Patent illegality is one of the grounds invoked for setting aside an arbitral award. The word ‘Patent Illegality’ is nowhere defined under the Arbitration and Conciliation Act, 1996.
This ground can be invoked if an award is said to be contrary to the substantive provisions of law or the provisions of the Arbitration and Conciliation Act, 1996, or against the terms of the contract.
Patent illegality as a ground for setting aside the arbitral award does not apply to international commercial arbitration.
Supreme Court initially recognized Patent Illegality in Oil and Natural Gas Corporation Ltd. vs SAW Pipes Ltd. (2003 – SC), wherein a wider interpretation was given to the phrase “public policy of India”. It was stated that an arbitral award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
- (a) the fundamental policy of Indian law;
- (b) the interest of India; or
- (c) justice or morality, or
- (d) if it is patently illegal.
Supreme Court again propounded the concept of patent illegality in Associate Builders vs Delhi Development Authority (2014 – SC), stating that the ground can be invoked under three sub-heads:
- (a) If there is a contravention of the substantive law of India;
- (b) If there is a contravention of the Arbitration Act itself;
- (c) If the award is not in accordance with the terms of the contract.
After the recommendations put forth under 246th Law Commission Report, the ground of patent illegality was given statutory effect through the 2015 Amendment Act. Patent Illegality was inserted as a ground for setting aside a domestic arbitral award under section 34(2A) of the Arbitration & Conciliation Act, 1996.
The Hon’ble Supreme Court of India in Ssangyong Engineering & Construction Co. Ltd. vs National Highways Authority of India (NHAI) (2019 – SC) held that the 2015 Amendment would apply prospectively.
That is to say, it will apply only to section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced before that date.
In Patel Engineering Ltd. vs North Eastern Electric Power Corporation Ltd., the Hon’ble Supreme Court stated that if an order of an arbitrator is found to be perverse or irrational or his view is not fair that any reasonable person would take, in that case, the ground of patent illegality can be invoked.
Patent Illegality has been a contested discussion between various practitioners in India. After a series of judgments and the 2015 Amendment Act, it has become a wholly separate ground and a self-sufficient tool for setting aside of the arbitral award. As far as enforcement of the foreign arbitral award is concerned, patent illegality is no ground as per the 2015 Amendment Act.
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