Patent Illegality and Refusing Enforcement of Foreign Awards: Part I
Updated: Jun 22, 2021
Author: Sonal Kumar Singh and Gaurav Rai
Authors are Managing Partner and Associate at AKS Partners respectively.
I. Introduction & Hypothesis
The UNCITRAL Model Law on International Commercial Arbitration (“UNCITRAL Model Law”), under Article 34(2)(b)(ii) provides that an arbitral award may be challenged and set aside inter alia on the ground of violation of the ‘public policy of the state’. The New York Convention on Recognition and Enforcement of Foreign Awards, 1958 (“New York Convention”) under its Article V similarly entitles a country to refuse recognition of a foreign award based on the public policy of such country. On similar lines as the New York Convention, the UNCITRAL Model Law under Article 36(2)(b)(ii) provides that a state may refuse the enforcement of a foreign seated award if the award is not as per the public policy of the state in which the award is being enforced. Hence, in both the instruments above, the element of public policy is specific to the country hearing the challenge to the domestic award or the application for recognition and enforcement of the foreign award.
The (Indian) Arbitration and Conciliation Act, 1996 (“Act”) encapsulates the provisions and principles regarding challenge and enforcement. In early judicial rulings (now overruled), ‘patent illegality’ was seen as an ingredient of ‘public policy of India’ for the challenge of domestic awards and by extension a part of the public policy of India for refusing enforcement of a foreign award. This inclusion was short-lived as the same was overruled by a subsequent larger bench judgment and thereafter the amendment of the Act in 2015 moved the principle of patent illegality away from the ambit of public policy. Although, patent illegality was included as a standalone ground for the challenge of domestic awards under Section 34(2A) of the Act, however, no such inclusion was made under Section 48 of the Act which deals with refusal of enforcement of foreign arbitral awards.
This piece attempts to support the hypothesis that the element of patent illegality should have remained as an ingredient of public policy to challenge domestic awards in India and by extension, patent illegality should also have continued to be available as a ground under public policy, to refuse enforcement of foreign awards being enforced in India. Part I of this piece shall deal with the history of the development of the principles of public policy and patent illegality.
II. History of patent illegality as part of the principle of public policy
In Renusagar Power Co. v. General Electric Co. (“Renusagar”), the Supreme Court of India (“SCI”) defined the scope of public policy for refusal to enforce foreign awards under the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961. It held that
“in view of the absence of a workable definition of "international public policy" we find it difficult to construe the expression "public policy" in Article V(2)(b) of the New York Convention to mean international public policy. ………the expression 'public policy' in Section 7(1)(b)(ii) of the Foreign Awards Act means the doctrine of public policy as applied by the court in India.”
“the enforcement of a foreign award would be refused on the ground that it is 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.”
After the enactment of the Act, in ONGC v. SAW Pipes, (“ONGC”) the SCI applied the public policy definition of Renusagar to Section 34 of the Act which dealt with the challenge of domestic awards. It also expanded the scope of such public policy by adding patent illegality to the mix. The SCI held that:
“Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.
…If the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal.”
While discussing public policy as part of Section 34 of the Act, in Associate Builders v. DDA (“Associate Builders”), the SCI provided a comprehensive restatement of the scope and ambit of public policy which applied to India and affirmed that patent illegality formed a part of public policy challenge to India seated arbitration awards. The SCI also re-affirmed and clarified that the ground of patent illegality shall only be available when the illegality goes to the root of the matter and is not just of a trivial nature.
III. Public policy of India under Section 34 and Section 48 of the Act
Section 34 and Section 48 of the Act use the same language as far as public policy exception is concerned. In ONGC matter, the SCI stated that patent illegality formed a part of public policy under Section 34 of the Act. The question then arose whether this expanded scope also applied to the enforcement of foreign awards. In this regard, soon two conflicting opinions of the SCI emerged.
In Phulchand Exports v. OOO Patriot, (“Phulchand Exports”) the SCI (division bench) agreed that the expanded scope of public policy, as propounded in the ONGC matter, also applied to foreign awards and their enforcement under Section 48 of the Act. In other words, the ground of patent illegality under public policy was also available to refuse enforcement of foreign awards, and accordingly, the SCI refused enforcement of a foreign award because it was patently illegal.
Subsequently, in Shri Lal Mahal v. Progeto Grano SpA (“Progeto Grano SpA”), the SCI (three-judge bench) led by Justice Lodha overruled Phulchand Exports and held that the expanded scope did not apply. An interesting fact is that in both these cases, Justice Lodha was a part of the bench. The SCI in Progeto Grano SpA ruled that:
“although the same expression 'public policy of India' is used both in Section 34(2)(b)(ii) and Section 48(2)(b) and the concept of 'public policy in India' is same in nature in both the Sections but, in our view, its application differs in degree insofar as these two Sections are concerned. The application of 'public policy of India' doctrine for the purposes of Section 48(2)(b) is more limited than the application of the same expression in respect of the domestic arbitral award.”
It is arguable that the expression of public policy within the Act should remain constant including what constitutes public policy. The position taken in Phulchand Exports appears to be correct and should not have been overruled. In this spirit, patent illegality should remain part of public policy both under Section 34 and Section 48 of the Act.
IV. Independent ground of patent illegality as removed from the scope of public policy
The 246th Law Commission Report (“Report”) was deeply troubled by the path generally being followed by the courts and their interpretation of the powers of the courts under the Act. Even though the SCI, by its landmark judgment in Bharat Aluminium and Co. vs. Kaiser Aluminium and Co. had corrected the course by not allowing foreign awards to be challenged under Part I of the Act, the Report felt a dire need of large-scale changes to the Act in order to make India arbitration-friendly. The Report felt that the ground for patent illegality as proposed by the SCI in ONGC can continue to be available for domestic awards however, the same should not be available for refusing enforcement of foreign awards. They, however, also wanted to achieve a status wherein the definition, ambit, and scope of the ground of public policy would remain the same under Section 34 and Section 48 of the Act.
To further the aforesaid position, the Report, removed patent illegality from the ambit and scope of public policy of India and proposed the insertion of an independent ground of patent illegality under Section 34(2A) of the Act. To make it abundantly clear that the ground of patent illegality would not be available under public policy, the report also suggested the addition of a proviso that did not allow a re-appreciation of evidence or setting aside of the award on the basis of an erroneous application of the law. Consequently, the Indian legislature made amendments to the Act in line with the suggestions of the Report. Thus, as it stands today, patent illegality as a ground is no longer available to refuse enforcement of a foreign award.
Part II of this piece will develop the arguments in support of the hypothesis above that patent illegality should form part of the public policy of India and should be available to refuse enforcement of the foreign award.
…(to be continued)
 UNCITRAL Model Law on International Commercial Arbitration 1985, art. 34.  (1994)1 SCC 644.  ibid .  ibid .  (2003) 5 SCC 705.  ibid .  (2015) 3 SCC 49.  ibid .  ibid [42.1].  (2011) 10 SCC 300.  (2014) 2 SCC 433.  ibid .  Justice AP Shah, ‘246th Law Commission Report: Amendments to the Arbitration and Conciliation Act 1996’ (05 August 2014) <https://lawcommissionofindia.nic.in/reports/report246.pdf> accessed 01 June 2021.  (2012) 9 SCC 552.  246th Law Commission Report (n 15) .  ibid .  The Arbitration and Conciliation (Amendment) Act 2015 <https://lawmin.gov.in/sites/default/files/ArbitrationandConciliation.pdf> accessed 01 June 2021.