Supreme Court of India: Substance Over Form While Setting Aside A Patently Illegal Domestic Award Under the Plenary Jurisdiction Of The Supreme Court

Rightful Setting Aside of a Patently Illegal Award by the High Court Even If Based on Overruled Precedent Warrants No Interference by the Supreme Court

Patent illegality is a head of public policy of India and consequently serves as a ground for setting aside domestic awards in India. It was first expounded in the judgment of ONGC v. SAW pipes[1] (‘SAW Pipes’) wherein the Supreme Court gave a wider interpretation to the expression ‘public policy of India’ in Section 34(2)(b)(ii) in Part I of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’) and held that an award would be “patently illegal”, if it is contrary to the substantive provisions of law; or, provisions of the Arbitration Act; or, terms of the contract. Pertinently, the ground of “patent illegality” cannot be invoked in international commercial arbitrations seated in India. Even in the 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 this ground is absent in Section 48 of the Arbitration Act.

Contravention of the Substantive Law of India

It means illegality which goes to the root of the matter and is not of trivial nature which includes contravention of Rules applicable to substance of dispute. (Section 28(1)(a) of the Arbitration Act)

Contravention of the Arbitration Act

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

Contravention of the Terms of Contract

This last contravention must be understood with a caveat. An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do.[2]

Another facet of Public Policy of India is the ‘Fundamental Policy of Indian Law’. After SAW Pipes, the Supreme Court in ONGC Ltd. v. Western Geco International Ltd.[3] (‘Western Geco’) expanded the term ‘Fundamental Policy of Indian Law’ in respect of domestic award and was interpreted to include three distinct and fundamental juristic principles. These principles as elaborated by the Supreme Court are:

• failure to adopt judicial approach;
• failure to comply with the principles of natural justice, and
• perversity and irrationality of the decisions to be tested on the touchstone of Wednesbury’s principle of reasonableness.

Later, on the recommendation of the Law Commission in its 246th Report the ground of ‘patent illegality’ for setting aside a domestic award was inserted in the Arbitration Act as clause (2A) in Section 34 vide 2015 Amendment Act.

Thus, by way of Arbitration & Conciliation, 2015 (Amendment) Act (‘2015 Amendment Act’), the judgment in SAW Pipes, has been expressly done away with and so has the judgment in Western Geco and a new ground of “patent illegality” as introduced by the 2015 Amendment Act was made applicable to applications under Section 34 made on or after 23.10.2015 i.e. the date on which the 2015 Amendment Act came into force.

The additional ground of patent illegality is now available under sub-section (2A) to Section 34 and includes contravention of the terms of contract (with caveat as discussed above) and contravention of the Arbitration Act whereas a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award.[4] Thus, 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.

In Patel Engineering v. North Eastern Electric Power Corporation[5], the Supreme Court was approached under its plenary jurisdiction after a series of back and forth of the award from the trial court right upto the Supreme Court earlier. The Award Debtor had again knocked the doors of the Supreme Court under Article 136 of Constitution of India which provides special or residuary powers to the Court exercisable outside the purview of the ordinary laws in cases where the needs of justice demand interference.

In this case, the award was set aside by the High Court on its findings of patently illegality. The High Court came to the finding that the findings in the award suffer from the vice of irrationality and perversity. However, interestingly, while setting aside the award the High Court relied upon Western Geco (which is no longer good law as stated above). Thus, the Award Debtor in these fresh proceedings argued that the judgement of the High Court suffers from error apparent on the face of the record as it had not taken into consideration the amendments brought in the Arbitration Act by 2015 Amendment Act i.e. doing away of Western Geco.

The Supreme Court whilst noticing that the High Court has relied upon Western Geco refused to accept the Award Debtors contentions for the simple reason of ‘substance over form’. In other words, the Supreme Court held that even though the High Court has referred to Western Geco, the case has been decided on the ground that the arbitral award is a perverse award and on a holistic reading of all the terms and conditions of the contract, the view taken by the arbitrator is not even a possible view. Thus, the Supreme Court under its plenary jurisdiction refrained to interfere with the order of the High Court setting aside the award suffering from vice of irrationality and perversity.

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

[1] [2003] 5 SCC 705

[2] Associate Builders v. Delhi Development Authority (2015) 3 SCC 49, paras 40 to 45.

[3] (2014) 9 SCC 263

[4] Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) (2019) 15 SCC 131

[5] SLP(C)Nos. 3584-85/2020 decided on 22 May 2020