The Supreme Court of India, in a recent judgment, reaffirmed the concept of patent illegality by upholding the High Court judgment that set aside an arbitral award on the ground that the view taken by the arbitral tribunal is not a plausible one. The Court further held that an Award can be interfered with if it amounts to unjust enrichment, which is a ground flowing from public policy of India.
The Supreme Court of India, in its judgment dated 22.05.2020, in Patel Engineering Ltd. v. North Eastern Power Corporation Ltd.1, has once again exposited the 'patent illegality' ground, appearing in Section 34 (2A) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). The most significant part of this judgment is the recognition and re-affirmation given to the test of patent illegality, as set out in Paragraph (42.3) of the Supreme Court's judgment in Associate Builders2 and which was reiterated in Paragraph (40) of Ssangyong Engineering3. The aforementioned test of 'patent illegality' lays down that any contravention of Section 28 (3) of the Arbitration Act, is deemed to be a sub-head of patent illegality. According to it, an arbitral tribunal must decide in accordance with the terms of the contract, but if an Arbitrator construes a term of the contract in such a way that it could be said to be something that no fair minded or reasonable person could do, the same will render the award 'patently illegal'. The Supreme Court of India further held that 'unjust enrichment' is also a ground to challenge an Award, flowing from the public policy doctrine under Section 34 (2) (b) (ii) of the Arbitration Act.
Three arbitral awards dated 29.03.2016, were passed by a Sole Arbitrator in the context of a Project between the Petitioner and Respondent ("Parties"). The Sole Arbitrator found that the contract dated 17.12.2004, between the Parties, itself provided rates for the payment of extra lead under Clause 2.7 and Clause 3.4 of the BOQ. Further, the Sole Arbitrator also interpreted Clause 33 (ii) (a) and Clause 33 (iii) of the Conditions of Contract, to hold that the rate for extra lead is to be determined in terms of these clauses.
The Respondent- North Eastern Electric Power Corporation Ltd. ("NEEPCO") challenged the three arbitral awards passed by the Sole Arbitrator, before the Additional Deputy Commissioner (Judicial), Shillong. The Additional Deputy Commissioner (Judicial) vide common judgment dated 27.04.2018, dismissed the applications under Section 34 of the Arbitration Act and upheld all the three arbitral awards. Thereafter, NEEPCO approached the High Court of Meghalaya ("High Court") under Section 37 of the Arbitration Act, and the High Court, by common judgment dated 26.02.20194, allowed the appeals preferred by NEEPCO and set aside the judgment of the Additional Deputy Commissioner (Judicial).
The judgment of the High Court was challenged by Patel Engineering Ltd. ("Petitioner") before the Supreme Court.5 The Supreme Court refused to interfere in the matter and consequently, the Petitions were dismissed vide order dated 19.07.2019.
Thereafter, the Petitioner filed review Petitions before the High Court, inter alia on the ground that the judgment of the High Court dated 26.02.2019 suffers from an error apparent on the face of the record as it has not taken into consideration the amendments incorporated in the Arbitration Act after the coming into force of the Amendment Act of 2015.
The High Court dismissed the review petitions filed by the Petitioner and aggrieved by the said orders, the Petitioner again approached the Supreme Court in the present Special Leave Petitions ("SLPs").
- Whether the SLPs filed in the instant matter are maintainable, since earlier SLP filed by the Petitioner, was dismissed vide order dated 19.07.2019?
- Whether the Amendment Act, 2015, which came into force on 23.10.2015, would apply to the present case?
- Whether the High Court was justified in setting aside the arbitral awards dated 29.03.2016, on the ground of 'patent illegality'?
- Whether the judgment of the High Court suffers from an error apparent on the face of record, since the High Court relied upon the decisions in Saw Pipes Ltd6 and Western Geco Internation Limited7, which are no longer good law after the Amendment Act, 2015 came into force from 23.10.2015?
The first question before the Supreme Court was with respect to maintainability of the Petitions, since earlier SLPs filed by the Petitioner, were dismissed. Even though the Court made certain critical observations in this regard, it remarked that it is not necessary to go into the question of maintainability of the Petitions.
The next question that was addressed by the Supreme Court, was whether the Amendment Act of 2015, would apply to the present case. The Court answered the said question in the affirmative, and held that since the awards are dated 29.03.2016, which is after the coming into force of the Amendment Act of 2015, the same shall apply as per the judgment of the Supreme Court in Board of Control for Cricket in India.8
Above all, the most significant question that came for the consideration of the Supreme Court was whether the High Court was justified in setting aside the arbitral awards dated 29.03.2016, on the ground of 'patent illegality'. The Supreme Court accepted the findings of the High Court to hold that the findings in the award suffer from the vices of irrationality and perversity. The High Court after delving into the interpretation given to the Clauses of the Contract by the Sole Arbitrator, had come to the conclusion that the Sole Arbitrator has taken into account irrelevant factors and has ignored vital clauses, rendering the award irrational and perverse. The High Court had further held that the Sole Arbitrator was required to interpret the Clauses of the Contract in accordance with the established rules of interpretation.
The Supreme Court referred to its judgment in Saw Pipes Ltd. and touched upon the concept of 'Patent Illegality' as a ground for setting aside a domestic award. The Court reiterated the dictum of Saw Pipes Ltd. and observed 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. The Court also noted how the dictum of the Saw pipes Ltd. has been later on referred and discussed on various occasions, particularly the 246th Law Commission Report, following which the Amendment Act, 2015 came into force, whereby Section 34 (2A) was inserted in the Arbitration Act.
The Supreme Court further referred to its decision in Associate Builders and Ssangyong Engineering and re-emphasized upon the test of patent illegality. The Supreme Court reiterated that "construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the Arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34 (2A)."
Adverting to the issue of the High Court's Judgment being bad in law on account of its reliance on Saw Pipes Ltd. and Western Geco, the Court held that although the High Court has referred to these judgments, but the matter was decided on the ground that the award is perverse, and the view taken by the Arbitrator is not even a possible view. The Supreme Court upheld the High Court judgment and observed that it had rightly applied the 'test of patent illegality', as set out in paragraph (42.3) of Associate Builders and reiterated in paragraph (40) of the Ssangyong Engineering judgment.
Apart from the above, it is pertinent to mention that the High Court had relied upon the judgment of the Bombay High Court in Angerlehner Structural and Civil Engineering Co. v. Municipal Corporation of Greater Mumbai.9 and assigned additional reasons for setting aside the award, wherein it held that the present case was a case of unjust enrichment which is contrary to the fundamental policy of India. This finding of the High Court has been quoted by the Supreme Court in the present order.
In the present case, the Supreme Court has reiterated the mandate of Section 28 (3) of the Arbitration Act, by stating that an Arbitral Tribunal must decide the dispute by taking into account the terms of the contract and while doing so if two views are possible, the Arbitral Tribunal is justified in taking one of the views. Thus, ground of interference will not be available under Section 34 of the Arbitration Act, merely because another view is possible. However, if the Arbitral Tribunal takes a view which is not even possible, or it takes a view which no fair-minded person could have taken, then the same would be against the public policy of India and thus, liable to be set aside. The Supreme Court also acknowledged existence of unjust enrichment as a ground flowing from public policy of India. In this case the Supreme Court interfered with the award on perversity as well as unjust enrichment.
1. Patel Engineering Ltd. v. North Eastern Power Corporation Ltd., 2020 SCC OnLine SC 466
2. Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49
3. Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India, (2019) 15 SCC 131.
4. North Eastern Electric Power Corporation Ltd. v.Patel Engineering Ltd, 2019 SCC OnLine Megh 30
5. Patel Engineering Ltd. Unity Infrastructure (JV) v. North Eastern Electric Power Corporation Ltd., Special Leave Petition (Civil) Nos. 13629-13631 of 2019.
6. Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
7. Oil and Natural Gas Corporation Ltd. v. Western Geco International Limited, (2014) 9 SCC 263
8. Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Etc., (2018) 6 SCC 287.
9. Angerlehner Structural and Civil Engineering Co. v. Municipal Corporation of Greater Mumbai, Bombay High Court, Arbitration Petition Nos. 162 of 2009 and 925 of 2012, Decided on 31.03.2017.
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