Introduction

India has given immense importance to diverting arbitrable matters to tribunals to reduce the workload of the conventional judicial corridors. While progress is being made in the field of arbitration by prioritising the principle of non-interference, there remains little to no additional protection of parties’ interests owing to limited rights of approaching the courts post-arbitration. Nevertheless, with recent advancements in the field, the ground of patent illegality has been recognised in addition to the already existing grounds, which can be invoked by the parties for setting aside an arbitral award. Although included in the legislation through the 2015 Amendment, due to not having been defined under the Arbitration and Conciliation Act, 1996 (hereinafter, “A&C Act”), the term has been subjected to various meanings by the courts over the years. As a result of judicial interpretation, patent illegality now extends to the rewriting of a contract or ignorance of vital evidence by the Tribunal.

Patent Illegality: An Ever-Evolving Concept in Arbitration

Patent illegality, in simple words, points at such illegality in the arbitral award which goes to the root of the matter. It was through the addition of Section 34 (2A) in the A&C Act that this term gained statutory recognition in Indian law. This was done as a result of the recommendations made by the Law Commission of India in its 246^th report.^[1] The A&C Act identifies and pays heed to such patent illegality which “appears on the face of the award”^[2] excluding international commercial arbitrations.^[3] Additionally, the proviso to the said section clarifies that mere erroneous application of the law or reappreciation of evidence cannot be a ground for setting aside an arbitral award.

Over the years, the courts have endeavoured to expand the definition of ‘patent illegality’ through various judgements. ONGC Ltd. v. Saw Pipes Ltd.^[4] was one of those early landmark judgements where patent illegality was discussed in detail. While elaborating on the concept, the Supreme Court explained that an award would be said to be patently illegal if it is contrary to the substantive provisions of the laws in force, the terms of the contract or the provisions of the Act, and such conflict directly affects the rights of the parties. The illegality should be of such a nature so as to shock the conscience of the Court and should not be trivial.

While the ONGC judgment^[5] only dealt with patent illegality within the scope of public policy, however, the courts, later on, undertook the task to define the term more intricately. In the case of Associated Builders v. DDA,^[6] a similar question arose. The Court looked into the aspect of evidence being ignored by the Tribunal and legality of such awards which are based on no evidence, and agreed that such an award would fall within the ambit of patent illegality. The Court also talked about other circumstances for invoking this ground: for instance, where the arbitrator does not give any reasons for the award. Judgements, decided after the 2015 Amendment came into force, like the Ssangyong Engineering and Construction Company case,^[7] sought to clarify the scope of interference with the award, whilst reiterating the abovementioned grounds. In this slew of cases, the case under discussion in this article is an important one, wherein the Court dealt with the issue of re-writing of the terms of the contract along with ignorance of evidence, both in the same case.

Analysis of the Judgement

Arbitration is steadily strengthening its roots in India and continues to grow as the judiciary and the legislature make constant strides in defining and expanding the contours of the subject, and its underlying rules and principles. A recent judgement in this regard is that of PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust,^[8] decided on 28^th July, 2021, wherein a Division Bench comprising of Justices R.F. Nariman and B.R. Gavai held that an arbitral award based on no evidence and/or in ignorance of evidence is liable to be set aside as it comes within the ambit of patent illegality. The Court further observed that an arbitrator does not hold the power to re-write a contract for the parties.

As per the facts of the case, the respondent had awarded a tender to the appellant. The appellant, being in favour of the revenue sharing model, requested for the incorporation of the same by way of an amendment in the License Agreement. The rejection of this request by the respondent (who favoured the royalty model) led to the invocation of the arbitration clause by the appellant. After the Tribunal passed an award in favour of the appellant, the respondent approached the Court under Section 34 of the A&C Act, praying for the arbitral award to be set aside. The petition was initially rejected by the District Judge, but the Madras High Court allowed the appeal of the respondent, thus setting aside the arbitral award. Thereafter, the appellant, being aggrieved, approached the Supreme Court.

The Apex Court gave its ruling in three parts as it adjudged the case on the factors of the scope of judicial interference in the arbitration process, the merits of the case, and the issue regarding the change from royalty payment model to revenue sharing model.

1. As regards the scope of judicial intervention with respect to an arbitral award, the Supreme Court whilst relying on past judgements, such as Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI)^[9] and MMTC Ltd. v. Vedanta Ltd.,^[10] reiterated that an application under Section 34 of the A&C Act for setting aside an arbitral award cannot be dealt with by the Court as an Appellate Court. It further directed that no re-appreciation of evidence can be done. Conversely, the Court stated that it may interfere when:
   • The arbitral award is in violation of the public policy of India;
   • The arbitral award is in conflict with the concepts of justice and morality;
   • There is patent illegality appearing on the face of the award, which goes to the root of the matter.
2. The Court, while adjudicating on the merits of the case, stated that the findings of the Tribunal were purely based on the contract entered between the parties in 1998 when there had been an existing policy for fixing tariff. This policy had been changed in 2003 through which the Central Government had declared that royalty will not be factored in while fixing the tariff. However, in 2005, another policy change had been undertaken stating that the royalty would be factored in while fixing the tariff, subject to a maximum of the bid of the second-lowest bidder. As per the Tribunal, the policy changes of 2003 and 2005 amounted to change in the law affecting the rights of the Company. The Court observed on this point that “[as per] the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, in our view, is a finding based on ‘no evidence’.”^[11]
3.  The Court, while discussing the above questions of law, further delved into the facts in order to ascertain the intention of the parties. After perusing the documents placed on record, the Court found that the License Agreement was sought to be amended by the Company to change royalty payment model into revenue sharing model. The Trust on the other hand, was opposed to the idea and refused to agree to the amendment. In light of these facts, the Court ruled that: “It is thus clear that the Award has created a new contract for the parties by unilateral intention of [the Company] as against the intention of [the Trust].”^[12] It can therefore be observed that the Court abhorred the Arbitral Tribunal’s ignorance of the agreement entered into by the parties (which is also a reflection of the parties’ intent) and the amendment to the agreement made by it by way of thrusting a new term in the License Agreement.

The Court, reiterating that a party to an agreement cannot be made liable to perform an act not stated in the contract entered into by him, finally held that, “In our view, rewriting a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.”^[13] Since, at the time of making the award, there was no appreciation of the basic evidence and there was also a grave breach of the fundamental principles of justice by re-writing the contract, the Court set aside the impugned arbitral award.

Thus, whilst giving an expanded meaning to the term ‘patent illegality’, the Court declared that the impugned award passed by the Arbitral Tribunal came within the meaning of ‘patent illegality’. The Court, herein, also laid down the principle that the term ‘patent illegality’ extends to and includes the re-writing of a contract or ignorance of vital evidence. The Court, ultimately, upheld the reasoning and the judgment of the Madras High Court, thereby making it a landmark case in arbitration law.

The authors are of the view that the addition of ‘patent illegality’ as a ground under Section 34 of the A&C Act has resulted in a positive form of court intervention which, instead of hampering the future growth of arbitration in India, will go a long way in building the trust of the parties by ensuring them an additional opportunity of securing justice. Further, not every arbitral award can be challenged before a court of law. It must be noted that only a certain few, which fulfil the criteria laid out under the section, can be pleaded to be set aside by either party. Hence, a balance has been maintained to avoid any misuse of this tool. However, the authors do suggest that the term be clearly defined by the legislature to avoid ambiguity of any kind.

Conclusion

The above judgement, expanding the contours of ‘patent illegality’, is sure to bring a newfound clarity to the present law and is appreciable, considering that a balanced expansion has been made without making the term ‘patent illegality’ a tool of misuse for the judgement-debtor in an arbitration. To sum up, with this expanded scope, the courts will be able to preserve the principles of natural justice in a proactive and responsible manner, even in quasi-judicial proceedings like arbitration law. The addition of ‘patent illegality’ has been, without dispute, a great measure by the legislature. However, a demarcation of its ambits and scope would help to prevent any incidents of its misuse in the future.

References

[1]     Law Commission of India, Report no. 246: Amendments to the Arbitration and Conciliation Act 1996, (August 2014), available at: https://lawcommissionofindia.nic.in/reports/report246.pdf.

[2]     The Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, §34 (2A) (India).

[3]     Id.

[4]     Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd, (2003) 5 SCC 705.

[5]     Id.

[6]     Associated Builders v. Delhi Development Authority, (2015) 3 SCC 49.

[7]     Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), (2019) 15 SCC 131.

[8]     PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, 2021 SCC OnLine SC 508.

[9]     Supra note 7.

[10]   MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163.

[11]    Supra note 8, at 70 ¶77.

[12]   Supra note 8, at 75 ¶81.

[13]   Supra note 8, at 78 ¶83.