Ground Of Patent Illegality Applicable In Cases Of Contravention Of Substantive law, Arbitration Act Or Rules; Not Applicable To Every Legal Mistake: Delhi HC

The Court was dealing with a petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an Arbitral Award.

Dismissing this Petition, the Single-Judge Bench of Justice Neena Bansal Krishna held, “...it is evident that the grounds agitated by the petitioners, do not fall in either of the categories of patent illegality or fundamental breach of Indian Law.”

The petitioners were represented by Senior Advocate Dhruv Mehta while the Respondent Company- Bunge India Pvt Ltd was represented by Senior Advocate Saket Singh.

Factual Background

The petitioners/claimants were promoter Directors of the Company Amrit Bansapati Company Limited (ABCL).They entered into Non-Compete and Business Transfer Agreements with the respondent. The petitioners received Non-Compete Fee by virtue of which the entire edible oil business of ABCL was transferred as a whole to the respondent. However, the Respondent breached the Agreements by refusing to shoulder the responsibility under the tax demands and notices despite their undertakings in the Agreements.

When the petitioners challenged the assessment Order, the Assessing Officer directed the deposit of a sum of over Rs 9 crore as Service Tax and interest/penalty. Since the dispute arose in regard to the interpretation of the terms of the Agreements, the petitioners initiated Arbitration proceedings seeking a finding on the interpretation of the Agreements. This Assessment Order was quashed by the CESTAT and after a year, the Arbitral Tribunal passed a Nil Award on the sole ground that in view of the demand itself having been quashed, the exercise of adjudicating upon the Claims of the petitioners had become academic.

One of the main claims of the Petitioners was that the non-consideration of the terms of the reference of the petitioners’ Claims and the documents filed therein, had resulted in an unjust and patently illegal Award, which is squarely against the rule of law and Public Policy of India. The impugned Award was thus, challenged on the ground that the Award was based on extraneous consideration.

At the outset, the Bench noted that the parties had specifically agreed in their Non-Compete Agreements(NCAs) that there was no service tax leviable on the said Agreement. In case the Notice got issued in the name of the petitioners, it was for the petitioners to have defended the same in which they were successful. Considering the fact that the Notice/Order issued for payment of service tax on the premise that NCA attracted the service tax, the Bench said, “The overhead costs, expenses and interest on the overdraft to garner money for pre Appeal deposit may have been borne by the petitioners as the Notice was in their name, and under no law can the incurred expenses be fastened on the respondent.”

As per the Bench, the Notices were specific to the petitioners and they couldn’t transpose their liability on the respondents. Moreover, it was specifically mentioned in the Agreements that the service Tax was not leviable on NCA fees. “For the erroneous acts of the third party, the respondent can definitely not be held liable for the costs incurred in defending the Notices before CESTAT”, it added.

Considering that the Petitioners had not been able to show any such clause providing that any liability, whether rightly or wrongly sought to be imposed, would be the responsibility or indemnified by the Respondent, the Bench held that the Arbitral Tribunal was right in giving the Nil Award.

The Bench also discarded the objections of the petitioners that the Tribunal traveled beyond the scope of reference of the impugned Award or that it was made on extraneous considerations and the same was without jurisdiction. The Claim that the Tribunal abdicated adjudication of the disputes and gave no finding on the question of contractual liability of one or the other party under the contract was also held to be not tenable.

On the issue of liability to pay, the Bench said, “Once the demand itself was held to be not sustainable, the question of who is liable to pay this purported/ proposed Service Tax became academic, as rightly observed by the Arbitral Tribunal.”

Clarifying that the scope of a challenge under Section 34 of the Act, 1996 is limited, the Bench further added, “The ground of patent illegality is applied when there is a contravention of the substantive law of India, the Arbitration Act or the rules applicable to the substance of the dispute.”

Elucidating further on the matter, the Bench said, “Though the Supreme court in State of Chhattisgarh & Anr. vs. SAL Udyog Pvt. Ltd. (2022) 2 SCC 275 as well, held that an award in blatant disregard of the express terms of the agreement suffers from patent illegality, the court had also made a reference to Associate Builders (supra) wherein it was observed that the term "patent illegality" does not apply to every legal mistake made by the arbitral tribunal. Furthermore, the term "patent illegality" does not apply to legal violations that are unrelated to matters of public policy or interest.”

Thus, observing that the grounds agitated by the petitioners, did not fall in either of the categories of patent illegality or fundamental breach of Indian Law, the Bench dismissed the Petition.

Cause Title: Naresh Kumar Bajaj v Bunge India Pvt Ltd [Neutral Citation: 2024:DHC:8134]

Appearance:

Petitioners: Senior Advocate Dhruv Mehta, Advocates Anubhav Ray, Gayatri Verma and Abhishek

Respondent: Senior Advocate Saket Singh and Advocate Sameer Patel