Patel Engineering Ltd. v. North Eastern Electric Power Corporation (2020) - Setting aside of Arbitral Award for Patent Illegality


Court :

Brief :
The petition was dismissed on the grounds that under Section 37 of the Act, the High Court considered the matter at length, and held that while interpreting the terms of the contract, no reasonable person could have arrived at a different conclusion and that the awards passed by the arbitrator suffered from the vice of irrationality and perversity.

Citation :
SLP(C) D No. 577 of 2020

  • Bench: Justices R. Banumathi, Ms. Malhotra, Aniruddha Bose
  • Appellant: Patel Engineering Ltd.
  • Respondent: North Eastern Electric Power Corporation Ltd.

Issue

· On what grounds did the Meghalaya HC set aside the award given to the appellant(Patel Engineering)?

· Did the Supreme Court reaffirm the scope of 'patent illegality'?

Facts

· The dispute arose between the appellant and the respondent leading to an arbitration award all in favour of PEL.

· NEEPCO challenged the awards under Section 34 of the Arbitration And Conciliation Act, 1996 which was dismissed by the Judicial Commissioner, Shillong and upheld the awards.

· Further, NEEPCO challenged the decision under Section 37 of the Act where the appeal was honoured and the awards set aside.

· The appellant as a result of the order decreed above applied to the Supreme Court.

Appellant's Contentions

· The appellant contended that the decision by Meghalaya HC was erroneous as it had not taken into account the amendments made to the aforesaid Act.

· It also argued that the HC failed to take into account the SC's decisions in ONGC Vs Sawpipes and ONGC Vs Western Geco which were held not to be good laws after the amendment.

Respondent's Contentions

· The respondent contended that the awards by the arbitrator were decided based on irrelevant facts and by ignoring the pertinent clause of the contract.

· It was argued that the award given was not in accordance with the judgements given by the SC in other cases and the awards were perverse.

Judgement

The petition was dismissed on the grounds that under Section 37 of the Act, the High Court considered the matter at length, and held that while interpreting the terms of the contract, no reasonable person could have arrived at a different conclusion and that the awards passed by the arbitrator suffered from the vice of irrationality and perversity.

Relevant paragraphs

The Law Commission in its 246th Report18 recommended the insertion of the ground of ‘patent illegality' for setting aside a domestic award by the insertion of clause (2A) in Section 34 of the Act. The relevant extract from the Report of the Law Commission is extracted herein below:-

"It is for this reason that the Commission has recommended the addition of section 34 (2A) to deal with purely domestic awards, which may also be set aside by the Court if the Court finds that such award is vitiated by "patent illegality appearing on the face of the award." To provide a balance and to avoid excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such "an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciating evidence." The Commission believes that this will go a long way to assuage the fears of the judiciary as well as the other users of arbitration law who expect, and given the circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards. This would also do away with the unintended consequences of the decision of the Supreme Court in ONGC v. Saw Pipes Ltd, (2003) 5 SCC 705, which, although in the 18 Available at http://lawcommissionofindia.nic.in/reports/Report246.pdf context of a purely domestic award, had the unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards, given the statutory language of the Act. …" (emphasis supplied) To give effect to the said recommendation, it was suggested that:

"(iii) After the Explanation in sub-section (2), insert sub-section ‘(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 re-appreciating evidence.' [NOTE: The proposed S.34(2A) provides an additional, albeit carefully limited, ground for setting aside an award arising out of a domestic arbitration (and not an international commercial arbitration). The scope of review is based on the patent illegality standard set out by the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. The proviso creates exceptions for erroneous application of the law and re-appreciation of evidence, which cannot be the basis for setting aside awards.]"

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Achyut kulkarni
on 30 December 2020
Published in Taxation
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