Patent Illegality and the Supreme Court: The Final Stance?

Keywords: Public policy, Patent Illegality, Domestic Arbitration


Nilakshi Srivastava and Sakshi Ajmera [i]


The authors have curated and analysed in depth the recent judgment of the Indian Supreme Court in Patel Engineering Ltd. v. NEEPCO (May 2020). The judgment is of great importance as it streamlines and summarises the legal position of the ground of patent illegality for setting aside a domestic award under section 34 of the Arbitration and Conciliation Act, 1996. The authors have also identified the issue of non-speaking orders and have extensively analysed how it impacts the implementation of this ground in India. A possible course of action in the future to curb the situation has also been suggested.


Introduction

The Indian Arbitration jurisprudence witnessed a paradigm shift with the enforcement of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”). One of the most significant changes brought in was the divergent directions given to domestic, international, and foreign Arbitrations. A comprehensive distinction can be found here. Recently, the Supreme Court of India (“SC”) undertook the herculean task of streamlining the jurisprudence on the ground of ‘patent illegality’ for setting aside of a domestic award. The jurisprudence on this matter has been obscured in the past as a number of authorities like Geco and Saw Pipes (as dealt in-depth below) were repeatedly relied upon by numerous High Courts even though after the enforcement of Amendment Act, 2015, these cases are no longer good law. The same happened in the present case as well and the SC finally set a uniform precedent by holding that Ssangyong Engineering is the precedent to be relied upon.


The true purport of Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act /the Act”), which empowers a court to set aside an arbitral award, has always been highly debatable. Even before the 2015 Amendment was enacted, the Indian judiciary made it very clear through a series of judgments, including Bharat Aluminium v. Kaiser Aluminium Technical Sevices, (“BALCO”) that the Court’s power under Section 34 is applicable only for domestic awards and not open for any foreign award. There was no ambiguity on the (non-) applicability of Section 34 to foreign awards as foreign awards, which fall under Part II, would always be tested on the grounds set out in Section 48.


The ambiguity, as discussed and settled in BALCO, was whether Part I could ever be applied to an arbitration seated outside India. In BALCO, the Court answered this question in the negative. Accordingly, awards passed in foreign seated arbitrations could not be set aside under Section 34. The Supreme Court attempted a reversal in Union of India v. Hardy Exploration and Exploration. However, this decision has since been overruled by the Supreme Court in BGS SGS Soma JV v. NHPC Ltd. Resultantly, BALCO was yet again held to be binding.


Even though Part I is not applicable to foreign seated arbitrations, the 2015 amendments carved out an exception for certain specific provisions such as Section 9, which will apply to all arbitrations unless parties agree to the contrary. The amendment to section 34 brought in the grounds for setting aside the domestic awards. ‘Patent illegality’ was first identified as one such ground under the umbrella of ‘public policy’ through the case of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (“Saw Pipes”). It was then incorporated as a statutory ground for domestic arbitrations (as opposed to domestic awards arising out of international commercial arbitration (“ICA”) by way of the 2015 Amendment.

It is undoubtedly a laudable attempt by the SC through a recent constitutional bench decision of Patel Engineering Ltd. v. NEEPCO to compile and put straight the legal history and currently applicable law on ‘patent illegality’ ground under Section 34 through the reasoning provided below.


Highlights of the Case


Factual Background

North Eastern Electric Power Corporation Ltd. (“NEEPCO”) filed three applications, against Patel Engineering Ltd. (“Patel Engineering”) under Section 34 of the Act, 1996 before the Additional Deputy Commissioner (Judicial), Shillong challenging the three arbitral awards dated 29.03.2016. The ADC upheld all three arbitral awards. NEEPCO unsuccessfully challenged the ADC’s decision before the High Court of Meghalaya under Section 37. The High Court set aside the judgment passed by the ADC. Patel Engineering filed special leave petitions (“SLPs”) before the SC, which were dismissed. Patel Engineering filed review petitions before the High Court which were also set aside. The same was challenged before the SC in the present case. The SC reaffirmed the order passed by the High Court and held that the award passed by the arbitrator suffered from the vice of irrationality and perversity. The petitions filed by Patel Engineering were dismissed.


Existing Jurisprudence that Molded the Current Decision


The SC judgment of Saw Pipes case was identified as the genesis of this ground which gave a wider interpretation to the ‘public policy of India’ in Section 34(2)(b)(ii) in Part I of the 1996 Act to include the same. The SC held that an award would be patently illegal if it is contrary to the substantive provisions of law; or, provisions of the 1996 Act; or, terms of the contract.


In a subsequent judgment of Associate Builders v. Delhi Development Authority, (“Associate Builders”) the SC discussed patent illegality as ground under public policy for setting aside a domestic award if:

  1. a. the decision of the arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at the same;

  2. b. the construction of the contract is such that no fair or reasonable person would take; or;

  3. c. the view of the arbitrator is not even a possible view.


This further broadened the scope of patent illegality ground.


Even though the patent illegality as ground was formulated by judgments like Oil & Natural Gas v. Western Geco (“Geco) and Saw pipes, however, the 2015 Amendment made them the relics of the past. Hence, currently, Ssangyong Engineering and Construction Company Limited v. National Highway Authority of India (“Ssangyong Engineering”) is referred to be the good precedent that has also been relied upon in this case. The SC in Ssangyong Engineering eliminated the exploitative use of “public policy” and “patent illegality” to unduly interfere with domestic and foreign awards. Additionally, the SC also affirmed the prospective applicability of the 2015 Act.


Findings of the Court


The SC validated the High Court’s decision by holding that an arbitral award can be set aside under Section 34 if it is patently illegal or perverse. The SC held that by interpreting the terms of the contract, no reasonable person could have arrived at a different conclusion and thus the awards passed by the arbitrator suffer from the vice of irrationality and perversity. This finding of the High Court is in conformity with Ssangyong Engineering and the rationale behind it that any other interpretation of the above clauses would definitely be irrational and in defiance of all logic. This stands true even though judgments which are not good law were brought in the picture like Geco and Saw pipes as they have been recognized as the genesis of this peculiar ground.


Taking a step further, the SC upheld that such completely unjust enrichment at the cost of public funds is abhorrent under the fundamental policy of Indian Law. Unjust enrichment being contrary to the Fundamental Policy of Indian Law is a ground for interference with an Arbitral Award under Sec. 34(2) of the Act. The High Court of Meghalaya, in the present case, upheld this principle and held that the Arbitral Award which led to unjust enrichment of Patel Engineering to the extent of about Rs.1,000 crores is against the fundamental policy of Indian law and, therefore, warrant interference on this count as well. The rationale behind using the ground of unjust enrichment in commercial dispute traces back to the laws of equity and the same was thus resorted to even though the Arbitration Act does not provide for the same in explicit terms.


The Root Cause of the Problem: Issue of Non-Speaking Orders


In the present case, the ground of appeal and the main contention was that the High Court erroneously applied the provisions as applicable prior to the 2015 Amendment and the judgment of the High Court suffers from error apparent on the face of the record since the High Court relied upon the decision in Saw Pipes and Geco, which no longer serve as good law. The 246th Law Commission Report stated that the public policy ground cannot have the same scope under Section 34 and Section 48 and the same was relied upon in the Ssangyong Engineering to terminate the stand taken by the courts in the Saw Pipes and Geco case. Nevertheless, the SC rejected this contention and recognized that even though the order was a non-speaking order, it was based on sound reasoning and thus the same was upheld. The authors identify that the matter could have been very easily restricted at the appeal level itself and then there would not have been a ground of review if the order would have been a speaking one. The issue would not have arisen on the surface if the order clearly mentioned the basis of the conclusion and the jurisprudence being relied upon. The importance of giving a speaking order has been recognized in Harbhajan Kaur (Through Her Attorney Charanjit Singh Bhatia) v. M/s. Aadya Trading & Investment (P) Ltd. & Anr. wherein it was held that non-speaking judgments cannot be passed while dealing with the objections which are filed under Section 34 of the Act. The SC clearly failed to notice this aspect in the present case. Thus lack of lucid interpretation by the courts and failure to examine and follow up precedents is one of the reasons which makes the Indian judiciary having numerous pending cases, everlasting legal process, and delayed justice mechanism.


Takeaways from the Case


The case at handstands as the most recent and comprehensive authority on the ground of patent illegality and traces a concise history of its origin and development. It also elucidates the importance of a speaking order to be passed under section 34 of the Act and hence must be considered by the respective legislators.


[i] Nilakshi Srivastava is a 3rd year law student at National law Institute University, Bhopal, who is currently engaged as a Research Assistant with Prof. Dr. Ingeborg Schwenzer and has been adjudicated the Semi Finalist of 16th WIllem C. Vis East International Commercial Arbitration Moot Court Competition along with a plethora of internships in the field of National Arbitration.


Sakshi Ajmera is a 3rd year law student at National law Institute University, Bhopal and has a penchant for research and writing. She is a seasoned author who has publications in a series of prestigious platforms like IndiaCorpLaw, NUJS Society of International Law and Policy and NUALS Security Laws E- Newsletters.




This article was coedited by Arnav Maru (Co-founder and Managing Editor) and Kareena Sobti (Associate Editor).




Preferred Citation: Nilakshi Srivastava and Sakshi Ajmera, “Patent Illegality and the Supreme Court: The Final Stance?”, Arbitration & Corporate Law Review, Published on 7th July, 2020.


Nilakshi Srivastava and Sakshi Ajmera
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