Unravelling The Ground Of ‘Patent Illegality’ For Setting Aside Arbitral Awards

While the Arbitration and Conciliation Act, 1996 (‘1996 Act’) as originally enacted did not include the ground of ‘patent illegality’ for setting aside domestic arbitral awards under section 34 of the said Act, however, the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment Act’) after coming into effect from 23rd October 2015 now provides parties an additional and distinct ground for setting aside a domestic arbitral award.
Since the legislature did not define what constitutes ‘patent illegality’ while inserting the said ground in the 1996 Act, this article traces the genesis of this ground by the Supreme Court, its subsequent statutory inclusion in the 1996 Act as a distinct ground by the 2015 Amendment Act with certain limitations, and the current interpretation given to the said ground by the Supreme Court in the case of Ssangyong Engineering & Construction Co. Ltd. v. National HighwaysAuthority of India[1] (‘Ssangyong’). In 2003, the Supreme Court, while interpreting the ground of ‘public policy’ under section 34(2)(b)(ii) of the 1996 Act for setting aside a domestic arbitral award, for the first time introduced ‘patent illegality’ as a sub-ground under the ‘public policy’ ground in ONGC Ltd. v. Saw Pipes Ltd.[2] (‘Saw Pipes case’) stating: “22. … Therefore, in a case where the validity of award is challenged, there is no necessity of giving a narrower meaning to the term “public policy of India”. On the contrary, wider meaning is required to be given so that the “patently illegal award” passed by the Arbitral Tribunal could be set aside.”

The Supreme Court then went on to illustrate what would constitute patent illegality in the following terms- “Take for illustration a case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act which specifically provides that “Arbitral Tribunal shall decide in accordance with the terms of the contract”. Further, where there is a specific usage of the trade that if the payment is made beyond a period of one month, then the party would be required to pay the said amount with interest at the rate of 15 per cent. Despite the evidence being produced on record for such usage, if the arbitrator refuses to grant such interest on the ground of equity, such award would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2) specifically provides that the arbitrator shall decide ex aequo et bono (according to what is just and good) only if the parties have expressly authorised him to do so. Similarly, if the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”.”

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