Patent Illegality and Refusing Enforcement of Foreign Awards: Part II

Updated: Jun 22

(Part I of this article can be accessed here)

Author: Sonal Kumar Singh and Gaurav Rai

Authors are Managing Partner and Associate at AKS Partners respectively

V. Arguments & Reasons to support the hypothesis

A. Patent Illegality is Very Narrowly Defined

Any fear of Indian courts refusing to enforce foreign awards under the ground of patent illegality is unfounded, as the conditions for using the principle of patent illegality to set aside an award is itself very narrow.

In ONGC, wherein the principle was first introduced, the test had always been that the award was such that it shocks the conscience of the court. In Associate Builders v. Delhi Development Authority,[1] the SCI re-iterated the specific outline of the scope of patent illegality as the fourth heading under the ground of public policy as applicable to domestic disputes. The three triggers of the ground of patent illegality to set aside an award were explained as such:

Contravention of Section 28(1)(a) of the Act “i.e if the arbitral tribunal does not decide the dispute in accordance with the substantive law for the time being in force in India[2]. Contravention of the Act itself would be regarded as a patent illegality “for example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act”[3]. Contravention of Section 28(3) of the Act – the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. The SCI held

an arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do.[4]

Even in Ssangyong Engineering v. NHAI,[5] wherein the SCI provided for a restatement of the law post the 2015 amendment, it reaffirmed the principles as laid down in Associate Builders. The only difference being that it held that the principles of patent illegality as explained by Associate Builders were now the principles of patent illegality under Section 34(2A) of the Act as an independent provision removed from the ambit of public policy and was available for challenge of domestic awards only.[6] As was pointed out in Associate Builders, that the rule of patent illegality will only apply if the construction of the term of the contract by the arbitral tribunal is such that no fair-minded person will interpret in such a manner.

In NHAI v. ITD Cementation,[7] the SCI relied on the principles of patent illegality to discuss the ground of perverse interpretation of contract under patent illegality. Guided by the principles in Associate Builders, the SCI held that where the arbitrator construes the terms and conditions of a contract in a reasonable manner, there will be no occasion to set aside the award. The interference of the court would only be required in case of a perverse interpretation i.e., one which is construed as something no fair-minded person could do.

This guideline gives impetus to the argument that patent illegality is narrowly defined. It only attacks the award if the award contains a perverse interpretation of the contract and hence the same should also be available at the time of recognition and enforcement of a foreign award, especially if the award dealt with Indian law as the substantive law applicable to the contract between the parties.

B. Two Sets of Public Policy Should Not Be Available Under the Arbitration Regime

The fact that an award has passed the stage of challenge in a neutral seat of arbitration does not mean that there must be automatic enforcement of the same in another country. The UNCITRAL Model Law and the arbitration legislation around the world, based on the UNCITRAL Model Law, specifically provide for challenge and enforcement as two different processes. It envisages that the public policy of two different countries will come into play at the stage of challenge and enforcement in case of international commercial arbitration in which enforcement will take place in a country other than the seat.

For instance, the provisions of the challenge of a Singapore seated arbitration will be tested on the anvil of public policy of Singapore based on the arbitration law of Singapore where if the award is not set aside and the award creditor moves for the enforcement of the award in India, then the award will be tested on grounds for refusing enforcement inter alia on the ground of public policy of India under the enforcement provisions of the Act. Hence, within the framework of the UNCITRAL Model Law, there is scope of different public policies to come into play.

If the ground of patent illegality remained a part of public policy before the 2015 amendment of the Act, and rightly so, the same would be available equally for challenge of India seated awards and the refusal of enforcement of a foreign seated award. It is interesting to note that patent illegality is not even available for all India seated awards but only those awards which are purely domestic. This means that an international commercial arbitration seated in India cannot be challenged on the ground of patent illegality even if the award suffers from patent illegality. This distinction is discriminatory and is not an element of a sound legislation.

C. Domestic Parties Can Now Have Foreign Seated Arbitrations

In PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited,[8] the SCI has upheld the judgment of the High Court of Gujarat at Ahmedabad which held that two domestic parties can choose a foreign seat of arbitration and such an award shall be a foreign award. As a consequence, the court held that only Part II of the Act would be applicable to such an award. The SCI also referred to the judgments of the High Court of Delhi[9] and High Court of Madhya Pradesh[10] which have pronounced similar judgments in line with the above proposition.

By approving that Indian parties may undergo a foreign seated arbitration, the SCI has basically allowed domestic parties to circumvent the domestic arbitration law of India and hence are not subject to the test of patent illegality available under Section 34(2A) under Part I of the Act. The SCI has discussed this issue in paragraph 59 of the judgment and held that the balance should be in favour of freedom of contract. Relevant discussion from paragraph 59 is extracted hereunder:

“The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign county when, after a foreign award passes muster under that procedure, its enforcement can be resisted in India on the grounds contained in Section 48 of the Arbitration Act, which includes the foreign award being contrary to the public policy of India.”[11]

Such judgments give further impetus to the argument put forth, that foreign awards should fulfil the test of patent illegality at the time of enforcement of the award. Hence, even if domestic parties can choose foreign seats and exercise their choice, they should still be amenable to the test of patent illegality under the ambit of public policy of India within the contours prescribed by the SCI in ONGC.

VI. Conclusion

This piece demonstrates the reasons for including patent illegality as part of public policy and consequently, as a principle to refuse enforcement of the foreign award in India. It is also evident that principles of international arbitration law as enunciated in the UNCITRAL Model Law, and the New York Convention recognize every state having its own interpretation of the public policy. However, India, to position itself as an arbitration-friendly country, has rather a setup a regime that encourages domestic parties to rather choose a foreign seat of arbitration so that the domestic arbitration laws of India are not applicable to the award. This position seems counter to the intent of the amendments made to the Act.

To conclude, if patent illegality remained a subset of the public policy of India, the ground of patent illegality would be available for refusing enforcement of foreign awards under Section 48 of the Act. Courts would be empowered to refuse enforcement of such foreign awards, wherein a perverse interpretation of the underlying contract had been preferred.

[1] (2015) 3 SCC 49. [2] ibid [34]. [3] ibid. [4] ibid. [5] (2019) 15 SCC 131. [6] ibid [30]. [7] (2015) 14 SCC 21. [8]PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited (C.A. No. 1647/ 2021) <https://main.sci.gov.in/supremecourt/2021/2818/2818_2021_33_1501_27661_Judgement_20-Apr-2021.pdf> accessed 10 June 2021. [9] (2017) 6 Arb LR 447. [10] (2015) SCC 7417 (MP). [11] PASL Wind Solutions (n 8).