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Case Analysis: Patel Engineering Ltd. vs. North Eastern Electronic Power Corporation Ltd.

Sourabh Balwani, Student, Maharashtra National Law University, Nagpur

Introduction

The jurisprudence revolving around setting aside of an arbitral award under the Arbitration and Conciliation Act, 1996 (the Act) is of evolving nature in India, with the courts occasionally interfering with the decision of arbitrators and instilling novel criteria through their various judgements. However, a significant thrust enabling courts a justification to set aside the award was rendered with the Arbitration and Conciliation (Amendment) Act, 2015 which codified the concept of ‘patent illegality’.[1] The Supreme Court, post amendment, pronounced significant judgements emphasising the principle of patent illegality. Recently, the court, in the case of Patel Engineering Ltd. v. North Eastern Electronic Power Corporation Ltd.[2] reaffirmed the principle and held that a domestic award could be set aside under Section 34 of the Act for being ‘patently illegal’.


Facts

The dispute between the two firms arose with the domestic arbitral awards dated March 29, 2016. The two entities entered into works contracts for three separate packages. Disagreements pertaining the extra payments for additional quantities of lead were the prime issues of all the three arbitral proceedings. It essentially focussed on the vetting of the clauses of the contract, amongst which one stated the conditions of a contract to be applicable in order to decide the rate at which Patel Engineering Ltd. was entitled to extra payments for additional quantities. The sole arbitrator pronounced the three arbitral awards in favour of Patel Engineering.


Procedural History

1) The three arbitral awards were challenged by North Eastern Electronic Power Corporation Ltd. (NEEPCO) before the Additional Deputy Commissioner (Judicial), Shillong under Section 34 of the Act. The said applications were dismissed at this stage, vide judgement dated April 27, 2018.


2) The Meghalaya High Court allowed the appeal by NEEPCO under Section 37 of the Act against the orders of the Additional Deputy Commissioner. In the judgement dated February 26, 2019, the High Court set aside the arbitral awards.


3) Later on, Patel Engineering Ltd. filed Special Leave Petition before the Supreme Court which was dismissed on July 19, 2019.


4) Patel Engineering Ltd. then filed a review petition before the Meghalaya High Court citing that the judgement of the Court is rife with evident errors as it did not take into consideration the provisions of Amendment Act, which are now embodied under the original legislation. The High Court dismissed the petitions on October 10, 2019, and the firm subsequently approached the Supreme Court.


Issue(s) before the Court

Whether the High Court erred in dismissing the review petition of its judgement setting aside the arbitral award which was earlier pronounced in favour of Patel Engineering Ltd.?


Findings of the Court

The court first dealt with the application of the provisions of the Amendment Act in the present case. The court citing its pronouncement in the case of Board of Control for Cricket in India v. Kochi Cricket Private Limited and Others[3], held that the present case concerned would attract the provisions of Amendment Act, as the applications under Section 34 of the Act have been filed after October 23, 2015 (the day on which Amendment Act came into force).

The Amendment Act inserted clause 2A in Section 34 of the original legislation. It reads as—


“(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of the evidence.”[4]

Explicating patent illegality as a ground to set aside a domestic arbitral award, the Supreme Court cited the judgement of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[5], where the Court elaborated on the contours of ‘public policy of India’ and its implications under Section 34(2)(b)(ii) of the Act. This case lay the genesis of the significant patent illegality doctrine as a ground for setting aside an award. The court said that an award would be patently illegal if it is contrary to the substantive provisions of the law, or the provisions of the Arbitration Act, or the terms of the contract. The legal framework was further elaborated in the judgement of Associated Builders v. Delhi Development Authority[6] . The court stated that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes a contract in a manner which no fair-minded or reasonable person would take, i.e. if the view taken by the arbitrator is not even a possible view to take. This view was also reaffirmed in the recent judgement of the Supreme Court in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India[7].

The court made an essential remark in Ssangyong Engineering and Construction Company Limited, underscoring that the expansive interpretation given to ‘public policy of India’ in Saw Pipes and Oil & Natural Gas Corporation Ltd. v. Western Geco International Limited[8] had been done away with, and a new ground of patent illegality was introduced under clause (2A) which would apply to applications under Section 34 made on or after October 23, 2015.

Clearing the air, the Supreme Court pointed out that the ground of patent illegality cannot be availed against international commercial arbitrations seated in India or for resisting enforcement of a foreign award under Section 48 of the Act.


In the concerned case, the Supreme Court remarking the award to be a domestic award, upheld the ground of patent illegality as a ground to set aside an arbitral award. The court expounded the ground of patent illegality in the following circumstances:


1. 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,


2. The construction of the contract is such that no fair or reasonable person would take, or,


3. That, the view of the arbitrator is not even a possible view.


The Supreme Court considered the judgement pronounced by the High Court of Meghalaya where it set aside the arbitral award due to it being patently illegal, to be in conformity with its pronouncements in Associate Builders and Ssangyong Engineering. The Court also accorded the High Court’s observation of the arbitral award to suffer from the vice of irrationality and perversity as correct. The High Court recorded the arbitrator’s act of consideration of irrelevant factors into account and ignorance of vital facts, as going against established principles. While considering the observations of the High Court, the Supreme Court stated the award to be perverse award. The High Court was of the view that on a holistic reading of all the terms and conditions of the contract, the view taken by the arbitrator was not a possible view.

The same was rightly set aside by the High Court, and review petition was also consequently dismissed. The Supreme Court did not find a ground to interfere with the High Court’s order.


Conclusion

This judgement by the Supreme Court reflects its wider interpretation of patent illegality as a ground to set aside a domestic arbitral award. Despite Patel Engineering Ltd. contending that the view taken by High Court was not appropriate since it did not accord the effects of Amendment Act, the Supreme Court stated that the High Court’s due deference to the judgements of Associate Builders and Ssangyong Engineering predicate rational reasoning applied by the Court. The court rightly denied interfering in the High Court’s order. This judgement will further contour the legal development in the patent illegality test.

[1] S. 34(2A), The Arbitration and Conciliation Act, 1996. [2] Patel Engineering Ltd. v. North Eastern Electronic Power Corporation Ltd., Order dated 22nd May 2020 in Special Leave Petition (C) Nos. 3584-85 of 2020. [3] Board of Control for Cricket in India v. Kochi Cricket Private Limited and Others, (2018) 6 SCC 287. [4] S. 34(2A), The Arbitration and Conciliation Act, 1996. [5] Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. [6] Associated Builders v. Delhi Development Authority, (2015) 3 SCC 49. [7] Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India, (2019) 15 SCC 131. [8] Oil and Natural Gas Corporation Ltd. v. Western Geco International Limited, (2014) 9 SCC 263.

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