Open Access Research Article
Review Of Patent Illegality In Setting Aside Arbitral Award In India (By: Ankita Priya)
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Article Details
Review Of Patent Illegality
In Setting Aside Arbitral Award In India
Authored
By: Ankita Priya
School Of Law
Galgotias
University
Greater
Noida(2022)
Abstract
Arbitration law is founded on two
pillars: party autonomy and award finality. If court interference distorts
these two pillars, arbitration law would fail to achieve its ultimate goal and
lose its identity. Indian arbitration law has progressed from indiscriminate
judicial involvement, as established in the Colonial Act and subsequent 1961
legislation, to a more mature Act based on the Model Law; this demonstrates the
need of limited judicial participation. It is difficult to define public policy
as a generic term and as a reason to vacate an arbitral ruling. Judicial
rulings about the scope of public policy that allow for nearly unlimited
judicial review of arbitral awards deal a fatal blow to international
commercial arbitration. This paper talks about the emergence of patent
illegality through the provision of public policy as a separate ground for
setting aside of the arbitral awards in the recent times. The paper uses the
doctrinal method of research and studies through various precedents established
by the Court in developing the doctrine of public policy vis a vis patent
illegality.
Keywords: arbitration, public policy,
patent illegality, arbitral award, etc.
Introduction
Some judges appear to have thought [public policy, the
unruly horse] more like a tiger, and refused to mount it at all, perhaps
because they feared the fate of the young lady of Riga. Others have regarded it
like Balaam's ass which would carry its rider nowhere. But none, at any rate at
the present day, has looked upon it as a Pegasus that might soar beyond the
momentary needs of the community. - Percy H. Winfield[1]
Fali Nariman describes arbitration in
India as a never-ending war between two irreconcilable principles: the high one
that demands justice even if the heavens fall and the lower one which demands
an end to litigation[2].
He goes on to state that ‘in India, we have our Arbitration Act since 1940—it
governs domestic and reaches out to foreign arbitration as well; it is based on
the high principle that the losing party never lets a Court forget it[3]. The
two pillars of arbitration law are party autonomy and award finality. If court
interference distorts these two pillars, arbitration law would fail to achieve
its ultimate goal and lose its identity. Arbitration legislation in India has
progressed. The Colonial Act and the Constitution protect people against
arbitrary court intrusion following legislation from 1961 to a more mature Act
based on the Model Law indicates the significance of limited judicial intervention.
The necessity to diminish the court's supervisory control is undeniable. The
Arbitration and Conciliation Act 1996 (India) ('1996 Act') was enacted with the
goal of allowing minimum judicial interference and ensuring the finality of
arbitral rulings. Given these goals, it's critical to identify the areas of
arbitration law that provide for comprehensive judicial review and the setting
aside of decisions, such as "public policy." Judicial rulings
on public policy have reaffirmed that it is a nebulous notion, with courts
applying multiple interpretations based on its flexibility and adaptability.
Arbitration laws in India are being
broadened by judicial interpretation, which is counter to legislative purpose.
The Court restored Indian arbitration jurisprudence to the pre-modern period of
the Arbitration Act 1940 (India) ('1940 Act') in the 2011 decision of Ramesh
Chander Arora v Kashmeer Saree Kendra[4].
The Court's ruling, which used the provisions created by the 1940 Act rather
than the 1996 Act, reignited the dispute over whether 'patent illegality' could
be used to establish the 'public policy' exemption. The focus of this article
is confined to determining whether 'patent illegality' is the same twin of
'public policy' and can be used to overturn arbitral judgements. In order to
support arbitration and ensure compliance with the 1996 Act, Indian courts have
defined the term "public policy" narrowly.
Renusagar Power Co Ltd v General
Electric Co[5] and Oil
& Natural Gas Corporation Ltd v Saw Pipes Ltd[6]
are the two important decisions at the heart of the debate.
However, Saw Pipes Overturned the
Court's effort to limit the scope of public policy in Renusagar. This reversal
calls into question the cornerstones of arbitration law, such as minimum court
interference and award finality. Saw Pipes has opened the floodgates for
parties to dispute an award on minor grounds, demonstrating that a segment of
the judiciary accepts a broad interpretation of public policy. In Saw Pipes,
the Court re-interpreted section 34(2)(b)(ii), resulting in a broad meaning of
'public policy.'[7] This
article condemns judicial excess to some extent.
Setting Aside Of Arbitral
Award And Public Policy
While participating in the
globalizing world, India adhered to the necessary criteria for the process. The
New York Convention of 1958 (NY Convention) and the UNCITRAL Model Law
("Model Law") have already sparked a global need for standardization
in arbitration frameworks. In accordance with this, the Arbitration and
Conciliation Act of 1996 was enacted. It roughly resembled the Model Law's
provisions. The provision for reserving an award is also influenced by this.
Article 34 of the Model Law is replicated in Section 34 of the Arbitration Act.
It establishes certain limited grounds for award denial. Not everyone takes
defeat in their stride. Henceforth when arbitral award dis favor one of the
parties in the dispute, the basic human nature drives him towards setting aside
of the award. An award in India can be
set aside only on the grounds mentioned in Section 34 of the Act. The purpose
of setting aside is to modify in some way the award in part or wholly[8].
Public policy denotes an issue
pertaining to the public benefit and interest. The notion of what is for the
public good or in the public interest, as opposed to what is hurtful or
damaging to the public good or public interest, has evolved over time[9].
It must be demonstrated that there is some element of illegality or that the
award's enforcement would be clearly detrimental to the public good, or that
enforcement would be wholly offensive to the ordinary reasonable and fully
informed member of the public on
whose behalf the State's powers are exercised[10].
Clause (ii) of sub-section (2)(b) of
Section 34, which specifies, among other things, that the Court may set aside
an arbitral award if it is contrary to "Indian public policy." The
word "Indian public policy" is not defined in the Act. As a result,
the aforementioned word must be defined in context, taking into account the
objective of the section and the scheme of the Act. Various experts have often
asserted that the term "public policy" does not lend itself to clear
definition and may alter from generation to generation and from time to time.
As a result, the term "public policy" is seen as ambiguous, capable
of taking on a restricted or broad meaning depending on the circumstances. Lacking precedent, the Court has to give
its meaning in the light and principles underlying the Arbitration Act,
Contract Act, 1872 and constitutional provisions[11].
The breach of public policy must
unquestionably be so unjust and outrageous as to shock the Court's conscience.
However, when the arbitrator has gone contrary to or beyond the stated law of
the contract or given relief in a non-disputed subject, Section 34 of the Act
would apply[12]. The
Public Policy Doctrine has judicially been pigeon-holed into the broad view and
the narrow view[13]. The
narrow view espouses a restricted interpretation of the Public Policy doctrine
calling for Courts to exercise caution in creating new heads of Public Policy
whereas the broad view undertakes a contextual approach to the Public Policy
doctrine, leaving it open to be amended and modified on a case-to-case basis. In
the Gherulal case[14],
the Supreme Court observed that “though the heads are not closed and though
theoretically it might be permissible to evolve a new head under exceptional
circumstances of a changing world it is advisable in the interest of stability
of society not to make any attempt to discover new heads in these days.” In
Kedar Nath Motwani vs. Prahlad Rai[15],
the Court however clarified that the enforcement of a contract would be deemed
to be against the Public Policy of India only if the illegality went to the
root of the contract.
The broad view of the Public Policy
doctrine, however, gained currency with the Supreme Court’s ruling in the
Muralidhar case[16],
wherein the Court observed that “what constituted public policy earlier might
not constitute public policy now, hence the development of new fields of
public policy was imperative. Public
policy does not remain static in any given community. It may vary from
generation to generation and even in the same generation. Public policy would
be almost useless if it were to remain in fixed moulds for all time.” In Central
Inland Water Transport[17],
observing that adopting a narrow view of the Public Policy doctrine would
countenance judicial law making, the Court held that “public policy connotes
some matter which concerns the public good and the public interest. The concept
of what is good for the public or in public interest or what would be harmful
or injurious to the public good or interest has varied from time to time.” This
view was further strengthened in Rattan Chand Hira Chand[18],where
the Supreme Court decided that an injury to public interest would depend upon
the context in which it is made and any contract which had a tendency to injure
public interest was one against public policy.
In Renusagar Power Company Ltd. vs.
General Electric Company[19],
the Supreme Court adopted the narrow view of the Public Policy and held that
“public policy” would mean the doctrine of public policy as applied by the
Court in India and not international public policy. Supreme Court defined the
contours of public policy to be domestic (as applied by courts in India) and
not international public policy[20].
Further, the Supreme Court advocated a narrow view saying the purpose of
Foreign Awards Act was to further international trade and commerce, and a
narrow interpretation would facilitate this objective[21].
The court pocketed the contours of public policy into the following heads: a)
“fundamental policy of Indian law; or b) the interest of India; or c) justice
or morality.”[22] Public
policy bar thus, can be attracted only if something bigger than a mere
violation of Indian law is shown[23].Court
also noted that no review of an award on merit is allowed under the public
policy examination, reiterating the position across various jurisdictions.
The first attitude of Indian courts
following Renusagar (supra) was to take a restricted approach to domestic
awards. The Supreme Court highlighted India's liberalisation strategy and the
goals of the Arbitration Act, which were to limit judicial interference in the
arbitral process by limiting the grounds for challenging an award[24].
A merely incorrect interpretation of substantive law would
not constitute the award contrary to
Indian national policy was the prevailing view[25].
Patent Illegality As A
Separate Ground In Domestic Awards
In
Oil & Natural Gas Corp v Saw Pipes[26],
the Supreme Court adopted a more expansive view of public policy in contrast to
its stance in Renusagar.[27]
The Supreme Court included ''patent illegality'' as a fourth ground of attack when
hearing the section 34 application, and it looked carefully at the judgement
and the contract's language regarding the damages provision. As a result of the
court's proactive stance, justices have begun to probe the legality of rulings
via the back door of public policy and monitor the improper use of laws.[28].
Numerous scholars have harshly criticized this stance.[29]
It
was decided that the legislative intent could not be that the award may be
overturned if it breaches the requirements of the Act, as suggested by section
34 when read in connection with other parts of the Act. As of right now, the
court has made no judgment.[30].
In contrast to how it acted in Renusagar, the Supreme Court in Oil &
Natural Gas Corp v Saw Pipes accepted a wider view of public policy.[31].To
actually vacate the 'patently unlawful' arbitration judgement, the Court found
that a wider definition was necessary (and some provisions of the 1996 Act do
not become redundant)[32].
The Supreme Court's Division Bench, led by Justice Sinha, adopted the Saw Pipes
finding in McDermott International despite widespread dissatisfaction.[33]
The
'patent illegality' argument has significantly undermined the spirit of the
1996 Act. It's the same as if Section 30 of the 1940 Act had never been
repealed, since the same challenges may be brought under the new law.[34].
A thorough examination of the 1996 Act also reveals that, although being in
direct conflict with the plain terms of the contract or substantive law, the
two conditions for setting aside the award are already conceivably achievable
under sections 34(2)(a)(iv) and
34(2)(a)(v),
respectively.[35].
This resulted in the court conducting a merit-based evaluation of rewards,
which runs counter to the aim of minimal judicial involvement.As a new basis of
intervention, some High Courts adopted the 'patent mistake of law.'[36]
The courts embraced a full-fledged merit-based assessment, compromising the
integrity of arbitration as an alternative conflict settlement method. It
resulted in countless awards being thrown aside, with courts conducting a
merit-based review[37]. Due to the Supreme Court's ruling that public
policy depends on criteria including the nature of the transaction and the
legislation, the courts will now be able to get to the heart of cases. To
render an award against the public policy and to deem it to be injurious to
public interest the merits of the award was necessary to be scrutinised.
Further
in SAIL vs Gupta Brother Steel Tubes Ltd.[38]
The Supreme Court reiterated the principles on which the Courts could
intervene. The reiteration of the principles is[39]:
(i)
''If the arbitrator goes beyond what is required
under the contract, the award is without jurisdiction, constitutes misconduct,
and may be challenged in court.
(ii)
If the arbitrator errs in his reading of the
contract, it's his call, and it's not a mistake that jumps out at you from the
face of the award, therefore the courts can't fix it.
(iii)
An incorrect conclusion in point of law made by the
arbitrator in response to a question of law presented to him does not render
the award itself invalid.
(iv)
Any award that goes against a material provision of
law or the conditions of a contract is obviously void.
(v)
The party that has incurred losses as a consequence
of the breach is only allowed to claim compensation in the amount specified by
the parties if the parties have expressly agreed on the amount of compensation
to be paid in the case of a breach.To rephrase, any damages for breach of
contract cannot exceed the amount indicated or defined in the contract.
(vi)
The arbitrator's award should be upheld even if the
arbitrator reached his or her judgment based on a hypothetical scenario.
(vii)
A court may not conduct an independent review of
the validity of the arbitrator's decision as if it were hearing an appeal of
that decision.''
This was followed by
Supreme Court’s judgement in Phulchand[40] thereby
making Part II i.e. international arbitration also a part of the doctrine of
public policy, henceforth rejecting the execution of foreign award. However, in
2013 the judgement in Phulchand was overruled by Shri Lal Mahal by majority
decision of the Apex Court.[41] This
ceased the wide interpretation of the ONGC judgement and the same was adhered
only to the domestic awards. According to the Court's interpretation,
Renusagar's stance on the international award was restored, which is that
non-enforcement of foreign judgments requires more than just a violation of
law.
As a result of Saw Pipes,
courts have overturned arbitration awards when arbitrators' rulings were at
odds with the terms of the agreement.[42].In
Western Geco, the Supreme Court determined that the ''fundamental principle of
law in India,'' the first pillar of public policy outlined in Renusagar, was
unclear in light of the precedent made by Saw Pipes. The Court in Western Geco
characterised the ''fundamental policy of law in India'' as:
· a
commitment on the part of the Courts to take a fair, honest, logical, and
judicial approach to the topic at hand;
· The
ruling of the court conforms to the norms of natural justice.; and
·
Whether or if the choice is reasonable according to the Wednesbury test[43]
[44] The
Law Commission of India believed that in order to guarantee that the phrase
''basic principle of Indian law'' was strictly defined, a clarification was
required in the modifications it provided after the Supreme Court's judgements
in Western Geco and Associate Contractors (which would be contrary to
international practise).[45].
It seems from the Supreme Court's dicta in the Western Geco case that
administrative law jurisdiction is invoked when redacting a motion to vacate an
arbitral verdict. However Associate Builders clarifies this misunderstanding by
explaining
that an arbitral award would be considered as ''perverse to law'' if[46]:
(i)
The finding is not based on any evidence
(ii)
The arbitral panel considers evidence that
has no bearing on the outcome of the case.
(iii)
It ignores important decision in arriving at
its decision.
This
judgement further laid the test to realise perversity/irrationality by
attracting the Wednesbury principle limiting to the cases where relevant
materials as to facts and other material on record is not taken into
consideration. The order would be perverse if on realisation it lays down that
even a layman would not depend on the evidence so recorded. The restriction as
to the principles of justice, morality and patent illegality would depend
whether its shocks the conscience of the court.[47]
As
the Wednesbury criterion of reasonableness allows a review of an arbitral
judgement on merits, the Law Commission thought that without such clarity, all
of their advances regarding the definition of ''public policy'' and the
fundamental policy of Indian law would be deemed null and invalid. Arbitral
rulings might have been challenged on the basis that they went against
fundamental Indian legal principles.[48].
On
October 23, 2015, the Act was updated to include recommendations from the Law
Commission of India's Supplementary Report.[49].
Section 34 of the aforementioned Act was amended in 2015 to include Subsection
2A and a new Explanation in clause (b) of the subsection (2). Particularly, the
updated language of paragraph (b) (ii) of subsection (2) of Section 34 is as
follows: ''Secondly, the arbitral ruling conflicts with Indian law. It is now
made clear that an award is only against Indian public policy if one of the
following three criteria is met: I I the award is against the fundamental
policy of Indian law; (ii) the award is against the most fundamental principles
of morality or justice; or (iii) the award was made with the intent to commit
fraud, corruption, or in violation of sections 75 or 81. A second rationale To
be clear, determining whether or not there has been a violation of the basic
policy of Indian law does not need a full consideration of the case's merits.
The following text has recently been added to Section 2A: ''(2A) The Court may
also invalidate an arbitral judgement if it determines that the award was not
the result of an international commercial arbitration and that it was tainted
by patent illegality that was evident on the face of the award. The mere fact
that the law was applied
wrongly
or the evidence was reassessed, however, does not allow for the simple reversal
of an award.. The term ''patent illegality'' is not defined, but the 2015
amendment introduces a new ground, Section 34(2A), for throwing aside domestic
arbitral verdicts on the basis of patent illegality. This section's phrasing,
''other than international commercial arbitration,'' indicates that this
premise will only apply to arbitrations conducted in India and not to
international commercial arbitrations.
In
addition, Section 34 was changed in 2019 to help prevent unrestricted review
under this provision. It has restricted its inquiry to just ''the arbitral
tribunal's record.'' With this modification in place, the court can only look
into evidence that has been presented to it. [50]
The Supreme Court's decision in M/s Emkay Global Financial Services Ltd. v.
Girdhar Sondhi, which forbids courts from utilising evidence that wasn't
provided to the arbitral tribunal during the proceedings, is better and more in
line with this solution.[51].
The
case of Ssangyong Engineering & Construction Co. Ltd., in which the Supreme
Court strictly defined ''Public Policy of India'' in light of the 2015
Amendment, exemplifies the present legal approach.[52]
The Supreme Court articulated the process to be followed while reviewing public
policy:
a.
Merit-based awards must be made without judicial interference. Nevertheless, it
may if it violates the norms of natural justice.[53]
b.
The Wednesbury challenge has been eliminated.[54]
c.
Justice and morality are understood to refer to the purest forms of both.[55]
d.
Any patent ineligibility must be clearly stated on the face of the award; basic
policy or any other holes may not be used to sneak it in later.[56]
However,
the patent illegality on the face of the award standard has been used by the
Supreme Court to defend the perversity assumption, so it is likely to be
abandoned any time soon.[57]
The
post-Ssangyong approach may be seen as advantageous since the Supreme Court has
also
supported
a narrow reading of public policy or a section 34 application widely. It is
uncertain, nevertheless, whether these legislative and judicial protections
will prevent the courts from reverting to the Saw Pipes posture. More and more
parties (even domestic ones) are avoiding institutions in India owing to the
extensive judicial involvement described above, contributing to the ongoing
uncertainty facing parties selecting the seat of arbitration in India.
Interestingly, courts have been assessing judgments through a broader lens of
merit analysis until recently, while perversity and irrationality remain
popular in judicial corridors. [58]
In
South East Asia Marine Engineering and Constructions Ltd v. Oil India Limited,
the Supreme Court recently overturned an award based on a review of the
contract as a whole. This Court reviewed the merits of the case before the 2015
change, notwithstanding the limited power of Section 34.[59]A
three-judge bench of the Supreme Court elaborated on the history of patent
illegality to overturn a domestic ruling in Patel Engineering v. North Eastern
Electric Power Corporation Limited..[60].
The Supreme Court recently ruled in cases like Ssangyong and Associate Builders
that if the arbitrator's decision is found to be perverse or so irrational that
no reasonable person would have reached the same decision, if the arbitrator's
construction of the contract has been that no fair or reasonable person would
make the same construction, or if the arbitrator's construction of the contract
results in any of the following: Because of this, Patel Engineering has
implicitly agreed with the argument that an arbitral decision can be overturned
if it is demonstrably illegal or perverse, as per Section 34 of the 1996 act.
Conclusion
Arbitration in India has come a long
way since 1940, with its goals greatly amended and enhanced by the 1996 Act; yet,
recent judicial interpretations of public policy have moved Indian law
backwards. The availability of concurrent grounds for throwing aside an
arbitral judgement is a blunder perpetrated first by draughtsmen in 1940 and
secondly by draughtsmen in 1996. The award might be set aside under Section
30(a) or Section 30(b) of the 1940 Act (c). Similarly, even though the 1996 Act
made significant policy changes the award can still be contested on
concurrent grounds. For example, if the arbitral award is challenged for
prejudice, the challenge might be launched under Section 13(5) or Section
34(2)(a) (iii). 101 The Saw Pipes decision confirmed the 1996 Act's inclusion
of concurrent grounds. The Saw Pipes decision can be construed as ‘error of
law' that can be contested under Section 34(2)(a)(v) or Section 34(2)(b) (ii).
The scope of public policy is so broad that other grounds for appeal are
included, broadening the scope for challenging the judgement. The judiciary's
liberal interpretation of the grounds for challenging a judgement is damaging
to the parties and renders India arbitration hostile.
Recently, there have been requests to
submit Saw Pipes ruling to a bigger bench in order to correct the Supreme
Court's original decision[61].
In arbitration cases, the Supreme Court has frequently decided that the award
is final on both facts and law, and that its merits cannot be reviewed by a
court of law[62]. In
addition, organising arbitration specialised benches is a possible approach to
preventing Saw Pipes. Such benches would be made up of a panel of judges who
would solely hear arbitration-related petitions. This would aid in the
expeditious resolution of cases and the establishment of clear jurisprudence
about the interpretation of public policy under the 1996 Act. This can also aid
in sifting through the uncertainty caused by past rulings.
Because 'public policy' is a fluid
notion, it will always be accessible to different judicial interpretations. In
relation to arbitration, the idea must be harmonised with the accompanying
norms of minimum judicial participation and court monitoring. The balance
between moral standards, norms of justice, and equity, which are at the heart
of public policy, should be struck carefully so that the effectiveness of
arbitration as a conflict resolution process is not jeopardised. The judge
should constantly try to exhibit restraint in order to prevent the negative
repercussions for Indian law and business outlined in this essay.
One silver lining to already frustrated procedure
is that the Courts under the petition to set aside the arbitral award cannot
re-open or re-examine the evidences even if the arbitrator has committed any
error as to the process of recording the evidences.[63] No further decisions on the dispute will be
made by the courts unless and until “Section 34(2) of the Act's” requirements
for setting aside an arbitral decision are satisfied. The Court lacks the power
to modify its own legal or factual conclusion. It cannot review evidence that
the arbitrator has previously seen or hear appeals against the arbitrator's
rulings. To investigate misconduct, the Court may simply view but not
scrutinise the record before the arbitrator.
Article Information
Review Of Patent Illegality In Setting Aside Arbitral Award In India (By: Ankita Priya)
Authors: Ankita Priya
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/09/06
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
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