Patent Illegality vis-à-vis Erroneous application of law

# Haryana Urban Development Authority, Karnal vs. Mehta Construction Company and Ors.

(30.03.2022 – SC) Relevant paras – 7,8,9,11,14,15 (MANU/SC/0399/2022)

Obiter Dictum -  In the present case, it is an accepted position that the application for setting aside of
the award dated 20th December 2013 was made on 28th March 2014 accompanied by an application for
condonation of delay. The court, therefore, had the power to condone the eight days' delay, which was
less than thirty days, in terms of the proviso to Sub-section (3) to Section 34 of the Act. In the application
seeking condonation of delay, it was stated that after receiving a copy of the award at about 6:50 p.m. on
20th March 2014, the Appellant had engaged an empanelled advocate and the records pertaining to the
arbitration case were constructed and examined. The short delay had also occurred as sanctions and
approvals were required from the higher/competent authority. [11] 3. Given the aforesaid background
and the short condonable delay which had occurred, present Court do not think that the High Court and
the Additional District Judge, Karnal were justified in refusing to condone the delay. The application for
condonation of delay in filing of the objections should have been allowed. [12] 4. Sub-section (1) to
Section 43 of the Act states that the Limitation Act, 1963 shall apply to arbitrations as it applies to the
proceedings in court. Sub-section (2) to Section 43 states that for the purpose of Section 43 and
Limitation Act, an arbitration shall be deemed to have commenced on the date referred to in Section 21
of the Act. In the context of the present case, several issues would arise for consideration, including the
date on which the Respondent had invoked the arbitration clause, and whether there was delay
thereafter in filing the application Under Section 11(6) of the Act, the legal effect and consequences of
the delay, the effect of the order dated 19th October 2012, etc. [14] 5. Sub-section (2)(a) to Section 34 of
the Act inserted with effect from 23rd October 2015 states that the arbitral award may be set aside by
the court if the court finds the award is vitiated by patent illegality appearing on the face of the award.
The proviso stipulates that the award shall not be set aside merely on the ground of erroneous
application of law or by misappreciation of evidence.

Ratio Decidendi - The objections under Section 34 of the Act did require consideration and in-depth
examination and should not have been dismissed without proper and full application of mind with
reference to the provisions of the Limitation Act and the Act. Thus, the arbitral award was set aside on the
ground of patent illegality. Therefore, Arbitral Award Cannot Be Set Aside Merely on The Ground of
Erroneous Application of Law or Misappreciation of Evidence.

# Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation (05.05.2022 - SC)

MANU/SC/0591/2022

ISSUE: Whether the Division Bench of Hon’ble Delhi High Court erred in its judgment by setting aside the
award and deviating from the settled principles for interference under Sections 34 and 37 of the Act?

Ratio Decidendi - Constituents of Patent Illegality (Relied on -  SsangYong Engineering and Construction
Company Limited v. National Highways Authority of India (2019) 15 SCC 131.)

Since the Division Bench had held the award to be patently illegal, the Supreme Court examined Section
34(2A) of the Act to that extent. It was reiterated that patent illegality should only be illegality that goes
to the root of the matter and must not be superficial. Moreover, every error of law would not fall under
the ambit of patent illegality, and neither would every erroneous application of the law. It was clarified
that an award would be patently illegal if and when it is based on no evidence, or ignores vital evidence,
or fails to state reasons vis-à-vis Section 28(3).
Obiter Dictum/ Court’s Observations - The Supreme Court discerned that a disturbing tendency has been
created whereby courts set aside the award after dissecting and reassessing factual aspects of the case
and conclude that the award warrants interference. Thus, the courts invariably dub the award to be
vitiated by either perversity or patent illegality. It was observed that this practice is leading to the
corrosion of the primary objectives of the Act and turning judicial pronouncements into a dead letter.

##### The above stated judgment of the Supreme Court reinstates the restrictive scope of interference
that courts have under Section 34 of the Act. The observations made by the Division Bench reflected its
approach that is akin to a civil court while adjudicating an appeal.

The Supreme Court also reiterated the limited constituents of patent illegality and public policy of India
that goes to show the pro-enforcement stance that is being maintained in an attempt to promote the
arbitral process and not diminish faith in the same.

#   Patel Engineering Ltd. vs. North Eastern Electric Power Corporation Ltd. (22.05.2020 – SC)(

MANU/SC/0447/2020)

Court’s Observation and Judgement - The sub-heads of patent illegality, as laid down in Associate
Builders v. Delhi Development Authority and Ssangyong Engineering and Construction Company Limited v.
National Highways Authority of India, were reaffirmed.  The Court ultimately dismissed the petitions filed
by Patel Engineering while holding as follows:

1. Patent illegality, as a ground for setting aside an award, has been given statutory force in
Section 34(2A) of the Act, as amended. This ground cannot be invoked in international
commercial arbitrations seated in India or for resisting enforcement of a foreign award
under Section 48 of the Act.
2. The present case arises out of a domestic award between two Indian entities. Patent
illegality is available as a ground 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;

 the construction of the contract is such that no fair or reasonable person

would take; or
 the view of the arbitrator is not even a possible view.
 The High Court arrived at the correct conclusion that an arbitral award can be set aside
under Section 34 of the Act if it is patently illegal or perverse, in conformity with the
decisions of the Supreme Court in Associate Builders  Case and Ssangyong’s Case.
 The High Court held that no reasonable person could have arrived at a different
conclusion while interpreting the relevant clauses of the contract and that any other
interpretation would be irrational and in defiance of all logic. The High Court also found
that the arbitrator arrived at his findings by taking irrelevant factors into account and by
ignoring vital clauses of the contract and therefore these findings suffer from the vice of
irrationality and perversity.
 Even though the High Court referred to various judgements, including Western
Geco (supra), which are no longer good law, the case has been decided on the ground
that the arbitral award is perverse and the view taken by the arbitrator is not even a
possible view, on a holistic reading of all the terms and conditions of the contract. The
High Court has rightly followed the test set out in Associate Builders (supra), which was
reiterated in Ssangyong Engineering & Construction Co. Ltd. Vs. National Highways
Authority of India (NHAI) (AIR 2019 SC 5041)
  The High Court rightly dismissed the review petitions filed by Patel Engineering, and there
is no ground warranting interference with the impugned order.
 In the present case, the Court has, after affirming the  Ssangyong Engineering and
Construction Company Limited v. National Highways Authority of India {(2019) 15 SCC
131} view of patent illegality, further held that 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, the view of the arbitrator is not even a possible view; then the award is required to be
set aside as being patently illegal.

The most significant part of this judgment is the recognition and re-affirmation given to the test of patent
illegality, as set out in Paragraph (42.3) of the Supreme Court's judgment in  Associate Builders and which
was reiterated in Paragraph (40) of Ssangyong Engineering.

The aforementioned test of 'patent illegality' lays down that any contravention of Section 28 (3) of the
Arbitration Act, is deemed to be a sub-head of patent illegality. According to it, an arbitral tribunal must
decide in accordance with the terms of the contract, but if an Arbitrator construes a term of the contract
in such a way that it could be said to be something that no fair minded or reasonable person could do,
the same will render the award 'patently illegal'. The Supreme Court of India further held that 'unjust
enrichment' is also a ground to challenge an Award, flowing from the public policy doctrine under Section
34 (2) (b) (ii) of the Arbitration Act.

# Ssangyong Engineering & Construction Co. Ltd. Vs. National Highways Authority of India (NHAI) (AIR
2019 SC 5041)

Summary - Previously, the Apex Court in the case of Associated Builders had held that “Patent Illegality”
would include: a) fraud or corruption; b) contravention of substantive law, which goes to the root of the
matter; c) error of law by the arbitrator; d) contravention of the Act itself; e) where the arbitrator fails to
consider the terms of the contract and usages of the trade as required under Section 28(3) of the said
Act; and f) if arbitrator does not give reasons for his decision. The Apex Court in Ssangyong Engineering’s
case has relied upon the findings given in the case of Associate Builders case, to some extent and has held
that if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the said Act, that
would certainly amount to a patent illegality on the face of the award.

The Supreme Court reiterated that "construction of the terms of a contract is primarily for an arbitrator
to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable
person would; in short, that the Arbitrator's view is not even a possible view to take. Also, if the arbitrator
wanders outside the contract and deals with matters not allotted to him, he commits an error of
jurisdiction. This ground of challenge will now fall within the new ground added under Section 34 (2A)."

The Court has further held that a finding based on no evidence at all or an award which ignores vital
evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent
illegality. Additionally, a finding based on documents taken behind the back of the parties by the
arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based
on evidence led by the parties, and therefore, would also have to be characterised as perverse.