2025 (12) TMI 1191 - SC - Indian Laws

Limits on 'patent illegality' review of domestic arbitral awards after s.34 challenge, with appeal allowed u/s37.

In an appeal under s.37 of the A&C Act, the dominant issue was whether the HC could set aside a domestic arbitral award for 'patent illegality' after the ... Interference with the arbitral award by the High Court under Section 37 of the Arbitration and Conciliation Act, 1996 on the ground of patent illegality - the award has been affirmed under section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- The bare perusal of section 34 mandates a narrow lens of supervisory jurisdiction to set aside the arbitral award strictly on the grounds and parameters enumerated in sub-section (2) & (3) thereof. The interference is permitted where the award is found to be in contravention to public policy of India; is contrary to the fundamental policy of Indian Law; or offends the most basic notions of morality or justice. Hence, a plain and purposive reading of the section 34 makes it abundantly clear that the scope of interference by a judicial body is extremely narrow. It is a settled proposition of law as has been constantly observed by this court and it is reiterated, the courts exercising jurisdiction under section 34 do not sit in appeal over the arbitral award hence they are not expected to examine the legality, reasonableness or correctness of findings on facts or law unless they come under any of grounds mandated in the said provision. Prior to 2015 amendment, the ground of “patent illegality” emerged as result of judicial interpretation in ONGC Ltd. [2003 (4) TMI 438 - SUPREME COURT] while interpreting “public policy” mandated under section 34(2)(b)(ii) of A&C Act wherein this court for the first time read patent illegality as a sub-ground to set aside the award on the broader purport of “public policy”. In Paragraph 22 of the decision this court observed: Therefore, in a case where the validity of award is challenged, there is no necessity of giving a narrower meaning to the term “public policy of India”. On the contrary, wider meaning is required to be given so that the “patently illegal award” passed by the arbitral tribunal could be set aside.” In 2015, by way of the Arbitration and Conciliation (Amendment) Act a new sub-section (2A) to section 34 of A&C Act was inserted which in addition to statutorily recognizing the ‘patent illegality’ ground for setting aside a domestic arbitral award made it an independent and distinct ground from ‘public policy’ under section 34. The proviso to the newly inserted clause further 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” - a finding based on no evidence at all can be said to be perverse and thus patently illegal. But where there is some evidence and a reasonably plausible inference has been drawn by the arbitrators, the courts should ordinarily refrain themselves from supplanting the views arrived by the arbitrator as that would be the true import of the legislative intent inherent in the Amendment Act. The terminology of ‘patent illegality’ indicates more than one scenario such as the findings of the arbitrator must shock the judicial conscience or the arbitrator took into account matters he shouldn’t have, or he must have failed to take into account vital matters, leading to an unjust result; or the decision is so irrational that no fair or sensible person would have arrived at it given the same facts - If a crucial finding is unsupported by any evidence or is a result of ignoring vital evidence that was placed before the arbitrator, it may be a ground the warrants interference. However, the said parameter must be applied with caution by keeping in mind that “no evidence” means truly no relevant evidence, not scant or weak evidence. The errors pointed out in the impugned judgement, i.e., lack of evidence, percentage-based guess allowances, etc. do not, singly or cumulatively, amount to patent illegality warranting annulment. There were at least some evidence and logical rationale for each award element. The arbitrator’s approach was certainly a possible view a reasonable man might take. The High Court, unfortunately, re-appreciated the evidence and came to a different view, which is impermissible. The High Court’s scrutinized the award from a stricter standard of proof than arbitration law demands. Arbitrators are not bound by the strict rules of evidence as per Section 19 of the A&C Act and may draw on their knowledge and experience. It is settled that a court should not interfere simply because the arbitrator’s reasoning is brief or because the arbitrator did not cite chapter and verse of the contract as long as the path can be discerned by which the arbitrator arrived at his conclusions. Here, the path is discernible and not absurd. The impugned judgement cannot be sustained and the appeal deserves to be allowed - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether, after an arbitral award has been affirmed in proceedings to set aside, an appellate court exercising power under the statutory appeal provision can annul the award by reassessing facts and evidence under the label of 'patent illegality'. (ii) Whether fixation of additional compensation for admittedly directed and accepted 'extra work', when the rate for such extra work was left open, amounts to impermissible rewriting of the contract or is a permissible application of restitution/quantum meruit principles. (iii) Whether the award was liable to be set aside as 'patently illegal' on the ground that certain heads of damages were allegedly based on 'guesswork' or 'no evidence', notwithstanding the arbitrator's reliance on oral and documentary material and a reasoned analysis. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Limits of appellate interference with an arbitral award already affirmed in set-aside proceedings Legal framework: The Court emphasised the statutory policy of minimal judicial intervention and held that the supervisory power to set aside an award is confined to the narrowly defined grounds in the set-aside provision. The appellate provision provides only a limited appeal against an order refusing to set aside or setting aside an award, and the appellate scrutiny is co-extensive with (and does not exceed) the limits applicable to set-aside scrutiny. Re-assessment or re-appreciation of evidence lies outside this limited judicial review. Interpretation and reasoning: The Court held that an appellate court cannot function as if it were a regular appellate forum on facts. Even if another view on evidence appears plausible, that does not justify substitution of the arbitrator's view. Where the award contains reasons, particularly in matters involving interpretation of contractual terms and assessment of evidence, interference must be exceptional and confined to the recognised grounds. Conclusion: The appellate court's annulment of the award after the award had been affirmed in set-aside proceedings was unsustainable because it impermissibly reappreciated facts and evidence beyond the narrow scope of appellate review permitted in arbitration matters. Issue (ii): Whether awarding additional compensation for extra work amounted to rewriting the contract or a permissible restitutionary determination Legal framework: The Court treated restitution/quantum meruit as a permissible basis for compensation where one party lawfully performs non-gratuitous work at the request of the other, the other party enjoys the benefit, and the consideration for such extra work is not governed by a concluded rate. The Court applied the principle that an arbitrator cannot grant relief contrary to an express contractual prohibition, but can interpret implied obligations and fill gaps where the contract is silent, so long as no express term is contradicted. Interpretation and reasoning: The Court found that, after completion/extension of the original contractual period, additional mining and transportation continued at the request of the employer, while the rate for this additional work was expressly left to be decided later and was never finalised. In that factual matrix, determining a reasonable compensation did not substitute any agreed rate, because no mutually settled rate existed for the extra work. The Court held that the arbitrator was addressing a 'vacuum' in the arrangement and preventing unjust enrichment by fixing a reasonable sum for benefit admittedly taken. The Court rejected the view that this exercise rewrote the contract, holding instead that it enforced a restitutionary obligation arising from directed and accepted extra performance where consideration had been left open. Conclusion: Fixing reasonable compensation for the extra work (by adding a modest per-unit amount) was within arbitral authority as a restitutionary/quantum meruit determination and did not amount to rewriting the contract in the absence of an agreed rate for the extra work. Issue (iii): Whether the award suffered from 'patent illegality' due to alleged 'guesswork' or 'no evidence' Legal framework: The Court explained that 'patent illegality' must be a glaring illegality going to the root of the award and cannot be equated with mere erroneous application of law or reappreciation of evidence. A key illustration is an award based on 'no evidence', but the Court clarified that 'no evidence' means absence of any relevant material, not weak, scant, or less persuasive evidence. Arbitrators are not bound by strict rules of evidence, and some approximation in quantification may be permissible where supported by material and rational reasoning. Interpretation and reasoning: On a holistic reading, the Court found the arbitrator had scrutinised oral evidence and documentary correspondence, accepted some claims, reduced others, and rejected at least one claim entirely-showing reasoned evaluation rather than arbitrariness. The Court held that the record contained material enabling the arbitrator to reach the conclusions, including for disputed transportation-related losses, and that the arbitrator's reasoning path was discernible and not absurd. The Court concluded that the appellate court applied an impermissibly strict, court-like standard of proof and effectively substituted its own factual conclusions, which is not the function of a court reviewing an award on 'patent illegality'. Conclusion: The alleged defects (including arguments of 'guesswork' and insufficiency of documents) did not cumulatively or individually meet the threshold of 'patent illegality' because there was some evidence and a logical rationale for the findings, making the arbitrator's conclusions a permissible view not open to appellate substitution. DISPOSITIVE OUTCOME The Court set aside the appellate court's decision annulling the award and restored the decision that had affirmed the arbitral award, holding that the interference was beyond the permissible scope of arbitration appeals and that the award did not suffer from patent illegality.