In this article, we analyze the decision rendered by a three-judge bench of the Supreme Court of India (Supreme Court) in Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd.1, where the ground of patent illegality for challenging a domestic award, post the amendment to the Arbitration and Conciliation Act, 1996 (Arbitration Act) in the year 2015, has been reaffirmed.
Disputes between the petitioner and the respondent in relation to works contract for 3 (three) different packages, resulted in 3 (three) arbitral awards dated 29 March 2016. The respondent challenged the said awards by way of applications under Section 34 of the Arbitration Act, before the Additional Deputy Commissioner (Judicial), Shillong (Deputy Commissioner). The Deputy Commissioner, by way of the common judgment dated 27 April 2018, rejected the applications filed by the respondents and upheld the arbitral awards.
Aggrieved by the said dismissal, the respondent filed appeals under Section 37 of the Arbitration Act before High Court of Meghalaya (High Court). By the common judgment dated 26 February 2019, the High Court allowed the appeals filed by the respondent and set aside the arbitral awards.
The petitioner preferred special leave petitions before the Supreme Court, challenging the decision of the High Court. The Supreme Court, dismissed the special leave petitions on 19 July 2019, holding that it was not inclined to interfere in the matters.
Pursuant to the dismissal of the special leave petitions, the petitioner filed review petitions before the High Court on the ground that judgment of the High Court suffered from error apparent on the face of the record as it had not taken into consideration the amendments made to the Arbitration Act by way of the Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act). The High Court, by way of its order dated 10 October 2019, declined to entertain the review petitions filed by the petitioner. The said dismissal order passed by the High Court was under challenge in the subject petition before the Supreme Court.
FINDINGS OF THE SUPREME COURT
The Supreme Court reiterated its decision in Board for Control for Cricket in India2, where it was held that the Amendment Act will apply to Section 34 petitions filed after 23 October 2015, i.e. the day on which the Amendment Act came into force. The Supreme Court took note of the fact that in the present case, the provisions of the Amendment Act would apply, as the applications under Section 34 of the Arbitration Act had been filed after 23 October 2015.
It was observed that patent illegality, as a ground for setting aside a domestic award was first expounded in the judgment of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.3, where the Supreme Court gave a wider interpretation to the public policy of India in terms of Section 34(2)(b)(ii) of the Arbitration Act. It was held that an award would be patently illegal if it is contrary to the substantive provisions of law, or the provisions of the Arbitration Act, or the terms of the contract. The Supreme Court reaffirmed its decision in Associated Builders v. Delhi Development Authority4, wherein, while considering patent illegality as a ground for setting aside a domestic award, it was held that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes a contract in a manner which no fair minded or reasonable person would take, i.e. if the view taken by the arbitrator is not even a possible view to take.
It was noted that the 246th (two hundred and forty sixth) Report of the Law Commission, recommended the addition of the ground of patent illegality for setting aside a domestic award by inserting clause (2A) in Section 34 of the Arbitration Act. It was further observed that pursuant to the recommendations of the Law Commission, the Arbitration Act was amended by the Amendment Act.
The Supreme Court went on to observe that the ground of patent illegality cannot be invoked in international commercial arbitrations seated in India. Further, even in case of a foreign award under the New York Convention, the ground of patent illegality cannot be raised as a ground to resist enforcement, since the said ground is not present in Section 48 of the Arbitration.
Reliance was placed on the decision in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India5 where the Supreme Court was considering a challenge to an award passed in an international commercial arbitration between a foreign entity registered under the laws of Korea and a Government of India undertaking. The Supreme Court noted that the expansive interpretation given to public policy in Saw Pipes (supra) and Oil and National Gas Corporation Ltd. v. Western Geco International Limited6 had been done away with and a new ground of patent illegality had been introduced, which would apply to applications under Section 34 of the Arbitration Act, made on or after 23 October 2015. It was held that insofar as domestic awards are concerned, the additional ground of patent illegality was now available under sub-section (2A) to Section 34. However, re-appreciation of evidence was not permitted under the ground of patent illegality, appearing on the face of the award.
With regards to the facts of the present case, the Supreme Court noted that both the parties to the arbitration were Indian entities and therefore, the award was also a domestic award. It was held that 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 if the decision is so irrational that no reasonable person would have arrived at the said decision, or if the construction of the contract is such that no fair or reasonable person would take or if the view of the arbitrator is not even a possible view.
The Supreme Court took the view that the High Court, having extensively relied upon the decision in Associated Builders (supra) had arrived at the correct conclusion that an arbitral award can be set aside under Section 34 of the Arbitration Act, if it is patently illegal or perverse. It was held that the decision of the High Court was in conformity with the decision of the Supreme Court in Ssangyong Engineering (supra). Reference was made to the decision of the High Court where it was held that no reasonable person could have arrived at a different conclusion while interpreting the clauses of the conditions of the contract and that any other interpretation of the said clauses would be irrational and in defiance of all logic. The Supreme Court also placed reliance on the findings of the High Court, wherein it was held that the award suffered from the vice of irrationality.
It was held that even though the High Court had referred to various judgments including Western Geco (supra), which were no longer good law, the matter had been decided on the ground that the arbitral award was a perverse award and that on a holistic reading of all the terms and conditions of the contract, the view taken by the arbitrator was not even a possible view. The Supreme Court, therefore took the view that the High Court had rightly followed the test laid down in Associate Builders (supra), which had been reiterated in Ssangyong Engineering (supra).
It was further held that once the earlier challenge to the High Court's order had already been repelled by the Supreme Court by dismissal of the special leave petitions, it was not open to the petitioner to re-open the matter by filing a review petition on the same grounds, which were rightly dismissed by the High Court.
In the present case, the Supreme Court, while taking note of the fact that the decisions referred to by the High Court including Western Geco (supra) and Saw Pipes (supra), were no longer good in law, has upheld the decision of the High Court based on its findings that the award was perverse and that the view taken by the arbitrator was not a possible view. In doing so, the Supreme Court relied upon the parameters laid down in Associate Builders (supra) and Ssangyong Engineering (supra). The Supreme Court refused to set aside the decision of the High Court merely because it placed reliance on the said decisions.
The Supreme Court has also set out the circumstances under which an award can be set aside as being patently illegal:
- If the award is found to perverse; or
- If the decision of the arbitrator is so irrational that no reasonable person would have arrived at the such a decision; or
- If the construction of the contract is such that no fair or reasonable person would take; or
- If the view of the arbitrator is not even a possible view.
This decision of the Supreme Court, in our opinion, will serve as a benchmark for challenges to domestic awards on the ground of patent illegality.
1 SLP (Civil) Nos. 3584-85 of 2020; SLP (Civil) Nos. 3438-3439 of 2020; SLP (Civil) Nos. 3434-3435 of 2020; Decided on 22 May 2020
2 (2018) 6 SCC 287
3 (2003) 5 SCC 705
4 (2015) 3 SCC 49
5 (2019) 15 SCC 131
6 (2014) 9 SCC 263
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