India, can be set aside under Section 34. Explanation 1 clarifies that an award is in conflict with the public policy of India, only if,-

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. The test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

The 2015 amendment introduced sub-clause 2A which reads as follows:

"An arbitral award arising out of arbitration's other than international commercial arbitration's, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: 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".

Section 48 provides that the enforcement of a foreign arbitral award may also be refused if the Court finds that the enforcement of the award would be contrary to the public policy of India. The same explanation which is provided under Section 34 is given to public policy under Section 48 as well.

"59. The judgment in Ssangyong (supra) noted in para 29 that Section 48 of the Act has also been amended in the same manner as Section 34 of the Act. The ground of "patent illegality appearing on the face of the award" is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations. Thus, the "public policy of India" ground after the 2015 amendment does not take within its scope, "perversity of an award" as a ground to set aside an award in an international commercial arbitration under Section 34, and concomitantly as a ground to refuse enforcement of a foreign award under Section 48, being a pari materia provision which appears in Part II of the Act. This argument must therefore stand rejected.", the court observed.

Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all.

Another contention raised in this case was that the Arbitrator's Award contained reasoning which was perfunctory in nature, it would not pass muster and it would be a breach of natural justice, 'reasons' being a part of natural justice as understood in this country. To contend this, Section 48(1)(b) of the Arbitration Act was referred to. In this regard, the court said:

Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all. The only grounds on which a foreign award cannot be enforced under Section 48(1)(b) are natural justice grounds relatable to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal, all of which are events anterior to the making of the award. S

The court further added that Section 48(1)(b) has to be narrowly construed in view of the judgment in Vijay Karia v. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1.

Foreign award cannot be set at naught on the ground that it has infracted the substantive law of the agreement

The court also observed that the Section 48 does not contain any ground for resisting enforcement of a foreign award based upon the foreign award being contrary to the substantive law agreed to by the parties and which it is to apply in reaching its conclusion. In this regard, the bench made the following observations:

"71...Whether the award is correct in law ...would be relevant if at all such award were to be set aside in the State in which it was made and that too if such law permitted interference on the ground that the arbitral award had infracted the substantive law of the agreement
72. As a matter of fact, if an international commercial arbitration were to be held in India, Section 28(1)(b) recognises that an arbitral tribunal can decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute which, in turn, has a direct nexus to the substantive law of the country whose laws are said to apply. There is no ground in the pari materia provisions of Section 34 to set aside such award on the ground that the substantive law of that country has been infracted. Indeed, the only ground on which such award could possibly be interfered with is if such award, valid under the law which it applied, could be held to be contrary to the public policy of India.
73. Thus, if in a given case the substantive law of a foreign country were to recognise a narcotic drug as being legal based upon which an award for the supply of such drug is then ordered, such award may possibly be resisted in India on the ground that it would be contrary to the fundamental policy of Indian law to give effect to such agreement in a case in which the Narcotic Drugs and Psychotropic Substances Act, 1985 prohibits import of such a drug. A foreign award cannot be set at naught under Section 48 on the ground that it has infracted the substantive law of the agreement."

Section 48(2) to be invoked only when 'basic notion of justice' is infracted

Yet another contention against enforcement of Award was by placing reliance on Section 48(2). Referring to Ssangyong Engg. & Construction Co. Ltd. (supra), the bench observed:

In order to attract Section 48(2) read with Explanation 1(iii), this Court in Ssangyong (supra) has held that it is only in exceptional cases which involve some basic infraction of justice which shocks the conscience of the court that such a plea can be entertained. ... In any case, the damages so awarded in the facts of this case cannot even remotely be said to shock the conscience of this Court so as to clutch at "the basic notion of justice" ground contained in Section 48(2) Explanation (1)(iii).

Also from the judgment:

Foreign Award Can Be Binding On Non-Signatories To Arbitration Agreement: Supreme Court

Case: Gemini Bay Transcription Pvt. Ltd.  vs. Integrated Sales Service Ltd. ; CA 8343-8344 OF 2018
Citation: LL 2021 SC 369
Coram: Justices RF Nariman and BR Gavai
Counsel: Sr. Adv K.V. Vishwanathan, Sr. Adv Harish Salve for appellants,  Arif Bookwala for respondent

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