In this blog post, Abhijna Ganesh Somashekhara, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes patent illegality as a ground for setting aside of an arbital award. 

Introduction

Arbitration law stands on two platforms. Firstly, party autonomy and secondly, finality of award. They stand separate from judicial interpretation as otherwise, arbitration law will not be able to achieve its objective and will cease to be of importance. Indian Arbitration law first developed due to the undiscriminating judicial intervention, then formed into a legislation in the year 1961 and then to an Act based on Model Law which was adopted by the United Nations Convention of International Trade Law.

Arbitration has provided a clean and effective dispute settlement mechanism. Arbitration on national as well as international platforms have undertaken steps so as to reduce judicial intervention and judicial review. The Arbitration and Conciliation Act, 1996 was developed in order to reduce judicial intervention and finality of award. Public Policy is considered as an area important in Arbitration. It is of an indefinable nature. The courts have been flexible and have provided various interpretations of the same. It is axiomatic that arbitration laws in India are being expanded by way of judicial interpretation and it is contrary to legislative intention.

In the Ramesh Chander Arora v Kashmeer Saree Kendra , the courts did not look into the 1996 Act that is followed today but looked into the jurisprudence of India’s arbitration and utilized  the previous act, the 1940 Act and revived the debate as to whether “patent illegality” could be utilized to establish the exception of “public policy”.

The question that is prevailing is whether patent illegality is interpreted in the same way that the concept of public policy is interpreted. The Indian courts, keeping in mind the objective that have been put forward by the 1996 Act are adhered and implemented, hence, due to this fact, the courts have interpreted public policy in an extremely narrow manner. There are two landmark judgements that stand at the controversy between public policy and illegality of a patents as grounds, the cases are Renusagar Power Co Ltd v General Electric Co and Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd.

The Renusagar case had widened the ambit of public policy. However, the Saw Pipes overruled and distinguished itself from the Renusagar case and reduced the scope of public policy. This change brought about many difficulties in arbitration law and challenged the very two pillars that arbitration law stood on, that is, finality of award and minimal judicial interpretation. Saw Pipes through its judgment, demonstrated that there is a prevailing section of the society actively supports the liberal interpretation. This has opened floodgates and have encouraged individuals to file cases even in trial matters. In Saw Pipes, the reinterpretation of Section 35(2)(b)(ii), which provided an extremely wide interpretation of the concept of public policy the concept of.

The Arbitration and Conciliation Act, 1996

The goal of the Parliament upon developing the said act was to increase autonomy, efficiency and effectiveness while reducing the scope of judicial intervention in the process of arbitration. Article 19(1) of the UNCITRAL Model Law on International Commercial Arbitration 1985 (‘Model Law’) states that, ‘subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.’ Moreover, Article 18 of Model Law portrays the commitment of the said law to work towards minimizing the scope of judicial intervention and strive towards achieving a large amount of autonomy.

This law serves a multitude of purposes, Firstly, it aims to bring together the numerous arbitration laws present in numerous jurisdiction with that of the Indian arbitration law. Secondly, to achieve an arbitration process in the country that is fair and not discriminatory in nature. Thirdly, it is a consolidation all previous act regarding arbitration and lastly, but most importantly, it provides the enforcement of awards as a means of decrees of the court of law.

However, the critics claim that despite the attempts of the Parliament, the Act passed has not had an impact on the system and makes it highly difficult to settle both international and domestic matters by the way of arbitration. The consequence due to the above, has resulted in parties taking their matters to participate in other dispute settling mechanisms outside the nation. Even though the Act has made changes, the stance in the court with regard to the arbitration remains the same.

Reforms and amendments, if enacted by Parliament can make the process effective and reliable. For instance, if Parliaments extends the authority and delegates certain powers to the arbitral tribunal, the scope and ambit of judicial intervention will stance to reduce. Powers could be such as, allowing the parties directly to file the cases and matters to the arbitral tribunal itself to review the claim of the parties instead of parties approaching the court and seeking interim measures. This would enable the arbitral tribunal to determine the requirement and need for judicial interpretation.

The 2003 Amendment Act to the 1996 Act

In the year 2003, a report was prepared by the law commission of India, highlighting the weaknesses and the discrepancies in the Arbitration and Conciliation Act, 1996. The Arbitration and Conciliation (Amendment) Bill 2003 was present to the Parliament. The Bill emphasized on a certain amendment to add a section to the prevailing Act, which allows the award to be set aside by the courts “on the additional ground that there is an error which is apparent on the face of the arbitral award giving rise to a substantial question of law” .

However, the Rajya Sabha withdrew the bill as it believed that it would overturn the parameters as set by the 1996 Act and by the judicial decisions of the court and would hence, increase the amendment if passed would increase the scope of judicial intervention in arbitration proceedings.

Public Policy as a ground for Judicial Intervention

Exploring the Limits of Judicial Legislation: The Renusagar and Saw Pipes Judgments

The judiciary has attempted to develop a structure to understand the concept of public policy and to determine as to what exactly falls under its purview. The two landmark judgments that have provided immense detail to the matter at hand are the Renusagar case and Saw Pipes case. Both these decisions challenged the two integral aspects of Arbitration law, that is, minimal court interference and the finality of the award. In the Renusagar case the court determined the parameters of Public Policy and contained it under three grounds. These three grounds are: (i) fundamental policy of the country, (ii) the interests of the nation and (iii) morality or justice.  This case however was decided prior to the year 1996 and the interpretation prevailing in the judgment was in accordance to the now repealed Foreign Awards (Recognition and Enforcement) Act 1961.

The principles as laid down in Renusagar were later on adopted by the Supreme Court in Saw Pipes and McDermott International Inc v Burn Standard Co Ltd. In addition to the narrow meaning established for public policy, a fourth ground, that is, the ground of “patently illegal” was inserted. Patently illegal’ or ‘blatant illegality’ or ‘error on the face of the record’ has a few definitions, it can mean: an error of law that goes to the root of the matter; or a violation of the constitution or a statutory provision; or it may be inconsistent with common law.

In Saw Pipes, the Court emphasized that the fourth ground was only applicable to domestic awards The Law Commission Report and the proposed Arbitration Act arbitration when dealing with the ground of ‘patently illegal.’ In the recent Constitutional Bench Supreme Court decision in Bharat Aluminium Co v Kaiser Aluminium Technical Service Inc, the Court held that it could not support the conclusion reached in Bhatia International v Bulk Trading SA and Venture Global Engineering v Satyam Computer Services Ltd that it would also apply to international arbitrations. However, in its judgment Ogilvy & Mather Pvt Ltd. v. Union of India, the Delhi High Court reinforced the dictum established and interpreted by Bhatia International and Venture Global Engineering that it will apply to international arbitrations as well.

Patently Illegal: Is a Separate Ground Necessary?

In Saw Pipes, as discussed above, it was observed that the concept of “public policy” was interpreted in accordance to the underlying principles as established in the 1996 Act. The court established that Public Policy concerns with matters relating to public good and public interest matters. Bearing this in mind the Supreme Court introduced the concept of Patent Illegality as a fourth ground under Public Policy that was determined in the Renusagar case. This meant that this ground could be utilized to set aside an award if contrary to law.

Despite all the criticisms faced by the decision of the Saw Pipes, the same judgment was followed by Justice Sinha in McDermott International case. However, it is believed that the ground of patently illegal under public policy goes against the spirit and basic foundation of the 1996 Act. It is said to be the same if the Parliament had decided to retain Section 30 of the 1940 Act. Moreover, while producing this judgment, the aspect of separation of power was pushed aside and was not taken into consideration. When initially the 1996 Act was enacted by the Parliament in accordance with the Model law it aimed to reduce the supervisory power of the courts whereas this patently illegal ground increases the ambit and purview of the court with respect to judicial intervention.

Conclusion

In conclusion, it can be established that the aims and objectives of the Arbitration and Conciliation Act of 1996 as implemented by the Parliament is of foremost importance, and the implementation of patently illegal as ground under public policy would be directly violating the basic structure of the said Act. It would destroy the two fundamental pillars of arbitration that is, finality of award and minimal judicial intervention. Moreover, it discourages the growth of Arbitration in the court and does not take the necessary steps to bring forward Dispute Settlement Mechanisms. Hence, the ground of Patently Illegal must not be applied and must be struck down by the court of law or the legislature.