PATENT ILLEGALITY: A CASE FOR A STRENGTHENED ENFORCEMENT REGIME

Arnav Doshi[1]


INTRODUCTION


The arrival of the significant ruling in Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited[2] (“Delhi Airport”) established the extent and scope of perversity or patent illegality as a ground available for annulment of an award granted by an arbitral tribunal. Section 34(2) of the Arbitration and Conciliation Act, 1996 (“the Act”) sets out grounds for setting aside of a domestic award whereas Section 48(1) and 57(1) embedded in Part II of the Act state the grounds for refusal of enforcement of a foreign award. However, a broad interpretation of patent illegality has led to its perfunctory use. In this recent Supreme Court judgment, the scope of patent illegality is revisited and revised to limit the scope of judicial intervention in the enforcement of awards as well as the extent of exercising patent illegality as a ground for setting aside arbitral awards.


I. PATENT ILLEGALITY: GROUND FOR ANNULMENT


The ground of patent illegality developed with the expansion of public policy exceptions for setting aside awards. Under Part I of the Act, Section 34(2)(b)(ii) states the refusal of a domestic award (Indian-seated arbitration) due to being in conflict with the public policy of India. Similarly, under section 48(2)(b)(ii) in Part-II(A) of the Act (for foreign-seated arbitrations under the New York Convention) and section 57(1)(e) in Part-II(B) (foreign seated-arbitrations under the Geneva Convention), the enforcement of the award could be refused by a judicial authority on the ground that it conflicted with the public policy of India.[3]


The landmark case of Renusagar Power Co. Limited. v. General Electric Company[4]paved the way for the public policy exception prior to the enactment of the Act. Interpreting the doctrine of public policy, a three-pronged test was applied for refusal of an award contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.[5] Scaffolding on the broadened understanding of public policy, it was ONGC v. Saw Pipes Limited[6] (“Saw Pipes”) that through purposive interpretation associated “patent illegality” as a subset of the public policy exception under Section 34 of the Act. The Division Bench explained that an award suffers from patent illegality when it was firstly against the provisions of the Act, secondly conflicting with statutory provisions of substantive law applicable to the parties to the dispute, or thirdly, when against the terms of the contract.[7] Thereafter, ONGC v. Western Geco International Limited (“Western Geco”) reaffirmed and upheld Saw Pipes, and added that illegality of the award must go to the root of the matter,[8] precluding illegality of trivial nature as a ground for contravening public policy.


The 246th Report of the Law Commission based on the decision in Saw Pipes recommended the addition of section 34 (2A) to deal with purely domestic awards which may also be set aside by the Court if the Court finds that such award is vitiated by patent illegality appearing on the face of the award.[9] In finality, the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) introduced Section 34(2A) whereby an award under Part I could be set aside on the grounds of “patent illegality appearing on the face of the award”.


Post amendment, Ssangyong Engineering and Construction Company Limited v. National Highway Authority (NHAI) (“Ssangyong”) cabined the broad ground of patent illegality, as laid in Saw Pipes and 2015 Amendment, to postulate that the contravention of a statute not linked to public policy or the public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.[10] Ssangyong partly statutorily superseded the judgments in Saw Pipes and Western Geco. Subsequently, the notable case of Patel Engineering Limited v. North Eastern Electric Power Corporation Limited[11] (“Patel Engineering”) further followed Ssangyong to hold that the expansive interpretation to “public policy” in Saw Pipes and Western Geco to be no longer good law due to the 2015 Amendment. Narrowing the scope of patent illegality, Patel Engineering established two important points relating to the enforcement of awards in India. Firstly, pursuant to the recommendations of the Law Commission, the ground of “patent illegality” cannot be invoked in international commercial arbitrations seated in India.[12] Thus, foreign-seated arbitral awards cannot be annulled under the ground of patent illegality. Secondly, it crystallized a test for the application of patent illegality:


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, that the view of the arbitrator is not even a possible view.


Inching towards a pro-enforcement regime, Ssangyong and Patel Engineering acted as an integral step in ensuring a reasonable and prudent application of patent illegality as a ground for refusal of domestic award enforcement and thereby preventing its broad interpretation from opening a Pandora’s box of non-enforcement tendency. The subsequent step towards India’s pro-enforcement stance came with the Supreme Court’s judgment in Delhi Airport.


II. FACTUAL MATRIX


Delhi Metro Rail Corporation Limited (“DMRC”) proposed the implementation of the Airport Metro Express Line (“the Line”) from New Delhi Railway Station to Dwarka Sector 21 via Indira Gandhi International Airport, New Delhi. It was decided to develop the project by engaging a concessionaire for financing, design, procurement, installation of all systems. On 25.08.2008, a Concession Agreement was entered between DMRC and Delhi Airport Metro Express Private Limited (“DAMEPL”) for design, installation, commissioning, operation and maintenance of the project.


The dispute originated when DAMEPL vide a letter wrote to DMRC regarding issues relating to the design and quality in the installation of viaduct bearings in the Line. However, DMRC responded with a letter stating that upon carrying out inspections, no bearings were found to be damaged. A notice was issued by DAMEPL on 09.07.2012, asking DMRC to cure the defects in DMRC’s works within a period of 90 days from the date of the notice, failing which it shall be treated as a breach having Material Adverse Effect on the Concessionaire under the Concession Agreement.[13] Additionally, a ‘non-exhaustive list of defects’ was stated in the aforementioned notice. Thereafter, DAMEPL issued a notice terminating the Concession Agreement under the reason that the defects highlighted were not cured. DMRC invoked arbitration under Article 36 of the Concession Agreement which refers to the dispute resolution mechanism to be adopted. The main issue of determining the validity of the termination of the Concession Agreement arose before the Tribunal. In turn, DAMEPL filed a counterclaim on the ground that DMRC did not cure the defects pursuant to the notice dated 09.07.2012.


The Tribunal, in so far as the defects are concerned, concluded that 72 % of the girders were affected by such cracks,[14] and held that DMRC was in breach of the Concession Agreement. Ergo, the termination notice issued by DAMEPL was valid. As compensation for the upheld counterclaim, the Tribunal Tribunal worked out ‘Adjusted Equity’ at Rs.983.02 crore and awarded a total amount of Rs.2782.33 crore, along with further interest, as Termination Payment to be made to DAMEPL.[15] Pursuant to the arbitral award, DMRC filed an application under Section 34 of the Act for setting aside the award, which the Single Judge of the Delhi High Court dismissed. DMRC filed an appeal under Section 37 of the 1996 Act read with Section 13 of the Commercial Courts Act, 2015 challenging the correctness of the judgment passed by the learned Single Judge. In the appeal and via an SLP, the Division Bench reversed the impugned judgment, and the arbitral award was partly set aside. DAMPEL filed an SLP challenging the intervention of the Division Bench in setting aside the award. The primary reason for the reversal was that the Tribunal had based its reasoning on the validity of the termination notice on two different dates leading to confusion and ambivalence as to the termination notice and the date of termination.


III. OUTCOME


The main issue before the Supreme Court was whether the Division Bench of the Delhi High Court had erred in their exercise of power under Section 37 of the Act and thereby setting aside the Tribunal’s award. The Supreme Court examined the contours of the court's power to review arbitral awards and held that the Act and the 2015 Amendment was enacted to limit judicial interference vis-à-vis setting aside of domestic awards to the grounds under Section 34 of the Act,[16] emphasizing on the decision in Ssangyong. The Court held that every error of law committed by the Arbitral Tribunal would not fall within the expression ‘patent illegality’. Likewise, erroneous application of law cannot be categorised as patent illegality.[17] That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards were set aside by categorising them as perverse or patently illegal without appreciating the contours of the said expressions.[18] Therefore, the Court set aside the decision of Division Bench and upheld the Rs. 2,782 crore arbitral award to make DMRC compensate DAMEPL.


CONCLUSION


Having emerged from the stable of public policy, patent illegality is now a separate and self-sufficient tool for challenging domestic awards under Section 34 of the Arbitration and Conciliation Act.[19] The Apex Court, at the present instance, reinforced the well-settled application of the ground of patent illegality under Section 34(2A). Moreover, it addressed the “disturbing tendency” of courts setting aside arbitral awards. The jurisprudential development evidenced a discernible trend of courts setting aside awards owing to the broad ambit of patent illegality with Saw Pipes and Western Geco. However, following the principles set in a series of judgments- from Associate Builders, Ssangyong to Patel Engineering, the Supreme Court in Delhi Airport steered the course towards a pro-enforcement regime by establishing the scope of judicial intervention in enforcement proceedings and limiting the corrosive appeal to patent illegality as a ground for annulment of domestic awards.


 

[1] Arnav Doshi is a Junior Staff Editor for the Arbitration Workshop. He is a third-year student pursuing B.B.A. LL.B. (Hons.) at O.P. Jindal Global Law School. He can be reached at 19jgls-arnav.jd@jgu.edu.in. [2] Civil Appeal No. 5627 of 2021. [3] Abhijeet Shrivastava and Anujay Shrivastava, Scope of ‘Patent Illegality’ in Refusing Enforcement of Arbitral Awards, IndiaCorpLaw (September 30, 2020), https://indiacorplaw.in/2020/09/scope-of-patent-illegality-in-refusing-enforcement-of-arbitral-awards.html. [4] (1994) Supp (1) SCC 644. [5] Renusagar Power Co. Ltd. v. General Electric Company and Another, (1994) Supp (1) SCC 644, ¶66. [6] (2003) 5 SCC 705. [7] ONGC v. Saw Pipes Limited, (2003) 5 SCC 705, ¶74. [8] ONGC Limited v. Western Geco International Limited, (2014) 9 SCC 263, ¶34. [9] Law Commission of India, Amendment to the Arbitration and Conciliation Act, 1996, Report No. 246, 21 (Aug, 2014). [10] Ssangyong Engineering and Construction Company Limited v. National Highway Authority (NHAI), (2019) 15 SCC 131, ¶37. [11] (2020) 7 SCC 167. [12] Patel Engineering Limited v. North Eastern Electric Power Corporation Limited, (2020) 7 SCC 167, ¶19. [13] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, Civil Appeal 5267 of 2021, ¶6. [14] Ibid at ¶11. [15] Ibid at ¶13. [16] Ibid at ¶22. [17] Ibid at ¶25. [18] Ibid at ¶24. [19] Khaitan & Co., Patent Illegality: Supreme Court Travels a Long Road To Tame a Herd of Unruly Horses, Lexology (July 16, 2020), https://www.lexology.com/commentary/arbitration-adr/india/khaitan-co/patent-illegality-supreme-court-travels-a-long-road-to-tame-a-herd-of-unruly-horses.

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