Introduction

The recent judgment of the Bombay High Court delivered on 16^th June, 2021, has reflected upon the lasting effect of ONGC Saw Pipes[1] and how it has exposed the award for increased interference. In BCCI v. Deccan Chronicle Holding,[2] the Bombay High Court set aside the award declared by the Tribunal, which directed BCCI to pay four thousand eight hundred fourteen crore rupees, with interest and cost, on the ground that the award suffered from patent illegality. According to the Court, the Tribunal failed to consider vital evidence and disregarded the terms of the contract, thereby resulting in a contrary interpretation. Hence, they found that the award is patently illegal and perverse in nature. Accordingly, the Court went into the case’s merits instead of a prima facie inspection, and set aside the award.

The Apex Court’s judgment in ONGC Saw Pipes added the ground of patent illegality to principles established in Renusagar.[3] Moreover, it expanded the meaning of “public policy” through this addition. The Court found that an award is patently illegal if the award, due to its unreasonableness, goes into the root of the matter. It further explained that the award disregarded the existing proposition of the law on the face of it. The Court added that such intervention during enforcement proceedings should be minimal. Contrary to its view, the Court went on to interpret the law and then verified the interpretation to apply in the award. The rule of minimum interference was further laid down in McDermott International Inc. v. Burn Standard Co. Ltd,[4] where it was reinstated that the circumstances should be so unfair as to shock the court’s conscience, thereby indicating the rare circumstances in which the principle should be applied. The Court also added that patent illegality would also come into the picture wherein the tribunal did not appreciate the evidence. The Court did not follow the rule of minimum interference and illegality and prima facie inspection, and gave an expansive interpretation to the term. The 2015 amendment,[5] was also based on the premise that the court should reduce its interference in arbitration matters and place its trust in the tribunal. The legislature added the ground of patent illegality to public policy under the Arbitration and Conciliation Act, 1996 (hereinafter, “the Act”).[6] In Associate Builders[7] and Ssangyong Engineering,[8] another attempt was made to limit the interference.  However, the recent case of Bombay High Court[9] has shown that even after two decades of developing jurisprudence, the doors opened by the Apex Court remained wide open to let the entity of interference pass, while enforcing the award in the name of patent illegality. This article analyses the effects of the judgment in the last two decades, along with possible solutions to reduce the court’s interference at the time of enforcement.

The Instances of the Haunting

In the case of ONGC Ltd. v. Western Geco International,[10] the Court believed that after prima facie review, if the inference of the tribunal is found to be inappropriate, the court can modify the award. However, the Court failed to realise that such a check could not be done on prima facie review, and allows the court to substitute its judgment beyond its powers. Also, in Sky Associates v. Delhi State Civil Supply Corporation,[11] the Court again went into the case’s merits. It determined the reasoning and finding of the arbitrator as patently illegal as it affected the root of the matter, and it contradicted the terms of the agreement. This conclusion was not based on a prima facie review of the award, but on a detailed analysis of the parties’ contract. In Poysha Oxygen Pvt. Ltd. v. Sh. Ashwini Suri and Ors.,[12] the High Court of Delhi, despite pointing out that the test of patent illegality is subjective and that there lies an inherent danger in applying the same, went on to apply the test and set aside the award on the ground that it shook the court’s conscience. Further, in Damodar Valley Corporation v. Central Concrete & Allied Products Ltd.,[13] the Court again re-appreciated the evidence to set aside the concerned award. Moreover, in the State of Jharkhand v. Bharat Drilling & Foundation Treatment Pvt. Ltd., Ranchi,[14] the Court re-did the exercise of finding the facts to set aside the award on the ground that the arbitrator wrongfully applied the principles of fundamental breach. Although, these judgments were delivered before the concept of patent illegality was codified, we can observe that such review of an award cannot be done unless the court goes into the merits.

Even after the 2015 amendment, and subsequent judgments, the courts have not followed the new principles. In Associate Builders, the Court specified the grounds under patent illegality and held that, “Patent Illegality would include: a) fraud or corruption; b) contravention of substantive law, which goes to the root of the matter; c) error of law by the arbitrator; d) contravention of the Act itself; e) where the arbitrator fails to consider the terms of the contract and usages of the trade as required under Section 28(3) of the said Act; and f) if arbitrator does not give reasons for his decision.”[15] In Ssanyoung,[16] the Court threw some light on the concept of prima facie review in terms of patent illegality, and stated that the contravention of any substantive laws which is not linked to public policy will not be a ground to set aside an arbitral award. It was also held that the court could not re-appreciate evidence and facts under the guise of patent illegality. However, in the recent Bombay High Court case, the practice of re-appreciation of facts and evidence again emerged, and the Court turned a blind eye towards the prima facie review mandate.[17] In addition to this, in Patel Engineering v. North Eastern Electric Power Corporation Limited,[18] the Apex Court permitted courts to set aside the award of unreasonableness and the impossibility of the arbitrator’s view. This decision again created a space for unguided discretion of the court at the time of deciding the enforcement petition. The Court disallowed the practice of modifying the award and held the ruling in Western Geco[19] as a bad law.

The pattern followed by courts in all these cases (before or after the 2015 amendment), while determining the patent illegality and setting aside the award, is that the court reviewed the award on merits, and thereby shook the foundation of minimum intervention. This act of intervention amounts to encroaching upon the Arbitration Tribunal’s jurisdiction and undermining its competence.

The Need for Exorcising the Ghost

The word ‘patent’ means apparent on the face of the record, which refers to an error that is open to view, readily visible, or intelligible.[20] However, the courts did not refrain from examining any of the above mentioned matters on merits when enforcement of awards had come forth, and the question of patent illegality had been raised. The scope of patent illegality should have been limited to prima facie examination at the time of enforcement proceedings; but instead, a thorough reading of the award and examination of the entire proceedings of the arbitral tribunal is being done by the courts.

One of the reasons is that a proper explanation was not given to the term ‘patent illegality’ while it was introduced. The courts, in subsequent judgments, have expanded the scope of the intervention as per their understanding. Despite the objectives being underlined in the 2015 amendment,[21] and section 5 of the Act,[22] the courts have continued interfering with the arbitration procedure. The extent has increased to the level that even though the arbitrator is well within its jurisdiction to determine and interpret the terms of the contract, the courts have offered their interpretation of the contractual terms while determining the award as patently illegal.[23] The courts should not slide in their interpretation because the arbitral tribunal is competent to handle the matters presented before it. The High Court of Delhi recently held that, “the fact that the Arbitral Tribunal had taken a different view in another case does not necessarily mean that the present view is patently illegal.”[24]

There exists a need for the Apex Court to specify the scope of court intervention. The increased interference leads to the wastage of time and resources of the parties involved. If the parties were willing to resolve the issue through courts, they would not have opted for arbitration in the first place. Therefore, specifying a limit to court interference is a necessity.

Furthermore, the meaning of patent illegality should be clarified and limited to objective grounds, so that the doctrine can be applied only in appropriate cases by the courts. The ignorance of substantive laws, deciding beyond the terms of the contract, and non-appreciation of evidence are the objective criteria; however, the criteria for the award’s unreasonableness should be removed. This criterion creates a room for the court’s discretion and judge’s personal opinion in an otherwise objective decision. The illegality approaching the matter’s roots is another criterion that should either be removed or a proper explanation should be offered to this term.

Lastly, it is vital that the extent of the term is limited. This can only be done by giving specific meanings to relevant terms, adding objective criteria and removing any scope of judicial discretion.

Conclusion

Enforcement of the award is the final and the most essential step of arbitration proceedings. The entire exercise can be rendered futile when the petition to enforcement of an award is dismissed on the grounds specified in the Act.[25] The award, if, violates public policy cannot and should not be enforced, however, giving broad meaning to the term and then bringing the award within its ambit is not justified. The author does not claim that the awards made by arbitrators are free of errors; however, the courts should place their trust in the judgment of the arbitrators to some extent, and enforce the award if the prima facie satisfaction of legality of the award is established. The increased intervention is not only against the legislative intent, but it also defeats the entire exercise of arbitration. The regime of non-intervention should be implemented out of papers, and courts should make space for the arbitration tribunal to exercise its jurisdiction by following the legislative scheme of the Act.

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References:

[1]   ONGC Ltd. v. Saw Pipes, (2003) 5 SCC 705.

[2]   BCCI v. Deccan Chronicle Holding, 2021 SCC OnLine Bom 834.

[3]   Renusagar Power Co. Ltd. v. General Electric Co., (1984) 4 SCC 679.

[4]    McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181.

[5]    The Arbitration and Conciliation (Amendment) Act, No. 3, Acts of Parliament, 2015 (India).

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

[7]    Associate Builders v. DDA, (2015) 3 SCC 49.

[8]    Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), AIR 2019 SC 5041.

[9]    Supra note 2.

[10]   Oil and Natural Gas Corporation Ltd v. Western Geco International Ltd, [2006] 132 COMPCASE 145 (BOM).

[11]   Sky Associates v. Delhi State Civil Supply Corporation 2014 SCC OnLine Del 7264.

[12]   Poysha Oxygen Pvt. Ltd. v. Sh. Ashwini Suri and Ors. 2009 SCC OnLine Del2216.

[13]   Damodar Valley Corporation v. Central Concrete & Allied Products Ltd, (2007) 3 Arb LR 531 (DB).

[14]   State of Jharkhand v. Bharat Drilling & Foundation Treatment Pvt. Ltd., Ranchi (2004) 1 Arb LR 127.

[15]   Supra note 7.

[16]   Supra note 8.

[17]   Supra note 2.

[18]   Patel Engineering v. North Eastern Electric Power Corporation Limited, 2020 SCC OnLine SC 466.

[19]   Supra note 10.

[20]   Shakil Ahmed Khan, P RamanathaAiyer, The Law Lexicon: The Encyclopaedic Legal And Commercial Dictionary 1422 (4th ed. 1997).

[21]   Supra note 5.

[22]   The Arbitration and Conciliation Act, No. 26 of 1996, Acts of Parliament, § 5 (India).

[23]   Supra note 2.

[24]   Delhi State Industrial & Infrastructure Development Corporation. Mapsa Tapes Pvt. Ltd, 2021 SCC OnLine Del 2728.

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