Plea Of Patent Illegality Is Not Available Against An Award In International Commercial Arbitration: Supreme Court

A Bench of Justice Sanjay Kishan Kaul and Justice MM Sundresh has held that in an application under Section 34 of the Arbitration and Conciliation Act, 1996, post the 2015-amendment,  the plea of patent illegality is not available for an award which arises from an international commercial arbitration.

Before the Apex Court, Mr. Vishal Gandhi appeared for the appellant, while Mr. Rahul Chitnis appeared for the respondent.

In this case, the appellant and respondent drew a settlement deed in relation to some disputes between them. The settlement deed had an arbitration clause. In the meantime a dispute arose between the parties regarding two e-mails that were sent by the wife of the respondent, who was not a party to the agreement, to the appellant, raising some grievance about non-compliance of the agreement.

The Appellant alleged breach of settlement deed as the wife sent false and defamatory emails and initiated the arbitrattion proceedings. The arbitrator passed an award in favor of the appellant on November 10, 2014 and the respondent challenged the same under Section 34 of the Act before the Bombay High Court on January 24, 2015. The Single Judge set aside the award on May 19, 2020 while the appeal filed by the respondent under Section 37 was dismissed by the Division Bench on April 20, 2021.

The appellant contended that an arbitration award arising out of an international commercial arbitration can't be challenged under Section 34 on the ground of patent illegality after the amendment to the act in the year 2015. The Arbitration and Conciliation Act was amended with effect from October 23, 2015, inter alia, by inserting explanations to Section 34(2) of the said Act as well as by inserting Sub-Section 2A to Section 34.

While evaluating the Section 34 post-amendment, the Bench noted that the admitted position is that the appellant is a party based in Singapore and thus, in terms of the aforesaid definition the arbitration although carried out within the country, would be an "international commercial arbitration".

"There is no doubt that the scope of interference by the Court became more restrictive with the amendments coming into force."

The Bench also stated that, "A distinction is sought to be carved out between a domestic award arising from an international commercial arbitration and a purely domestic award. The test for interference was sought to be made more stringent by the amendment in respect of a domestic award arising from an international commercial arbitration."

The Court noted that a distinction was sought to be made between purely domestic awards and awards arising out of arbitrations other than international commercial arbitrations, as set out in sub-section 2A to Section 34 of the said Act.

"The crux of the aforesaid is that while the plea of the award being vitiated by patent illegality is available for an arbitral award, such an award has to be a purely domestic award, i.e. the plea of patent illegality is not available for an award which arises from international commercial arbitration post the amendment.", the Court held.

On the argument canvassed by the appellant that the award has to be scrutinised in the post amendment scenario and thus both the forums below fell into error by applying the test applicable in the pre-amendment scenario, the Bench held that there is no doubt that the proceedings were started prior to the amended and referred to a judgment in case of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors to hold that, "The 2015 Amendment Act is prospective in nature and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the said Act, on or after the 2015 Amendment Act, and to court proceedings which had commenced on or after the 2015 Amendment Act came into force."

The Court examined phraseology used in the arbitration clause of the settlement deed between the parties, which averred thus, "the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto."

After referring to judgments on the interpretation of such clauses in agreements, the Bench held that,

"In this case, the Section 34 proceedings had already commenced when the 2015 Amendment Act came into effect. The court proceedings were already subject to the pre-2015 legal position. In a conspectus of the aforesaid, a generally worded clause such as Clause 9 of the Deed of Settlement cannot be said to constitute an agreement to change the course of law that the Section 34 proceedings were subject to."

The Court noted the line of the reasoning in the case of Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India that to prevent any uncertainty in law, while seeking to fine tune the law to restrict the scope of interference in awards, the legislature took a conscious decision to make applicable the amendments only from the date it came into force.

"The general phraseology of a clause which seeks to include any amendment to the Act would not be able to be availed of to expand the scope of scrutiny as it would appear to run contrary to the legislative intent of Section 26 of the Amendment Act.", the Court held.

Regarding the award denying benefits to the respondent as the wife sent the false and defamatory emails, the Bench noted that though the wife was initially impleaded in the proceedings under Section 9 of the said Act, she was later dropped from the arbitration proceedings as she was not a party to the agreement vide consent order.

"In a sense the agreement accepted that the wife of the respondent had no role to play and the respondent could not be penalised for her conduct. Merely because indiscreet email sent by the wife respondent can't deny his dues.", the Court observed.

The Court held that the Arbitrator's conclusions are not in accordance with the fundamental policy of Indian law, and can thus be set aside under the pre-2015 interpretation of S. 34 of the said Act and set aside the award, and upheld the judgments of the High Court, to the extent they interfered with the award.

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