Patent Illegality and Public Policy Compared

Between 2003 and 2015 patent illegality was an aspect of public policy, and the combination gave Indian courts a jurisdiction over awards wide enough to amount to an appeal. The Amendment Act of 2015 separated the two. Public policy under Section 34(2)(b)(ii) is now confined by Explanation 1 to fraud or corruption, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of morality or justice. Patent illegality stands alone in Section 34(2A), is available only for a purely domestic award, and is limited by a proviso excluding an erroneous application of law and any re-appreciation of evidence.

1. How the Two Came Apart

Under the Foreign Awards Act the expression public policy had been given a narrow content in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644: the fundamental policy of Indian law, the interests of India, and justice or morality. In Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 the Supreme Court held that for a domestic award the expression must be given a wider meaning, and added a fourth category: an award patently illegal, that is contrary to the substantive law of India, to the provisions of the Act, or to the terms of the contract. The ground widened further in Oil and Natural Gas Corporation Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263, which read a judicial approach, natural justice and a Wednesbury standard into the fundamental policy of Indian law.

The Law Commission, in its 246th Report, recommended that the expression be confined and that patent illegality be placed in a separate provision applicable only to domestic awards. The Amendment Act of 2015 did both: it inserted the two Explanations to Section 34(2)(b)(ii) and added Section 34(2A) with its proviso.

What each ground now contains, and the prohibition they share

2. Public Policy after 2015

Explanations to Section 34(2)(b)(ii)

Explanation 1. It is hereby clarified that an award is in conflict with the public policy of India, only if, (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2. For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

Fraud or corruption. Fraud in the making of the award, such as a bribe to an arbitrator or the procuring of an award by perjured evidence, and not fraud in the underlying transaction, which is a matter for the tribunal.
Fundamental policy of Indian law. Compliance with the binding provisions of Indian statutes and with orders of superior courts; the disregard of a statutory prohibition is the clearest illustration. Explanation 2 makes plain that the enquiry stops short of the merits.
Most basic notions of morality or justice. The award must shock the conscience of the court. This is where a decision based on no evidence at all, or founded on material a party never saw, is placed in an international commercial arbitration, where patent illegality is not available.

📖 Ssangyong Engineering and Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131

Held: After the amendment of 2015 the ground of public policy is confined to Explanation 1, and the wider view taken in Saw Pipes and Western Geco no longer represents the law. The fundamental policy of Indian law does not permit a review of the merits or a re-appreciation of evidence. Perversity is no longer an aspect of public policy; for a purely domestic award it falls under patent illegality in Section 34(2A). The most basic notions of justice are offended where the award shocks the conscience, as where a decision rests on no evidence, ignores vital evidence, or is based on material gathered behind the back of a party.

Significance: This is the decision that fixes the present content of both grounds, and it is the authority to cite for the proposition that the pre-2015 cases must be read with care.

3. Patent Illegality under Section 34(2A)

Section 34(2A), Arbitration and Conciliation Act, 1996

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-appreciation of evidence.

The content of the ground, as settled in Ssangyong, falls into three classes.

Contravention of the substantive law of India. The illegality must go to the root of the matter and must appear on the face of the award. A decision giving effect to an arrangement the law forbids is the clearest case; a debatable view of a statute is not.
Failure to have regard to the contract. Section 28(3) requires the tribunal to take into account the terms of the contract and the trade usages applicable to the transaction. An award which ignores the bargain, or awards a relief the contract excludes, is patently illegal. The limit is that the construction of the contract belongs to the arbitrator, and only a construction no fair-minded person could adopt crosses the line.
No reasons, or a finding with no basis. An award that gives no reasons where reasons are required by Section 31(3), or that records a conclusion no reasonable person could reach on the evidence, is patently illegal. This is where perversity now sits.

📖 Delhi Airport Metro Express (P) Ltd. v. Delhi Metro Rail Corporation Ltd., (2022) 1 SCC 131

Held: Patent illegality is a ground of restricted scope. It is available where the arbitrator takes a view that is not even a possible one, or construes the contract in a manner no fair-minded person would, or gives no reasons at all. A distinction must be drawn between the absence of reasons, which is fatal, and reasons which are inadequate or which the court would have expressed differently, which is not. Courts must be mindful that the arbitrator is the chosen forum, and interference is not warranted merely because another view is possible.

Significance: The judgment is the leading modern statement of restraint under Section 34(2A), and it corrected a tendency of courts to treat inadequate reasoning as patent illegality.

4. The Two Grounds Compared

Basis	Public policy, s. 34(2)(b)(ii)	Patent illegality, s. 34(2A)
Applies to	Every award made in India, and in corresponding form to a foreign award under Section 48	A purely domestic award only; expressly excluded for international commercial arbitration
Raised by	The court may find it of its own motion	The court may find it; it is ordinarily pleaded by the applicant
Content	Fraud or corruption, contravention of the fundamental policy of Indian law, conflict with the most basic notions of morality or justice	Illegality going to the root and apparent on the face of the award: contrary to the substantive law, to Section 28(3), or resting on no reasons or no evidence
Merits	Explanation 2 excludes a review on the merits	The proviso excludes an erroneous application of law and re-appreciation of evidence
Where perversity sits	No longer, after Ssangyong	Here, for a domestic award
Relationship to Section 48	The corresponding ground exists for foreign awards, and is construed even more narrowly	No counterpart; a foreign award cannot be refused enforcement for patent illegality

⚠ Why the exclusion of international commercial arbitration matters

The proviso to Section 34(2A) denies the ground to an award made in an international commercial arbitration seated in India. The reason is that a foreign party who chooses India as the seat should not face a wider scrutiny than it would face elsewhere. The consequence is practical: a complaint that would be framed as patent illegality in a domestic reference must, in an international commercial arbitration, be brought within one of the three cases in Explanation 1, and in practice within the most basic notions of justice, which requires the award to shock the conscience of the court.

5. How the Two Are Pleaded Together

In a domestic challenge both grounds are usually taken on the same facts, and the distinction matters for how the argument is framed rather than for which label is used. A decision ignoring the terms of the contract is patent illegality under Section 28(3); if the result is also so unfair as to shock the conscience, it is additionally a conflict with the most basic notions of justice. A decision resting on evidence one party never saw is a breach of Section 18, a ground under Section 34(2)(a)(iii), a conflict with the most basic notions of justice, and patent illegality, all at once.

What neither ground permits is the argument that the tribunal weighed the evidence wrongly or preferred one construction of the contract to another. Explanation 2 and the proviso to Section 34(2A) are directed at precisely that argument, and an application that rests on it will fail however it is labelled.

6. Related Topics and Provisions

Topic or provision	Connection
Challenge to the Arbitral Award: Section 34	The section as a whole, with limitation and the outcomes
Setting Aside a Domestic Award: Nature, Scope and Grounds	The grounds the applicant must prove under Section 34(2)(a)
Rules Applicable to the Substance: Section 28	Section 28(1)(a) and 28(3), whose breach is patent illegality
Sections 18 and 31(3), A&C Act, 1996	Equal treatment and the requirement of reasons
Section 48, A&C Act, 1996	Public policy in the enforcement of a foreign award