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MONTHLY NEWSLETTER S C O P E O F J U D I C I A L FEBRUARY 2021 I N T E R F E R E N C E I N A R B I T R A L A W A R D S O N T H E G R O U N D O F P A T E N T I L L E G A L I T Y BY MR. ANSHUMAN GUPTA , MR. VIGNESH RAJ, AND MR. ABOUT THE FIRM NABEEL WASIM MALIK AKS Partners (formerly known as A.K. Singh & Co) is a law firm INTRODUCTION introduction into the Act by way of based in New Delhi (India) that Arbitration, as an alternative the 2015 amendment. This piece provides a comprehensive dispute resolution mechanism, is will also explore the contentious range of legal services and intended to resolve parties’ disputes issue pertaining to the extent of solutions to domestic and in a private and efficient manner. judicial scrutiny regarding the international clients. The Firm offers a unique blend of the The mechanism is premised on interpretation of a contract by an local knowledge to minimal court interference during arbitral tribunal, as a ground to set apply the regulatory, the arbitral process and ease of aside an arbitral award, by Indian economic, political and recognition and enforcement of as well as foreign courts. cultural context to legal issues arbitral awards. and develop case strategies. We regularly handle PRE-2015 AMENDMENT – THE technically challenging and The Arbitration and Conciliation SAW PIPES REGIME complex multi-jurisdictional Act, 1996 (“Act”), was enacted with The scope of ‘patent illegality’ was matters. Our team is this goal of minimizing judicial first propounded by the Supreme spearheaded by one of the interference [1]. The scope of Court of India (“Supreme Court”) in highly recognised lawyers with extensive experience in judicial interference after passing ONGC v. Saw Pipes (“Saw Pipes”) international dispute an award, is limited to the grounds [2]. The Supreme Court sought to resolution and strong stated under Section 34 of the Act. include patent illegality as a subset government and diplomatic One such ground for domestic of ‘public policy’, which is a ground backgrounds. This experience gives us the deepest arbitral awards is “patent illegality”. to set aside arbitral awards under understanding of the key the Act [3]. While patent illegality decision points that are critical The interpretation and scope of was not clearly defined in Saw in navigating complex & patent illegality, as a ground for Pipes, the Supreme Court complicated matters and setting aside domestic awards, has interpreted the term to mean: managing government regulations. been subject to continuous and at times conflicting judicial scrutiny. a. awards passed against the terms This piece explores how ‘patent of the contract; or illegality’ has been interpreted by Indian courts and the b. in contravention to the circumstances which led to its substantive provisions of the laws P A G E 1 / 1 5 of India or the Act. MONTHLY NEWSLETTER FEBRUARY 2021 The broad interpretation to the DEFINING THE SCOPE OF Consequently, the Law term ‘public policy’ as provided for “PUBLIC POLICY” AND “PATENT Commission recommended the in Saw Pipes, reflected the intent ILLEGALITY”: 246TH LAW addition of Section 34(2A) to the to reiterate the principle: a wrong COMMISSION REPORT Act, which allowed courts to set must not be left unredeemed and The Law Commission of India aside awards on the grounds of a right must not be left (“Law Commission”) in its 246th “patent illegality appearing on unenforced [4]. The Supreme Report [6], took exception to the the face of the award”. This Court opined that a narrow wide interpretation given by provision was to apply only to definition of the term ‘public courts to the term “public policy” domestic arbitral awards and not policy’ under Section 34 of the Act, under Section 34 of the Act. The to international arbitrations and would be against the interest of Report was particularly critical of foreign awards. The Law finality of awards. the Saw Pipes judgment. Commission was also keen to Although the said judgement was avoid the problem caused by The aforesaid Saw Pipes passed in the context of a excessive judicial intervention in interpretation, was often relied domestic arbitral award, the domestic awards, and upon to review the merits of an interpretation was also being used recommended that a clarification arbitrator’s decision. This by courts to deny the be made as to the scope of interpretation was subsequently enforcement of foreign arbitral judicial interference under the delineated by the Supreme Court awards under Section 48 of the ground of patent illegality. As a in the Associate Builders case [5], Act [7]. result, the Law Commission where the scope of patent recommended that an arbitral illegality was interpreted to only The Law Commission, was also award should not be set aside cover: opposed to the sub-categorization merely on the ground of of patent illegality as a subset of erroneous application of law or by a. contraventions of substantive public policy, particularly since reappreciation of evidence, and laws of India; such interpretation would be the scope of interference is only in contrary to the best international situations where there was an b. contraventions of the Act; practices. The Law Commission error apparent on the face of the and/or proposed to differentiate the award. scope of the term ‘public policy’ c. interpretations of the contract and ‘patent illegality’. They in an unreasonable manner. proposed to apply patent illegality as a ground only to domestic arbitrations and not to international arbitrations, irrespective of their seat of arbitration. P A G E 2 / 1 5 MONTHLY NEWSLETTER FEBRUARY 2021 PATENT ILLEGALITY: 2015 contractual interpretation made the interpretation as held in the AMENDMENT & BEYOND by an arbitral tribunal, unless the celebrated decision of Ssangyong. The Act was amended in the year interpretation is one which no 2015, which came into force on 23 reasonable person would make. The interpretation of patent October 2015 [8]. Section 34(2A) Moreover, it was also reiterated illegality has further been clarified was added to the Act as a that the arbitrator does not have by various judgements. It has separate ground for setting aside the power to wander outside the been held that in the event of only domestic arbitral awards and contract and adjudicate on multiple possible interpretations not international commercial disputes not referred to him. to a contract, the arbitral tribunal’s arbitration awards or foreign decision to adhere to one awards. The scope of ‘patent ANALYSIS OF COURT’S POWER particular interpretation of the illegality’ was thus limited to the TO EXAMINE CONTRACTUAL contract would not in itself render error in the domestic arbitral INTERPRETATION the award patently illegal [10]. award being prima facie and on PROPOUNDED BY ARBITRAL However, if the arbitral tribunal goes beyond the terms of the the face of the record. TRIBUNAL The importance of ensuring contract and deals with issues These changes to the regime with minimal judicial intervention in extrinsic to the dispute, that respect to patent illegality, were arbitral awards was highlighted in would be a jurisdictional error, the subject of interpretation by the Supplementary Report No. making the award liable to be set the Supreme Court in Ssangyong 246 of the Law Commission aside [11]. Further, the High Court [9]. The Supreme Court in (“Supplementary Report”). As a of Delhi has employed this Ssangyong, reiterated the result, after the 2015 amendment, interpretation and held that the opinions of the Law Commission the test to determine whether an reliance placed by the arbitrator and held that a mere arbitral award is contrary to the on documents extraneous to the contravention of a statute or “fundamental policy of Indian law” contract for interpretation of the substantive law of India (not no longer entails a review of the terms of the contract was a case linked to public policy or public dispute on merits. of patently illegality [12]. interest) could not be a ground to set aside a domestic award on the The Supreme Court made it clear The Supreme Court in South East ground of patent illegality. It also in Ssangyong that the grounds Asia Marine Engineering and reiterated the language of Section not available for challenging an Constructions Ltd v. Oil India 34(2A) to deter courts from re- award under the ground of Limited (“South East Asia”) [13], appreciating evidence. ‘fundamental policy of Indian law’ observed that on a holistic cannot be brought in through the reading of the terms and Further, the scope of judicial backdoor to challenge an award conditions of the contract, scrutiny of contractual terms was under the ground of patent limited and held to be exclusively illegality. Doing so would amount within the domain of the to doing something indirectly arbitrator. Courts were required which one cannot do directly. not to interfere with any Various decisions have followed P A G E 3 / 1 5 MONTHLY NEWSLETTER FEBRUARY 2021 if the view taken by the arbitrator SCOPE OF COURT’S "question of law", and thus was not even a possible view or INTERFERENCE IN incapable of being interfered with was perverse, then the award INTERPRETATION OF under setting aside proceedings. passed is liable to be set aside as CONTRACTS BY ARBITRAL The Queen's Bench Division of the patently illegal. The Supreme High Court in B v. A [16] similarly TRIBUNALS IN OTHER Court further held that if the held that an error in the JURISDICTIONS construction of the contract by The power of the courts in foreign construction of a contractual the arbitral tribunal was irrational jurisdictions to interfere with an provision as per the relevant rules upon a complete perusal of the arbitrator’s interpretation of of contractual interpretation by the arbitral tribunal was not a same, then the award is liable to contractual terms has been held valid ground of challenge to the be set aside as patently illegal.

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