Patent illegality of an Arbitral Award
Before the amendment in 2015 in the Arbitration Act, there were very few grounds available for setting aside the arbitral award passed by arbitrators. The reason behind this was that Indian law followed model law and it adopted all the provisions related to setting aside an arbitral award given in the model law. After the amendment in 2015, several provisions were added and changes were made, one such change was the introduction of section 34 (2A) which talks about patent illegality of an arbitral award as a ground for setting aside the arbitral award.
The award which is patently illegal on the face of it can be set aside. Parties to the contract can claim before the domestic court to set aside an arbitral award due to the award being patently illegal. But it is to be kept in mind that only domestic awards can be set aside on this ground if the award is passed by an arbitral tribunal whose seat of arbitration is not in India or is a foreign award then it cannot be set aside in the domestic court on the same ground. Thus step was taken on the recommendation made in the 246th law commission report.
The issue related to setting aside of arbitration award due to patent illegality came before the court in the case of Patel Engineering vs. NEEPCL. In this case, NEEPCL wanted to set up a Kameng Hydroelectricity Project in pursuance of which it bought land in Arunachal Pradesh and invited bids for civil work in three parts. Patel engineering replied to the bid and got selected after which both the parties entered into the contract. Later, a dispute arose between the parties related to the rate which will apply to the three packages. Parties referred the dispute to the tribunal which decided in favor of Patel engineering. Aggrieved by the decision of the tribunal NEECPL i.e. Defendant appealed before deputy commissioner who rejected the application so the defendant went to the high court. The high court decided in favor of NEEPCL. Finally, the order of the review petition filed by Patel engineering in the high court of Meghalaya was challenged before the Supreme Court.
The court dismissed the petition and said that if the award issued by the arbitrator is against the substantive law then it can be said to be patently illegal and on this ground, it can be challenged and set aside by the court. By the term “against substantive law” it means the decision of the arbitrator is unfair or unjust and it is so perverse that no reasonable man has arrived at that conclusion.
Court also cited the case of Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. in which it extended the applicability of this provision to the foreign award where the seat of arbitration is outside India and thus giving it a wider interpretation. But in the case of Patel engineering court said that the decision given by this court in the Saw Pipes Case was not applicable after the amendment in 2015. The court dismissed the petition filed by Patel engineering and held that ground patent illegality of an arbitral award is available to the parties but it can only be in domestic courts for domestic awards.