The subjects of intellectual property rights and arbitration are both highly relevant to commercial and corporate law firms and lawyers throughout Ahmedabad and the rest of the country; therefore, in this post, we will be discussing recent developments in these fields, which are crucial developments in the field of commercial and corporate law. Patent illegality is a famous ground used to set aside an arbitral award, even though the phrase itself is not defined in the Arbitration and Conciliation Act 1996. This contention can be used if an award violates the terms of either the contract, the Arbitration and Conciliation Act of 1996, or other substantive legal provisions. International commercial arbitration does not allow the arbitral result to be set aside for patent illegality. The Supreme Court overturned a domestic award due to patent infringement in the case of Patel Engineering Ltd v. North Eastern Electric Power Corporation Ltd (dated May 22, 2020, in S.L.P. (C) Nos. 3584-85 of 2020, etc.). This decision was made under Section 34 of the Act. In the present case, the North Eastern Electric Power Corporation Ltd. (“NEEPCO”) and Patel Engineering Ltd. (“PEL”) had disagreements over work contracts about three different packages of a building project. As a result, PEL was given three arbitral awards, all of which were dated March 2016 (referred to as “Awards.”) The Meghalaya High Court invalidated these Awards in response to a challenge by NEEPCO under section 37 of the Act. PEL subsequently filed review petitions against this, claiming that the High Court’s decision contained an “error apparent” because the 2015 Amendments to the Act had not been considered.
To lend more perspective to the problem, it is pertinent to note that the 2015 Amendments incorporated section 34(2A), which construed patent illegality as a valid reason to set aside a domestic award statutory force. This clause, in effect, prohibited an award from being overturned on the mere basis of “erroneous application of the law or by re-appreciation of evidence” and was meant to be more limited in scope than the prior legal precedent’s interpretation of patent illegality.
The Supreme Court additionally stated that section 34, as modified, would apply because the awards were contested after the 2015 Amendments came into effect. The main issue, however, concerned whether the High Court had appropriately applied this ground in setting aside the Awards and the breadth of patent illegality under the revised section 34(2A). In response to this inquiry, the Court noted that under section 34(2A) of the Act, patent illegality could be held to be a justification for setting aside a domestic arbitral award only in the following three situations: (a) if the arbitrator’s decision was found to be perverse or irrational to the extent that no reasonable person would have reached the same conclusion; (b) if the arbitrator’s construction of the contract is one that no fair or reasonable person would adopt; or (c) if the arbitrator’s perspective is failed to qualify as a viable one. The High Court had rightly established that an arbitral judgement could be set aside under section 34 if it was obviously unconstitutional, the court noted after applying these criteria. In reaching its judgement, the High Court carefully studied the situation. It concluded that no reasonable man could have read the relevant contract articles and reached the same result as the arbitral tribunal. Therefore, the decisions of the High Court were not against the 2015 Amendments but instead in accordance with them. The court upheld the annulment of the Awards for patent illegality because there was no need to reopen the investigation.
In summary, the ruling laid down in the Patel Engineering case evidently suggests that courts appear to be willing to nullify domestic arbitration rulings, which might look like it is taking some steps backwards. Notably, the Supreme Court applied a similar strategy in South East Asia Marine Engineering & Constructions Ltd v. Oil Limited (dated May 11, 2020, in Civil Appeal No. 673 of 2012), in which it invalidated another domestic award due to an “impossible and perverse interpretation of the contract.”