Brief Note on Patent Illegality

Introduction
The Amendment Act clarifies that “patent illegality” as an element of public policy applies
only to domestic and not international arbitration. The term ‘public policy’ was first
described by the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co
(“Renusagar case”), where it was held that a foreign award could be refused enforcement
only if it was contrary to the fundamental policy of Indian law, or interests of India, or
justice or morality. The Supreme Court, adopting these three grounds into domestic
arbitration, in ONGC Ltd. v. Saw Pipes Ltd. (“Saw Pipes case”) further broadened the
scope to include ‘patent illegality’. An award would be considered ‘patently illegal’ if it
violated the substantive laws of India, as in this case, the terms of the contract which would
then be in contravention of section 28(3) of the 1996 Act.

(I.) ONGC v. Saw Pipes Ltd

The term public policy has been mentioned under Section 34(2)(b) of the A&C Act, 1996
“The phrase “Public policy of India” occurring in Section 34(2)(b) is not defined in the act.
In a case where the validity of the 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.” Para 22

Para13- Section 34 read conjointly with other provisions of the act indicates that the
legislative intent could not be that if the award is in contravention of the provisions of the
Act, still however, it could not be set aside by the court. However, otherwise would be
contrary to the basic concept of justice. If the arbitral tribunal has not followed the
mandatory procedure prescribed under the act, it would mean that it has acted beyond its
jurisdiction and thereby the award would be patently illegal which could be set aside under
Section 34.

Para 74-A So the court held that it can set aside the arbitral award under Section 34(2):

 For the reasons mentioned in Section 34(2)9a)(i) to v,

 For the reasons stated in Section 28(1)(a)
 For the reasons stated in Section 34(2)(b)(ii) on the ground of conflict with the public
policy of India if it is contrary to
  Fundamental policy of Indian law
 The interest of India
 Justice or morality
 If it is patently illegal

(II.) Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd

Para 16- Patent Illegality as a ground for setting aside a domestic award was first
expounded in the judgment of Saw Pipes Ltd. where this court was dealing with a domestic
award. This court gave a wider interpretation to the “public policy of India” in Section 34(2)
(b)(ii) in Part I of the 1996 act. The court held that an award would be “patently illegal” if it
is contrary to the substantive provisions of law or provisions of the 1996 act or terms of the
contract.

Para 17- In the subsequent judgment of Associate Builders, v. DDA, this court discussed the
ground of patent illegality as a ground under public policy for setting aside a domestic award.

Para 40 of the Associated Builders v. DDA- “Patent Illegality- We now come to the fourth
head of public policy namely patent illegality. It must be remembered that under the
explanation to Section 34(2)(b) an award is said to be in conflict with the public policy of
India if the making of the award was induced or affected by fraud or corruption. Added to
this ground, is the ground that an arbitral award would be set aside if there were an error of
law by the arbitrator.

Para 22” the ground of patent illegality is a ground available under the statute for setting
aside a domestic award, if the decision of the arbitrator is found to be perverse, or so
irrational that no reasonable person would have arrived at the same or the construction of
the contract is such that no fair or reasonable person would take or the view of the arbitrator
is not even a possible view.

(III.) Ssangyong Engg & Construction Co. Ltd v. NHAI (2019)

The judgment of Associate Builders v. DDA was reiterated whereby the court observed that

; “ the change made in section 28(3) by the amendment act really follows the stated paras in
Associate Builders v. DDA namely that the construction of the terms of a contract is
primarily for an arbitrator to decide unless the arbitrator construes the contract in a manner
that no fair minded or reasonable person would ; in short that the arbitrator’s view is not
even a possible view to take. Also, if the arbitrator wanders outside the contract and deals
with matters not allotted to him, he commits an error of jurisdiction. This ground of
challenge will now fall within the new ground added under Section 34 (2A).”