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PATENT ILLEGALITY: A NEW PUBLIC POLICY CONSIDERATION TOWARDS NON-ARBITRABILITY?

Anurag Mohan Bhatnagar & Manvendra Shekhawat, 2nd Year, National Law University Odisha.



Background:

On 23rd May, 2020 a constitution bench of the Apex Court in the case of Patel Engineering Ltd. v North Eastern Electric Power Corporation Ltd. (NEEPCO) held that an arbitral award can be set aside as under Section 34, Arbitration and Conciliation Act, 1996 (hereinafter, Act) by the High Court if it is perverse or ‘patently illegal’ after the recent 2015 Amendment to the Act.


“The Act was enacted for the sole purpose of making the resolution of disputes in accordance with the international economic scenario”. The Act was molded on the basis of the UNCITRAL Model Law on International Commercial Arbitration, 1985 (hereinafter, Model Law). The Model Law was penned down strictly for the same purpose – “for each of the States to arrogate it within their statutory laws either completely or substantial parts of its provisions”[1]. India on the other hand, adopted the Model Law almost in its entirety with significant changes.


If the decision of the Arbitrator is so irrational, that no prudent person would have construed the same, or so perverse, or that the perspective of the arbitrator is not even possible, then the arbitral award will be liable to be termed as patently illegal.


Judicial Precedents on the ground of “Patent Illegality”:

To begin with, Indian courts interpreted the ground of public policy in a restrictive manner in conformity with practice in various countries. “Eventually, India adopted the Model Law even for governing the domestic arbitration”[2]. As a result, India did not set-up a qualitative demarcation between ‘public policy’ for international and domestic arbitrations, rather adopted the philosophy of the Model Law of reading restrictively the ground to set aside arbitral awards. A few judgments which have dealt with the ground of “patent illegality” or public policy in general are discussed below:


1. The Apex Court, in the case of Oil and Natural Gas Corporation Ltd. v SAW Pipes Ltd. (hereinafter, the SAW Pipes Case) read the public policy clause to the dismay of many stakeholders and lawyers of the arbitral clause. It was concluded that the SAW Pipes case brought back the dilemma which existed in the Act of 1940 which was the setting aside of the arbitral awards on the sole basis of ‘patent illegality’. The Supreme Court held that it was not necessary to interpret ‘public policy’ narrowly and that such an interpretation would render certain sections of the Act, such as Section 28 void. It also stated that any award passed as under Sections 24, 28 and 31 of the Act can be brought as under Section 34 solely on a broad reading of ‘public policy’. Hence, it held that an award is liable to be set aside if it was contrary to (a) the interest of India, or (b) fundamental policy of Indian Law, or (c) justice or morality, or if the award is patently illegal prima facie.


A famous comment was gaining attention in the 2000’s after the SAW Pipes case which was:


Unfortunately, in Saw Pipes the Supreme Court has opened the floodgates to arbitral litigation, that means, once more that the lawyers will laugh and legal philosophers weep[3].


2. The Supreme Court decided a matter in the case of Board of Control for Cricket in India v Kochi Cricket Pvt. Ltd. and Etc. and held that, “the Act as amended in 2015 would apply to the present case, as the awards were passed, and the applications challenging the awards were filed, after the commencement of the Amendment Act”.


Analysis of the Patent Illegality Clause:

The Saw Pipes case was criticized for including the term ‘patent illegality’ in Section 34 of the Act, which is against the preamble of 1996 Act based upon UNCITRAL Model Law allowing minimal judicial intervention. The reason behind adopting the Model Law was to increase the flow of investment in India and to make India a hub Alternative Dispute Resolution Mechanisms by adopting market friendly mechanisms.


The 1940 Act vandalized the arbitral mechanism in India by allowing the judiciary to intervene in the arbitral process on the ground of patently illegal. There is no doubt the parties were suffering from excessive cost of litigation even after adopting an arbitral process as a better mechanism.


On the other hand some scholars found that it is important to have some kind of reviewing body for the arbitral awards of a private dispute resolution process. Carrie Menkel Meadow comments on the ability of this ADR system and questions “whether settlements are entered into coercively and secretly without the protections of the rule of law”?


Arbitral awards are final and binding upon the parties and they do not have any remedy of appealing the award if there is any ignorance of law on the part of the arbitrator. And that’s where the need arises of a legal system to encourage the courts to remove the error if any. In the case of Ace Pipeline Contracts Private Limited v. Bharat Petroleum Corporation Limited it was held that “if the appellant feels that the arbitrator has not acted independently or impartially, or he has suffered from any bias, it will always be open to the party to make an application under Section 34 of the Act to set aside the award on the ground that arbitrator acted with bias or malice in law or fact”.


Procedure of Setting Aside Arbitral Awards in Hong Kong:

Legislators always try to solve the problems regarding their legal system by inquiring about the legal systems of other countries, to find if they have dealt with those problems in a better way. Comparison with the other legal systems helps to find different methods for ensuring the speedy settlement of disputes when the judiciary has the power to interfere in the arbitration proceedings and set aside an arbitral award. Let’s take the example of Hong Kong which is considered to be one of the prominent centres for arbitration in the world. One of the reasons is the admiration of the judicial system upon the arbitral awards. The country follows different systems for domestic arbitration and international arbitration and the latter system is based upon UNCITRAL Model Law.

  1. International Arbitration - Hong Kong has ensured their position in the field of International Arbitration by complying with the international standards of international arbitration laws. The courts in Hong Kong allow the award to be set aside in the case of international arbitration only on the ground of public policy which was also given a narrow interpretation to prevent the excessive intervention of the courts in the process of international arbitration.

  2. Domestic Arbitration - On the other hand the courts in Hong Kong allow appeal against the arbitral awards in cases where the arbitrator was unreasonable in awarding or has misinterpreted any law under domestic arbitration. However the courts are not lenient enough to allow appeal frequently and followed some factors which need to be considered before allowing such appeal. The acts also allow the setting aside of an arbitral award but only on the grounds that if there is any misconduct on the part of the arbitrator or the award or its process was not properly conducted. There are no such grounds as ‘error of law’ but the character of the tribunal and its even-handedness can be used to set aside the award.

Concluding Remarks:

Clearly, the current law in India is in dire need for the notion of public policy to interdependently coexist with the demand of speedy and accurate resolution of disputes, which would in turn be beneficial for the betterment of Commercial Law in general. However, this would in turn, depend up to a great extent upon the judges’ and arbitrators’ allegiance to justice. Public Policy in general is a doctrine competent of compromising arbitration. As a result, the doctrine was provided with a restrictive meaning in order to let it function without impairing arbitral process. There is a need for a supreme institution of Arbitration that could govern the arbitration mechanism in India and certify that the arbitrators are good. There has to be a distinction between international and domestic commercial arbitration in consonance with the prerequisites of international trade and mandate the Supreme Court to meddle with foreign arbitral awards that aim to elude laws of India.




[1] O.P. Malhotra & Indu Malhotra, The Law and Practice of Arbitration and Conciliation (4th ed. 42). [2] Statement of Objects and Reasons to the Arbitration and Conciliation Bill, Clause 3 (1995) [3] Sarah E Hilmer, Did Arbitration Fail India or did India Fail Arbitration?, 10 Int. A.L.R. 2007 33, 34 (2007).

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