Patent Illegality As A Ground For Setting Aside Domestic Arbitral Awards

The United Nations Commission on International Trade Law – Model Law on International Commercial Arbitration, 1985 (“Model Law”) was drafted for the individual States to adopt “in their statutory arbitration laws either in its entirety, or a substantial part of its provisions, or at least its general shape and philosophy, so as to bring about a certain amount of uniformity amongst national laws…”. The Arbitration and Conciliation Act, 1996 (“Act”) was made in tandem with this Model Law. The Model Law envisaged limited grounds for setting aside arbitral awards at the seat of arbitration, which was also adopted by India in the Act. A party who wishes to set aside an arbitration award may do so by filing an application under Section 34 of the Act. While Section 34 of the Act has undergone significant changes pursuant to the 2015 amendment to the Act (2015 Amendment”), the Government recognized and has kept in mind the two vital aspects; i.e.  party autonomy and finality of awards, to ensure minimal judicial interference with arbitral awards and arbitration proceedings, while making changes to Section 34 of the Act. 

It was pursuant to the 246th Law Commission Report that the ground of patent illegality was given statutory effect through the 2015 Amendment. The 2015 Amendment introduced Section 34(2A) in the Act whereby a domestic arbitral award could be set aside by Courts in India on the ground of “patent illegality appearing on the face of the award..”. However, it was made clear that the award could not be set aside on the grounds of patent illegality if there was an erroneous application of the law or by re-appreciation of evidence. 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 Act. In a recent judgment the Supreme Court in Patel Engineering Limited vs North Eastern Electric Power Corporation Limited examined the scope of patent illegality subsequent to the 2015 Amendment. 


The North Eastern Electric Power Corporation Limited (“NEEPCL”) had acquired 710 hectares of land in Kameng, Arunachal Pradesh in the year 2000 and had also obtained clearances from the Ministry of Environment and Forests for setting up Kameng Hydro Electric Project (“KaHEP“). NEEPCL issued an invitation for bids for civil work for KaHEP under three separate packages. All three packages were awarded to Patel Engineering Limited (“Patel Engineering”) and the three agreements were signed on December  17, 2004. Certain disputes arose between the parties with respect to certain payments. While NEEPCL accepted that it did owe Patel Engineering certain amounts under the agreements, there was a dispute regarding the rate that would be applicable under the agreement. Thereafter, the disputes under all three agreements were referred to arbitration. On  March 29, 2016, the sole arbitrator after hearing both parties passed three awards in favour of Patel Engineering. 

NEEPCL filed three applications under Section 34 of the Act before the Additional Deputy Commissioner (Judicial), Shillong (“Deputy Commissioner”) challenging the three arbitral awards. The Deputy Commissioner vide common judgment dated April 27, 2018  rejected the applications under Section 34 of the Act and upheld all the three arbitral awards. NEEPCL then filed three appeals under Section 37 of the Act before the Meghalaya High Court which was allowed and the Deputy Commissioner’s judgment was set aside (“High Court Order”). Being aggrieved by this order of the Meghalaya High Court, Patel Engineering filed a special leave petition before the Supreme Court which was dismissed. 

This led to Patel Engineering filing review petitions before the Meghalaya High Court to challenge the High Court Order on the ground that the High Court Order suffered from error apparent on the face of the record, as it had not taken into consideration the 2015 Amendment. The review petitions were dismissed by the High Court (“Review Petition Order”). Patel Engineering then approached the Supreme Court to challenge the Review Petition Order.

Applicability of BCCI v Kochi

The Supreme Court in its decision in Board of Control for Cricket in India vs. Kochi Cricket Pvt. Ltd clarified the law on the applicability of the 2015 Amendments. In its decision, the Supreme Court held that Section 36 was a procedural provision and a party could not enjoy the right of an automatic stay by filing a petition under Section 34 of the Act by relying upon the phrase “has been” which was inserted under Section 36 by the 2015 Amendment to mean petitions filed under Section 34 of the Act before October 23, 2015 . It was reasoned that the execution of a decree is a procedural right, and there can be no vested right accrued upon a party to agitate the execution of an award in a certain manner or resist the execution of an award if it is not made in a certain manner. The Supreme Court also clarified that the remaining 2015 Amendment was prospective in nature, and would apply to those arbitral proceedings that are commenced on or after the 2015 Amendment came into effect, and to court proceedings which have commenced on or after the 2015 Amendment came into effect. 

In the present case, given that the awards were passed on March 29, 2016, the 2015 Amendment would be applicable to the procedure for setting aside the arbitral awards.

Patent Illegality 

The ground of patent illegality was first propounded by the Supreme Court in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd (“Saw Pipes Decision”). While giving a wider interpretation to the meaning of public policy of India, the Supreme Court held that an award would be “patently illegal”, if it is contrary to the substantive provisions of law, or provisions of the Act, or terms of the contract. As highlighted by the 246th Law Commission in its report, the Saw Pipes Decision had the unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards, given the statutory language of the Act. Therefore, the Law Commission restricted the wider interpretation given to the term public policy of India and recommended the insertion of patent illegality as another ground for setting aside a domestic arbitral award. The Commission believed that introducing patent illegality as a ground would “assuage the fears of the judiciary as well as the other users of arbitration law who expect, and given the circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards.” 

Additionally, the Supreme Court in its decision in Associate Builders v. Delhi Development Authority (“Associate Builders”) had clearly stated that the arbitral tribunal is primarily responsible to determine the terms of the agreement. The ground of patent illegality can only be invoked if the arbitral tribunal fails to determine the terms of the agreement in a reasonable manner and that the agreement has been construed in such a way that no fair minded or reasonable person could do.

The Supreme Court in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India reiterated the view taken in Associate Builders and also added that the ground of patent illegality could be invoked if the arbitral tribunal goes beyond the agreement and deals with matters outside the scope of the agreement. 

The Decision

The Supreme Court observed that even though the High Court had referred to the decision in Oil & Natural Gas Corporation Ltd. v. Western Geco International Limited which is no longer good law due to the 2015 Amendment, the High Court had rightly decided the case by holding that the arbitral award was a perverse award and on a holistic reading of the agreement, the view taken by the arbitrator was not even a possible view. 

In the present case, the special leave petition filed by Patel Engineering was accordingly dismissed by the Supreme Court while also reiterating that the ground of patent illegality is a ground available to parties under the Act 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.