Patel Engineering v NEEPCO: Supreme Court sets aside Award for Patent Illegality

This post is authored by Hitesh Nagpal. He is a third-year student at Maharashtra National Law University, Mumbai.

Patel Engineering v NEEPCO: Supreme Court sets aside Award for Patent Illegality

On 22 May 2020, the Supreme Court in Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd. reaffirmed the scope of ‘patent illegality’, which is a ground available under section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) for setting aside a domestic arbitral award. Section 34(2A) of the Act reads as follows:

“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 reappreciation of evidence.”

Background

The dispute between Patel Engineering Ltd. (“PEL”) and North Eastern Electric Power Corporation Ltd. (“NEEPCO”) arose out of a works contract in three packages, each of which contained a separate arbitration clause. The parties’ dispute culminated into three separate awards, all in favour of PEL.

NEEPCO challenged these awards by filing applications under section 34 of the Act before the Additional Deputy Commissioner (Judicial) Shillong; who dismissed the applications and upheld the awards. NEEPCO challenged the awards under section 37 of the Act before the Meghalaya High Court (HC). The Meghalaya HC, by way of a common judgment, allowed the appeals and set aside the awards.  

Aggrieved, PEL challenged the Meghalaya HC’s decision before the Supreme Court by way of special leave petitions (SLPs). However, the Supreme Court dismissed each of the SLPs.

PEL then filed review petitions before the Meghalaya HC, contending that the decision of the Meghalaya HC ‘suffers from error apparent on the face of the record as it had not taken into consideration the amendments made to Arbitration and Conciliation Act, 1996 by Amendment Act of 2015’. Dismissal of the review petitions by the Meghalaya HC resulted in the present challenge before the Supreme Court.

PEL submitted that the Meghalaya HC had erroneously applied the provisions of the Act as applicable prior to the Arbitration and Conciliation (Amendment) Act, 2015 (the Amendment). PEL also argued that the Meghalaya HC erred in referring to the Supreme Court’s decisions in Oil and Natural Gas Corporation Limited v. Saw Pipes Limited (Saw Pipes) and Oil and Natural Gas Corporation Limited v. Western Geco International Limited (Western Geco), which are no longer good law after the Amendment.

Supreme Court’s Decision

Relying on Board of Control for Cricket in India v. Kochi Cricket Private Limited, the Supreme Court held that the amended section 34 would apply to the present case as the petitions were filed after the Amendment came into force. It was observed that ‘patent illegality’ as a ground to set aside domestic arbitral award was expounded in Saw Pipes, where this Court gave a wider interpretation to the ‘public policy of India’ in Section 34(2)(b)(ii) of the Act and held that “an award would be ‘patently illegal’, if it is contrary to the substantive provisions of law; or, provisions of the 1996 Act; or, terms of the contract.”

The Supreme Court reaffirmed its decision in Associate Builders v. Delhi Development Authority (Associate Builders) and Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (Ssangyong), where it had considered patent illegality as a ground to set aside domestic arbitral awards. Relying on the aforementioned cases, the Supreme Court observed that since the present cases arises out of a domestic award between two Indian entities, patent illegality as a ground for setting aside the award is available if:

  1. “the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at the same; or,
  2. the construction of the contract is such that no fair or reasonable person would take; or,
  3. that the view of the arbitrator is not even a possible view.”[1]

The Meghalaya HC rightly referred to Associate Builders and Ssangyong in deciding that a domestic award can still be set aside if it is found to be patently illegal or pervasive. Reference was made to the decision of the Meghalaya HC, wherein it was held that the findings of the arbitrator suffers from vice of irrationality and perversity because the arbitrator arrived at it by taking into consideration irrelevant factors and ignoring pertinent clauses of the contract.

It was held that despite the fact that the Meghalaya HC relied on several decisions, such as Western Geco, which have ceased to be good law, the case has been decided on the ground that the tribunal rendered a perverse award and on a comprehensive reading of the terms and conditions of the contract, the view taken by the arbitrator is not even a possible view. Moreover, it held that the Meghalaya HC rightly followed the test laid down in Associate Builders and Ssangyong.

In light of the above, the Supreme Court dismissed the review petitions filed by PEL; thereby affirming the Meghalaya HC’s decision to set aside the arbitral award and dismiss the review petitions before it.  

Conclusion

The primary issue in the present case was whether the Meghalaya HC rightly dismissed the review petition which was filed by PEL contending that the Meghalaya HC erroneously applied the provisions as applicable prior to the Amendment and relied on the decisions, which are no longer good in law.

While holding that the Meghalaya HC rightly dismissed the petitions, the Supreme Court reaffirmed the scope of ‘patent illegality’. It held that the domestic award it to be set aside only if it is patently illegal on any of the three grounds as highlighted above.


[1] Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd., 2020 SCC OnLine SC 466.

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