ARBITRAL AWARD: COULD IT BE SET ASIDE DUE TO PATENT ILLEGALITIES

 

Arbitral Award: could it be set aside due to patent illegalities

 

 

The Arbitration & Conciliation Act 1996 was enacted as a comprehensive legislation for providing fillip to economic liberalization and according such alternate dispute resolution mechanism which was hassle free and intervention of court was minimal. The object was to do away with tardy legal process and address the concerns of investors as timely disputes of commercial disputes was perceived as necessary for time bound disposal of the disputes. The Arbitration & Conciliation Act 1996 ( In short “A & C” Act) has further evolved over the years and Arbitration & Conciliation (Amendment) Act 2015 has been a comprehensive legislation by amending several provisions of the A & C Act 1996. There are further amendments in the A & C (Amendment) Act 2021 and the underlying object was to simplify the arbitral procedure and minimizing the intervention of courts. In fact institutional Arbitration is also encouraged so as to bring in its ambit institutions constituting panel of arbitrator with persons of expertise so as to address the dispute before hand by quality experts. The 2015 Act has also stipulated that award should be published within a year from the date of entering into reference. It is in that backdrop that appellate remedy is not available to arbitral award, however, provision of objection u/s 34 of A & C Act is provided for with a view to accord safety valve and ensure probity as regards legality of award. The objection could be raised against award only as per the prescription of Section 34 of the A & C Act 1996. What is significant to point out in this context is that even the grounds of objection against the award before a Court is circumscribed over the years. It may be apt to reproduce the provisions of Section 34 of A & C Act as amended and up to date for ready reference:

"34. Application for setting aside arbitral award.—

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if--

(a) the party making the application establishes on the basis of the record of the arbitral tribunal that--

(i) a party was under some incapacity; or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that--

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.--For the avoidance of any doubt, it is clarified 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.

Explanation 2.--For the avoidance of doubt, 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...."

“(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, 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 re appreciating evidence.”

It is the prospect of setting aside of arbitral award on the premise of patent illegalities that is being discussed herein.

The Arbitration and Conciliation Act 1996 was enacted after repealing the Arbitration act 1940 with a comprehensive enactment with a view to cater to the need of the hour and to meet the aspiration of speedy justice in trade and business for creating a business ambience without much hassle. The intervention of the courts are minimal as per the new Act. As per section 31 (3) of the A & C Act 1996, the Arbitral Tribunal is required to give reasons for rendering arbitral award. As arbitrator is the creature of the agreement and therefore, unless parties agreed that there shall not be any need for the Arbitral Tribunal to give reasons, while publishing award, the reasoning for the award shall be necessary.

 

LAW

PATENT ILLEGALITIES

The matter has been deliberated by Delhi High Court in Dedicated Freight Corridor vs Tata Aldesa JV  in   O.M.P. (COMM) 105/2021 & I.A. 10346/2021 and decided on 24^th August 2023.

In the case of Associated Builders Vs DDA (2015) 3 SCC 49 the Supreme Court has held that “Patent Illegality” would include:

a) fraud or corruption;

b) contravention of substantive law, which goes to the root of the matter;

c) error of law by the arbitrator;

d) contravention of the Act itself;

e) where the arbitrator fails to consider the terms of the contract and usages of the trade as required under Section 28 (3) of the said Act; and

f) if arbitrator does not give reasons for his decision.

In Delhi Airport Metro Express (P) Ltd. [Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131] referring to the facets of patent illegality, it is held as under :

"29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression "patent illegality". Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression "patent illegality". What is prohibited is for Courts to re appreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34 (2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression "patent illegality".

In Ssangyong Engg. & Construction Co. Ltd. v. NHAI , (2019) 15 SCC 131 the Supreme Court has culled out the limited scope of judicial interference, while, dealing with objections to the arbitral awards under the 1996 Act and observed thus :

"34. What is clear, therefore, is that the expression "public policy of India", whether contained in Section 34 or in Section 48, would now mean the "fundamental policy of Indian law" as explained in paras 18 and 27 of Associate Builders Vs DDA (2015) 3 SCC 49 i.e. the fundamental policy of Indian law would be relegated to "Renusagar" understanding of this expression”.

Thus, it will not be available to raise objection to the effect that the Arbitrator had not adopted judicial approach. However, the principles of natural justice as contained in Sections 18 and Section 34(2) (a) (iii) of the 1996 Act, shall remain available as grounds of challenge of an award as also held in Associate Builders Vs DDA (2015) 3 SCC 49.

As per 1996 Act, as held in Associate Builders (Supra), principle of "patent illegality" contains three sub-heads:

(a) A contravention of the substantive law of India would result in the death knell of an arbitral award. The illegality should be such so that it goes to the root of the matter and cannot be of a trivial nature. This in effect shall be akin to contravention of Section 28 (1) (a) of the Act, which reads as under:

28. Rules applicable to substance of dispute.--(1) Where the place of arbitration is situated in India,--

(a) in an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;‟ .

(b) A contravention of the Arbitration Act itself would be regarded as a patent illegality.

(c) Equally, the third sub-head of patent illegality is really a contravention of Section 28(3) of the Arbitration Act i.e the Arbitral Tribunal shall decide a dispute in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. It thus follows that the terms of the contract if construed in unreasonable manner that no fair indeed or reasonable person could do.

The very object of the A & C Act 1996 as is also discussed in Union of India Vs Varindera Constructions Ltd, (2018) 7 SCC 794 has been to put in place a comprehensive legal framework governing the process of arbitration and providing an efficient and effective mode of dispute resolution mechanism as an alternative to the main course judicial stream. The underlying aim of this is to encourage the resolution of disputes through arbitration. The disposal of arbitral case in a fair, impartial, and expeditious manner has of course been the sine qua non. This gives fillip to the principle of party autonomy in shaping the resolution process.

What is of some significance is the fact that in order to make arbitration process more effective, role of courts are perceived as minimal. Therefore, Section 5 of the Act specifically restricted the interference of the courts and only in exceptional circumstances, the court is entitled to intervene in the dispute which is the subject-matter of arbitration. Again, such an intervention may be before, at or after the arbitration proceeding, as the case may be.

CONCLUSION

It is now a settled law that the ground of patent illegality gives way to setting aside an Arbitral Award but it should conform to the object of a very minimal scope of intervention. A party cannot simply raise an objection on the ground of patent illegality, if the Award is against them. Patent illegality, requires a distinct transgression of law, the clear lack of which makes the petition a pointless effort of objection towards an Award passed by a competent Arbitral Tribunal. Under the limited scope of Section 34 of the 1996 Act as amended and up to date, the interference of the Court is not desirable, unless the necessity of it is so pervasive. Merely because, the petitioner claimed that the Arbitrator misappreciated the evidence on record or wrongly interpreted the relevant clauses of the contract agreement shall be of no avail. In order to seek setting aside of arbitral award on the premise of patent illegalities, the same has to be categorically shown and in such a manner that it should shock the conscience of the court and the broad contour of that stands illustrated above.

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                       Anil K Khaware

                       Founder & Senior Associate

Societylawandjustice.com