'Lawful' Patently Illegal International Commercial Arbitration Awards – A Dichotomy

Sub-Section 2A of Section 34 of the Arbitration & Conciliation Act, 1996, introduced on October 15, 2015, apparently on account of the presumed negative fallout of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 for foreign business entities in India and 246th Report of the Law Commission of India (August, 2014), makes a clear distinction between a Domestic Arbitration award and an International Commercial Arbitration award, when it comes to “Patent Illegality”, which is a ground for assailing a Domestic Arbitration award, but not an International Commercial Arbitration Award. Relevant part of the said Sub-Section 2A of Section 34 is reproduced below:

“34.(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…..”

Apparent from its text, Sub-Section 2A of Section 34, inter alia, poses serious challenges to India's arbitration ecosystem for, inter alia, the following reasons:

1. The distinction carved out between a Domestic Award and an International Award from the point of view of impunity from “Patent Illegality” is unfathomable in as much as “Patent Illegality” is something which ought not be sustainable qua all awards – Domestic as well as International. In other words, if “Patent Illegality” is not enough to set aside an International Commercial Arbitration Award, it is difficult to see any good reason for not adopting a similar benchmark for domestic arbitration awards and vice versa.

2. The legislative intent in not making “Patent Illegality” available as a ground for impugning an International Commercial Arbitration Award seems to be creation of a conducive and expedient dispute resolution ecosystem for foreign players in India. In all this milieu, domestic investors and entities seem to have been left out, thereby creating two sets of post-award legal benchmarks. If a separate arbitration ecosystem is that important for foreign players, aren't we denying benefits thereof to our domestic players!

3. Looking from the prism of foreign entities at the receiving end of an otherwise patently illegal award, Sub-Section 2(A) of Section 32 may not be the best of attractions available in the dispute resolution landscape in India. The lure of irrelevance of “Patently Illegal” awards in impugning International Commercial awards in India may backfire in as much as foreign players/investors in India may not want to be at the receiving end of patently illegal arbitration awards. Therefore, one sees no good reason for irrelevance of “Patent Illegality” for impugning International Arbitration awards in India – legal or otherwise in as much as foreign players may still find it as a “red herring”, without necessarily creating an expedient dispute resolution mechanism.

4. It goes, without saying, that laws of India are presumably important considerations for a foreign player before undertaking business ventures in India, irrespective of the governing law, more specifically since awards are to be ultimately enforced in India in most cases. On this aspect, it would be certainly worrisome for a foreign player to enter into arbitration contracts under Indian law, knowing fully well that even patently illegal awards are allowed to be enforced against such foreign players, should the occasion so arise. To this extent, the apparent lure of limited grounds for impugning international commercial arbitration awards stands diluted by the lurking possibility of patently Illegal awards affecting such foreign entities in India.

5. Another issue would be an International Commercial Arbitration with Indian law as the governing law and an offshore jurisdiction as the situs for ultimate enforcement of the award, as and when passed. What if the domestic laws of the relevant offshore jurisdiction do not allow execution of a patently illegal award under the governing law i.e. Indian Law !. To this extent, India's best bet would to keep a uniform benchmark for both domestic and foreign awards.

6. The seriousness of the issue can best be illustrated by the Hon'ble Supreme Court's judgment in I-Pay Clearing Services Private Limited vs. ICICI Bank Limited, (2022) 3 SCC 121, wherein the Court held that an arbitrator's award of Rs.50 Crores against alleged loss on account of termination of the subject contract without a definite finding on such a termination is nothing but “Patent Illegality”. In other words, the Hon'ble Supreme Court opined that non-speaking award of a claim without any specific finding of fact or any good reason whatsoever is Patent Illegality. Are we then going to allow an International Commercial Arbitration Award to be executed in India, even if claims have been allowed without specific findings, while striking down Domestic Awards on the same ground!.

7. Another important issue is whether a foreign award, otherwise patently illegal within the meaning of Section 34 (2A) of the Arbitration & Conciliation Act, 1996, can be enforced or executed in India under the Enforcement Foreign Awards (Recognition & Enforcement) Act, 1961 (now repealed) and Section 48 of the Arbitration & Conciliation Act, 1996. It is important to mention here that Section 44 of the Arbitration & Conciliation Act, 1996 defines “Foreign Award” by, inter alia, referring to the First Schedule, which mentions about “arbitral awards not considered domestic awards” as coming within the definition of “Foreign Award”.

Though Section 48 of the Arbitration & Conciliation Act, 1996 contemplates 7 possible grounds for non-enforceability of a Foreign Award, the real test would be the test of “Public Policy”, as enunciated by Explanation – I to Section 48 (2) (b) of the Act, the rest 6 possible grounds being largely technical in nature. This issue has been addressed by the Hon'ble Supreme Court of India by giving a narrower meaning to “Public Policy” for purposes of Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 (now repealed) and Section 48(2)(b) of the Arbitration & Conciliation Act, 1996. In this connection, the following observations of the Hond'ble Supreme Court in Renusagar Power Co. Ltd. Vs. General Electric Co., 1994 Supp. (I) SCC 644 are relevant:

“This would imply that the defence of public policy which is permissible Under Section 7(1)(b)(ii) should be construed narrowly…..”

“… Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of India; or (ii) the interests of India; or (iii) justice or morality.”

The above much-narrow construction of “Public Policy” for purposes of Section 48(2) (b) of the Arbitration & Conciliation Act, 1996 vis-à-vis Section 34 (2) (b) (ii) of the same Act in Renusagar (1994) has been adopted in subsequent judgments of the Supreme Court in Oil and

Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, Associate Builders Vs. DDA, 2015 (3) SCC 49, Ssangyong Engineering & Construction Co. Ltd. Vs. NHAI, AIR 2019 SC 5041 etc. Cutting a long story short, an International Commercial Arbitration Award, otherwise patently illegal under Section 34(2) (b) (ii) of the Arbitration & Conciliation Act, 1996, can still be enforced in India and Section 48(2)(b) of the Act may not stand on the way of its due enforcement, whereas there is no question of enforcement of a patently illegal domestic award on account of Section 34(2A) of the Act.

The Draft Amendments to the Arbitration & Conciliation Act, 2024 are, indeed, a welcome change in as much as the same intend to do away with Sub-Section 2A of Section 34 of the existing Arbitration & Conciliation Act, 1996 by, inter alia, making no distinction between Domestic Awards and International Commercial Arbitration Awards from the point of view of “Patent Illegality”.

Till the proposed Amendment sees the light of the day, we keep our fingers crossed.

Views Are Personal.