SCOPE OF JUDICIAL INTERFERENCE IN ARBITRAL AWARDS ON THE GROUND OF PATENT ILLEGALITY

INTRODUCTION

Arbitration, as an alternative dispute resolution mechanism, is intended to resolve parties' disputes in a private and efficient manner. The mechanism is premised on minimal court interference during the arbitral process and ease of recognition and enforcement of arbitral awards.

The Arbitration and Conciliation Act, 1996 ("Act"), was enacted with this goal of minimizing judicial interference1. The scope of judicial interference after passing an award, is limited to the grounds stated under Section 34 of the Act. One such ground for domestic arbitral awards is "patent illegality".

The interpretation and scope of patent illegality, as a ground for setting aside domestic awards, has been subject to continuous and at times conflicting judicial scrutiny. This piece explores how 'patent illegality' has been interpreted by Indian courts and the circumstances which led to its introduction into the Act by way of the 2015 amendment. This piece will also explore the contentious issue pertaining to the extent of judicial scrutiny regarding the interpretation of a contract by an arbitral tribunal, as a ground to set aside an arbitral award, by Indian as well as foreign courts.

PRE-2015 AMENDMENT - THE SAW PIPES REGIME

The scope of 'patent illegality' was first propounded by the Supreme Court of India ("Supreme Court") in ONGC v. Saw Pipes ("Saw Pipes")2. The Supreme Court sought to include patent illegality as a subset of 'public policy', which is a ground to set aside arbitral awards under the Act3. While patent illegality was not clearly defined in Saw Pipes, the Supreme Court interpreted the term to mean:

  1. awards passed against the terms of the contract; or
  2. in contravention to the substantive provisions of the laws of India or the Act.

The broad interpretation to the term 'public policy' as provided for in Saw Pipes, reflected the intent to reiterate the principle: a wrong must not be left unredeemed and a right must not be left unenforced4. The Supreme Court opined that a narrow definition of the term 'public policy' under Section 34 of the Act, would be against the interest of finality of awards.

The aforesaid Saw Pipes interpretation, was often relied upon to review the merits of an arbitrator's decision. This interpretation was subsequently delineated by the Supreme Court in the Associate Builders case5, where the scope of patent illegality was interpreted to only cover:

  1. contraventions of substantive laws of India;
  2. contraventions of the Act; and/or
  3. interpretations of the contract in an unreasonable manner.

DEFINING THE SCOPE OF "PUBLIC POLICY" AND "PATENT ILLEGALITY": 246TH LAW COMMISSION REPORT

The Law Commission of India ("Law Commission") in its 246th Report6, took exception to the wide interpretation given by courts to the term "public policy" under Section 34 of the Act. The Report was particularly critical of the Saw Pipes judgment. Although the said judgement was passed in the context of a domestic arbitral award, the interpretation was also being used by courts to deny the enforcement of foreign arbitral awards under Section 48 of the Act7.

The Law Commission, was also opposed to the sub-categorization of patent illegality as a subset of public policy, particularly since such interpretation would be contrary to the best international practices. The Law Commission proposed to differentiate the scope of the term 'public policy' and 'patent illegality'. They proposed to apply patent illegality as a ground only to domestic arbitrations and not to international arbitrations, irrespective of their seat of arbitration.

Consequently, the Law Commission recommended the addition of Section 34(2A) to the Act, which allowed courts to set aside awards on the grounds of "patent illegality appearing on the face of the award". This provision was to apply only to domestic arbitral awards and not to international arbitrations and foreign awards. The Law Commission was also keen to avoid the problem caused by excessive judicial intervention in domestic awards, and recommended that a clarification be made as to the scope of judicial interference under the ground of patent illegality. As a result, the Law Commission recommended that an arbitral award should not be set aside merely on the ground of erroneous application of law or by reappreciation of evidence, and the scope of interference is only in situations where there was an error apparent on the face of the award.

PATENT ILLEGALITY: 2015 AMENDMENT & BEYOND

The Act was amended in the year 2015, which came into force on 23 October 20158. Section 34(2A) was added to the Act as a separate ground for setting aside only domestic arbitral awards and not international commercial arbitration awards or foreign awards. The scope of 'patent illegality' was thus limited to the error in the domestic arbitral award being prima facie and on the face of the record.

These changes to the regime with respect to patent illegality, were the subject of interpretation by the Supreme Court in Ssangyong9. The Supreme Court in Ssangyong, reiterated the opinions of the Law Commission and held that a mere contravention of a statute or substantive law of India (not linked to public policy or public interest) could not be a ground to set aside a domestic award on the ground of patent illegality. It also reiterated the language of Section 34(2A) to deter courts from reappreciating evidence.

Further, the scope of judicial scrutiny of contractual terms was limited and held to be exclusively within the domain of the arbitrator. Courts were required not to interfere with any contractual interpretation made by an arbitral tribunal, unless the interpretation is one which no reasonable person would make. Moreover, it was also reiterated that the arbitrator does not have the power to wander outside the contract and adjudicate on disputes not referred to him.

ANALYSIS OF COURT'S POWER TO EXAMINE CONTRACTUAL INTERPRETATION PROPOUNDED BY ARBITRAL TRIBUNAL

The importance of ensuring minimal judicial intervention in arbitral awards was highlighted in the Supplementary Report No. 246 of the Law Commission ("Supplementary Report"). As a result, after the 2015 amendment, the test to determine whether an arbitral award is contrary to the "fundamental policy of Indian law" no longer entails a review of the dispute on merits.

The Supreme Court made it clear in Ssangyong that the grounds not available for challenging an award under the ground of 'fundamental policy of Indian law' cannot be brought in through the backdoor to challenge an award under the ground of patent illegality. Doing so would amount to doing something indirectly which one cannot do directly. Various decisions have followed the interpretation as held in the celebrated decision of Ssangyong.

The interpretation of patent illegality has further been clarified by various judgements. It has been held that in the event of multiple possible interpretations to a contract, the arbitral tribunal's decision to adhere to one particular interpretation of the contract would not in itself render the award patently illegal10. However, if the arbitral tribunal goes beyond the terms of the contract and deals with issues extrinsic to the dispute, that would be a jurisdictional error, making the award liable to be set aside11. Further, the High Court of Delhi has employed this interpretation and held that the reliance placed by the arbitrator on documents extraneous to the contract for interpretation of the terms of the contract was a case of patently illegality12.

The Supreme Court in South East Asia Marine Engineering and Constructions Ltd v. Oil India Limited ("South East Asia")13, observed that on a holistic reading of the terms and conditions of the contract, if the view taken by the arbitrator was not even a possible view or was perverse, then the award passed is liable to be set aside as patently illegal. The Supreme Court further held that if the construction of the contract by the arbitral tribunal was irrational upon a complete perusal of the same, then the award is liable to be set aside as patently illegal.

The decision in South East Asia appears to be contrary to the wordings of patent illegality as a ground for setting aside of the award since the view taken is that any error in interpretation not on the face of award can be reviewed by the Court under Section 34 of the Act. Such an interpretation is self-defeating more so because it fails to consider the words "on the face of the award" as set out in Section 34(2A) of the Act. While the ground of patent illegality to set aside domestic arbitral awards was intended to govern erroneous interpretations of the law and jurisdictional issues of the award, the recent Supreme Court ruling in South East Asia, has created controversy regarding the extent of court's ability to interpret the underlying contracts while determining the ground of patent illegality for setting aside an arbitral award.

SCOPE OF COURT'S INTERFERENCE IN INTERPRETATION OF CONTRACTS BY ARBITRAL TRIBUNALS IN OTHER JURISDICTIONS

The power of the courts in foreign jurisdictions to interfere with an arbitrator's interpretation of contractual terms has been held to be extremely limited by courts.

The Supreme Court of the United States in Oxford Health Plans LLC v. Sutter14, held that the sole question for the court to consider is whether the arbitrator interpreted the parties' contract, not whether he got its meaning right or wrong. The Supreme Court of the United States in this case stated that it was not for the court to determine whether the arbitrator had committed errors in interpretation, but to merely determine whether the arbitrator strayed from interpreting the contract at all.

Similarly, the House of Lords in Lesotho Highlands Development Authority v. Impregilo SpA and Others15, has held that a challenge on the ground that the arbitral tribunal arrived at a wrong conclusion regarding a matter of law or fact is not permitted. In this case, a mistake in interpreting the contract was considered to be a "question of law", and thus incapable of being interfered with under setting aside proceedings. The Queen's Bench Division of the High Court in B v. A16 similarly held that an error in the construction of a contractual provision as per the relevant rules of contractual interpretation by the arbitral tribunal was not a valid ground of challenge to the arbitral award.

Similarly, the Singapore High Court in Quanzhou Sanhong Trading Ltd v. ADM Asia-Pac. Trading Pte Ltd.17, held that a wrong conclusion reached by the arbitral tribunal will stand as long as the issue decided was within the terms of reference to the arbitral tribunal.

CONCLUSION

The intent of the 246th Law Commission report was to reduce judicial variations in the scope and grounds to set aside arbitral awards. Based on this report, the Law Commission intended to define the contours of public policy and patent illegality as two distinct and mutually exclusive grounds for setting aside arbitral awards. These recommendations were in fact adopted by the 2015 amendment of the Act with the intent to limit the scope of judicial interference pertaining to the merits of the dispute.

The Act now clearly recognises patent illegality to be a distinct and separate ground for setting aside arbitral awards between domestic parties, from that of public policy. The basis for invoking the ground of patent illegality is to challenge an arbitral award based on grave errors of appreciating the law of the contract for jurisdictional errors, substantive law as well as the provisions of the Act. However, it is pertinent to note that the interpretation of a contract is a matter for the arbitrator to determine18. Therefore, as long as the arbitral tribunal does not wander beyond the terms of the contract or beyond the disputes referred to them, the conclusion reached by the arbitral tribunal, regardless of its correctness, must be upheld.

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Footnotes

1. Section 5, Arbitration & Conciliation Act, 1996.

2. Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd., (2003) 5 SCC 705.

3. Section 34(2)(b)(ii), Arbitration & Conciliation Act, 1996. [4] Dhanna Lal v. Kalawatibi and Ors, [2002] Supp 1 SCR 19.

5. Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49.

6. Law Commission of India, Amendments to the Arbitration and Conciliation Act 1996, Report No. 246 (August 2014).

7. Phulchand Exports Ltd. v. OOO Patriot, (2011) 10 SCC 300.

8. Arbitration & Conciliation (Amendment) Act, 2015.

9. Ssangyong Engineering & Construction Co. Ltd v. National Highways Authority of India, (2019) 15 SCC 131.

10. Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306.

11. MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573.

12. Mohan Steels Limited v. Steel Authority of India, O.M.P. 488/2015.

13. (2020) 5 SCC 164.

14. 569 U.S. 564, 573 (U.S. S.Ct. 2013); Jock v. Sterling Jewelers Inc., 942 F. 3d 617 (2d Cir. 2019).

15. [2005] UKHL 43; London Steam-Ship Owners' Mutual Insurance Association Ltd v. Kingdom of Spain, [2020] EWHC 1582 (Comm).

16. [2010] EWHC 1626 (QB); Reliance Industries Ltd v. Union of India, [2018] EWHC 822 (Comm).

17. [2017] SGHC 199.

18. Pure Helium India (P) Ltd. v. Oil & Natural Gas Commission, (2003) 8 SCC 593; D.D. Sharma v. Union of India, (2004) 5 SCC 325.

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