Judicial Dictionary

Patent illegality

The judgment in Associate Builders v. DDA, (2015) 3 SCC 49 examined each of the heads set out in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, together with the addition of the fourth head of “patent illegality” laid down in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. Since we are concerned with the “perversity principle”, the relevant paragraphs of this judgment are set out as follows:

“29. It is clear that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective.” (page 75)

“31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:

(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.

A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held: (SCC p. 317, para 7)

“7. … It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.”

In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10] , it was held: (SCC p. 14, para 10)

“10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be, the conclusions would not be treated as perverse and the findings would not be interfered with.”

It must clearly be understood that when a court is applying the “public policy” test to an arbitration award, it does not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by the
arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score.

Once it is found that the arbitrators approach is not arbitrary or capricious, then he is the last word on facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594], this Court held: (SCC pp. 601-02, para 21)

“21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted. Even the minority view was that the second respondent was liable as claimed by the first respondent, but the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-law 248, in a claim against a non-member, had no jurisdiction to decide a claim against another member. The finding of the majority is that the appellant did the transaction in the name of the second respondent and is therefore, liable along with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act, it is not possible to re-examine the facts to find out whether a different decision can be arrived at.”

It is with this very important caveat that the two fundamental principles which form part of the fundamental
policy of Indian law (that the arbitrator must have a judicial approach and that he must not act perversely) are to be understood.” (pages 75-77)

“42. In the 1996 Act, this principle is substituted by the “patent illegality” principle which, in turn, contains three subheads:

42.1. (a) A contravention of the substantive law of India would result in the death knell of an arbitral award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is really a contravention of Section 28(1) (a) of the Act, which reads as under:

“28. Rules applicable to substance of dispute.

—(1) Where the place of arbitration is situated in India—

(a) in an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;”

42.2. (b) A contravention of the Arbitration Act itself would be regarded as a patent illegality — for example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act, such award will be liable to be set aside.

42.3. (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:

“28. Rules applicable to substance of dispute. —(1)-(2)***

(3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”

This last contravention must be understood with a caveat.

An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fairminded or reasonable person could do.” (page 81)

This judgment has been consistently followed in a plethora of subsequent judgments, including:

a. National Highways Authority of India v. ITD Cementation India Ltd., (2015) 14 SCC 21 at paragraph 24 (page 38);
b. Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228 at paragraph 45 (page 252);
c. Venture Global Engg. LLC v. Tech Mahindra Ltd., (2018) 1 SCC 656 at paragraph 85 (page 687);
d. Sutlej Construction Ltd. v. State (UT of Chandigarh), (2018) 1 SCC 718 at paragraph 11 (page 722);
e. Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd., (2018) 3 SCC 133 at paragraph 51 (page 169);
f. HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471 at paragraphs 18-19 (page 493);
g. M.P. Power Generation Co. Ltd. v. ANSALDO Energia SpA, (2018) 16 SCC 661 at paragraph 25 (page 679);
h. Shriram EPC Ltd. v. Rioglass Solar Sa, (2018) 18 SCC 313 at paragraph 34 (page 328);
i. State of Jharkhand v. HSS Integrated Sdn, (2019) 9 SCC 798 at paragraph 7 (page 804); and
j. Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 at paragraphs 20, 34-36 (pages 154, 169-170).

Given the parameters of judicial review laid down in Associate Builders (supra), it is obvious that neither the ground of fundamental policy of Indian law, nor the ground of patent illegality, have been made out in the facts of this case, given the fact that the Majority Award is certainly a possible view based on the oral and documentary evidence led in the case, which cannot be characterized as being either perverse or being based on no evidence.


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