PATENT ILLEGALITY VIS-À-VIS ARBITRATION LAW

By Nickkita Shome


INTRODUCTION: -

Arbitration is a process, where a dispute is submitted to an impartial third party called arbitrator, whose decision, or who makes the decision, which is usually binding on both parties. Disputes like property, insurance, contract, business, family, construction, commercial, etc., can be solved by Arbitration.[1] However, disputes like criminal offences, minor guardianship, charity, will-related, matrimonial, etc. cannot be solved through arbitration and hence, need to be addressed by a proper court of law.

Arbitration is a system of private justice and not a court proceeding. For example, let’s assume Drishti and Aheli are in a contract and Aheli thinks Drishti breached the contract and Drishti thinks vice-versa. Now, they can move to the court for solving this dispute but they do not want to. Hence, they can alternatively, appoint Madhurima, who is a lawyer, to decide who is right. In this case, Madhurima will act as an arbitrator, who actually plays the role of a private judge. Therefore, if Aheli and Drishti agree that Madhurima will arbitrate then, this agreement would be considered as an Arbitration Agreement[2], and the compensation as decided by the arbitrator will be known as an Arbitral Reward.

Patent Illegality[3] is an important term that is used under Arbitral Reward. This mainly denotes how to set aside an arbitral reward by giving a patently illegal argument. Here, the word ‘patent’ means that it is a ground for setting aside the Arbitral Award.


INCLUSION OF PATENT ILLEGALITY: -

Section 34 of the Arbitration and Conciliation Act, 1996[4] states – “grounds for setting aside of Arbitral Reward.” The part of ‘patent illegality’ was added in the 2015 Amendment of the Act.

In the year, 2003, the Supreme Court while interpreting the ground of ‘public policy’ under S.34(2)(b)(ii) of the 1996 Act, for setting aside a domestic arbitral award, for the first time introduced ‘patent illegality’ as a sub-ground under the ‘public policy’ ground in the case of ONGC Ltd. V. Saw Pipes Ltd, 2003. [5]The court held that in a case where the validity of the award is challenged, there is no necessity of giving a narrower meaning to the term ‘public policy of India’. On the contrary, wider meaning is required to be given so that the “patent illegal award” passed by the Arbitral Tribunal could be set aside.

PUBLIC POLICY AND PATENT ILLEGALITY : -

An arbitral award can be challenged in court if it is opposed to public policy. The term ‘public policy’ has been defined in two different cases of the Supreme Court. The narrow meaning has been provided in the case, Renusagar V. General Electric,1994[6] in which it was stated that public policy is something which is and consists of –

a. The fundamental policy of Indian law

b. Interests of India

c. Justice or morality,

and if any person is breaching them or any one of them, then it will be considered opposed to public policy. Basically, if the arbitral award is against these three things, then it is opposed to public policy.

Again, the term, ‘public policy’ has been widely defined in the case, ONGC V. Saw Pipes,2003[7], which states that if the arbitral award is contrary to the arbitration agreement, then, it is considered as patent illegality. Henceforth, it was held that the arbitral award becomes void in such a case.


· Example of Patent Illegality in domestic awards –

The arbitral award which is domestic in nature is known as a domestic award.

As we all know, an arbitral award has to be decided according to the contract. But, for instance, if the contract talks about fifteen percent interest over the money, then it would be considered as patent illegality because less interest cannot be given as an award on the grounds of equity.


The Supreme Court in Associates Builders V. Delhi Development Authority, 2014[8]brought up what was stated as patent illegality in the Saw Pipes Case under the following three subheads viz.,

a. Infringement of the substantive law of India

b. Infringement of the Arbitration Act itself and

c. Infringement of S. 28(3) of the Arbitration Act,1996 which mandates the Arbitral Tribunal to decide the case in accordance with the terms of the contract, taking into consideration the usages of the trade applicable to the transaction.[9]


FOREIGN ARBITRAL AWARD: -

A foreign arbitral award was introduced in India under two parameters – the New York Convention,1958, for enforcement of recognition of foreign arbitral awards and the Geneva Convention of 1927. In these events, as the country is a signatory to both these conventions, the non-states of the New York Convention will take precedence, and hence, according to Section 58 and 49 of the Arbitration Act, the enforcement of a foreign award in India takes place. Section 49 deals with the enforcement of foreign awards under the New York Convention[10] whereas, Section 58 deals with the enforcement of foreign awards under the Geneva Convention[11] of the Part-II of the Arbitration and Conciliation Act.

There are two vital keywords that are to be kept in mind while enforcing these awards. They are Reciprocity and Commercial Reservations, which are mentioned under S. 44(B) and S. 53(C) of the same Act. The country from whose government we are trying to enforce the award must have an Act that is equal to the reciprocal provision which is maintained. Furthermore, the award which we are trying to enforce must be used as a commercial holding. If these two parameters are more or less not compliant then, the award would not be enforceable as a whole.

Section 34 of the Arbitration and Conciliation Act which is setting a sign of an arbitral award, is also applicable while enforcing a foreign award. We have the layer of a period of one month to challenge the award. Section 48 and 57 are under certain deal-breakers for enforcing a foreign award that needs to be satisfied. In addition, the parties who are enforcing the award, should not be under any incapacity, which means that there should be a valid and appropriate nature of the arbitration.

The subject of the arbitration falls under the sub-terms of the submission of the arbitration. The composition of the arbitration tribunal was not in any way against the arbitration agreement. Besides, if the arbitration award or the subject matter of the operation does not violate the basic notions and norms of morality and justice and is not in breach of the fundamental public policies of India, then, it is absolutely a perfect arbitral award. Therefore, according to Section 75 and 81 of the Arbitration and Conciliation Act, if an award is induced by fraud and corruption then it needs to be free of all these parameters as mentioned above to be able to become an effective award that can be enforced in India.

In the case of Phulchand Exports V. OOO Patriot, 2011[12],Justice Lodha held that Patent Illegality would apply to domestic awards as well as foreign arbitral awards. Hence, if the foreign award suffers from patent illegality, then it shall be held void. However, in the case of Sri Lal Mahal V. Progetto Grano,2013[13], Justice Lodha gave a completely different judgement. The reason being that in the Sri Lal Mahal V. Progetto Grano Case, Phulchand Exports, a Delhi-based company was supposed to supply and export Durum wheat (a variety of wheat) to Progetto Grano, an Italy-based company. Moreover, it was earlier mentioned by the Progetto Grano company that if any dispute arises then the arbitration would be held in London by GAFTA (Grain and Feed Trade Organization). It was also mentioned in the same agreement that the quality of wheat which the Indian Company was supposed to send, should be tested and checked by an Indian laboratory.

The main dispute arises when inferior quality wheat was sent to Italy with a corrupted certification of the quality check from India and when it was again lab-tested in Italy by the Progetto company, they found that it is not the same Durum Wheat which they demanded from India. Therefore, based on Italy’s lab-testing, an arbitration was held in GAFTA in which the judgment was in favor of Progetto Grano company, and the Sri Lal Mahal Company was ordered to pay compensation (foreign arbitral award) to them for their breach. However, Sri Lal Mahal Company considered this arbitral award as patent illegality because it was mentioned in the agreement that the wheat would be tested in an Indian Laboratory whereas, the decision was made based on Italy’s lab-test and therefore, there is a breach of the conditions of the original agreement. Thus, they filed a suit against the Progetto Grano Company in the Supreme Court of India.

Finally, it was held by Justice Lodha, in this case, that foreign arbitral award shall not be held invalid on the grounds of Patent Illegality.


CONCLUSION: -

Arbitration is an alternative dispute resolution where the disputing parties agree to appoint an impartial arbitrator based on his expertise and reputation to decide a dispute by means of a final and binding award. Arbitration is considered to be international when the parties’ facts or the legal matter extend beyond the single jurisdiction. The distinction between domestic and international arbitration is important as it will affect the enforcement of the award. On the other hand, arbitration differs from other types of dispute resolutions as the arbitrator is selected by the parties and unlike mediation and conciliation, the arbitrator not only resolves the dispute but also makes a binding decision. Arbitration disputes usually arise from a variety of business deals such as merger and acquisition, financial, services, construction, and infrastructure. Intellectual property and purchase and sale agreements arbitration are chosen by the parties because it offers the following benefits over local state courts.

Firstly, the parties are free to select the place of the arbitration. Secondly, the arbitrator is the neutral, independent, and impartial party which means an unbiased dispute resolution. Thirdly, the proceedings are conducted privately and confidentially. Furthermore, the arbitration award is final with no right of appeal which saves the parties time and money when compared to the court's lengthy appellate proceedings. Finally, the cross-border acceptance of an arbitration award is supported by international treaties as a result the arbitration award can be easily enforced abroad unlike a foreign court judgment.

Patently Illegality occurs if the arbitral award is contrary to the arbitration agreement. It is a ground available under the Act for setting aside a ‘domestic arbitral award’ in two circumstances, i.e., firstly, the arbitrator’s decision is found to be so irrational that no reasonable person would have arrived at the same decision and secondly, the arbitrator’s construction of the contract is such that no reasonable prudent person would arrive at a similar conclusion.


[1] Abhijeet Shrivastava & Anujay Shrivastava, Scope of ‘Patent Illegality’ in Refusing Enforcement of Arbitral Awards, INDIACORPLAW ( Jul. 16, 08:42 PM), https://indiacorplaw.in/2020/09/scope-of-patent-illegality-in-refusing-enforcement-of-arbitral-awards.html [2] Bernardo M. Cremades, The Leading Arbitrators' Guide to International Arbitration - 2nd Edition, JURIS LEGAL INFORMATION (Jul. 16, 09:00 PM), https://arbitrationlaw.com/library/arbitral-award-chapter-23 [3]Aditya Mehta & Arjun Sreenivas, The Supreme Court reaffirms the scope of patent illegality, INDIA CORPORATE LAW (Jul. 16, 09:00 PM), https://corporate.cyrilamarchandblogs.com/2020/05/supreme-court-reaffirms-the-scope-of-patent-illegality/ [4] Arbitration and Conciliation Act, 1996 [5] Oil and Natural Gas Ltd. v SAW Pipes Ltd. (2003) 5 SCC 705. [6] Renusagar Power Co. Ltd vs General Electric Co. (1994) AIR 860, 1994 SCC Supl. (1) 644 [7] Id. at 5 [8] Associate Builders v Delhi Development Authority, (2014) (4) ARBLR 307(SC) [9] Sidharath Goyal, Unravelling the Ground Of 'Patent Illegality' For Setting Aside Arbitral Awards, LIVE LAW (Jul.17, 08:49 PM), https://www.livelaw.in/columns/unravelling-the-ground-of-patent-illegality-for-setting-aside-arbitral-awards-148085 [10] https://www.newyorkconvention.org/ [11] Pedro J. Martinez-Fraga, OXFORD UNIVERSITY PRESS ( Jul. 17, 10:00 PM), https://www.cambridge.org/core/books/american-influences-on-international-commercial-arbitration/geneva-convention-of-1927/ACF0003372F82468E84BC26776945D98 [12] Phulchand Exports Ltd. v. O.O.O. Patriot, (2011) 10 SCC 300 [13] Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433,



Author - Nickkita Shome

2nd Semester, B.A.L.L.B,

Amity Law School,

Amity University Kolkata.

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