Arbitration: 'Patent Illegality' & 'Contra Proferentem' explained

Cause Title : Flowmore Limited vs M/s Skipper Limited, O.M.P. (COMM) 391/2022, Delhi High Court

Date of Judgment/Order : 2nd February, 2023

Corum : Hon’ble Mr. Justice Chandra Dhari Singh

Citied: 

1. PSA Sical Terminals Pvt. Ltd. vs. The Board of Trustees of V. O. Chidambranar Port Trust, Tuticorin and Ors. AIR 2021 SC 4661
2. Patel Engg. Ltd. v. North Eastern Electric Power Corpn. Ltd., (2020) 7 SCC 167
3. Nabha Power Ltd. Vs. Punjab State Power Corporation Ltd. (2018) 11 SCC 508
4. Associate Builders vs. Delhi Development Authority, (2015) 3 SCC 49
5. R vs. Northumberland Compensation Appeal Tribunal. Ex Parte Shaw, 1952 1 All ER 122
6. ChampseyBhara Company vs. The Jivraj Balloo Spinning and Weaving Company Ltd., AIR 1923 PC 66
7. Delhi Airport Metro Express Pvt Ltd vs. Delhi Metro Rail Corporation (2022) 1 SCC 131

Background

The main ground taken by the learned senior counsel for the petitioner while assailing the Arbitral Award is that the impugned Arbitral Award is ex-facie erroneous and suffers from patent illegality, contrary to the fundamental policy of Indian Law by misappreciating vital evidence and virtually re-writting the contract terms by way of his interpretation, and has altered the agreed terms and the intention of the parties.

Judgment

The Delhi High Court decided that the issue before the Court was to adjudicate whether the Learned Arbitrator had adopted a judicial approach while giving out the Award. The Court may only interfere where the Arbitrator has failed in adopting a judicial approach during the Arbitration Proceedings, analysis of the contract, and thus while giving the Award. Where it is evident that the Learned Arbitrator had worked well within his limits and there has not been any arbitrary exercise of power, there is no scope of interference of the Court.

The Delhi High Court referring to the various judgments as above held that on the issue of 'patent illegality' raised by the Petitioner,  the decisive test is that first, whether the learned arbitrator has adopted a judicial approach; second, the principles of natural justice has been upheld; third, the decision must not have been egregious, or rather, perverse.

“Patent Illegality” is an illegality that goes to the root of the matter but excludes the erroneous application of the law by an arbitral tribunal or re-appreciation of evidence by an appellate court. 

The court observed that in this instant case, the Arbitral Award was a well-reasoned award, with the findings being clearly arrived at based on all the documents/evidence on record. The learned Arbitrator has clearly considered all the relevant evidence of record, and the ground of “misappreciation of evidence” does not stand validated as per the submissions of the Petitioner and under the observation of the Court. The impugned Award is in no way in contravention of the Arbitration and Conciliation Act, 1996, to reason that the Award is patently illegal.

A party cannot simply raise an objection on the ground of patent illegality if the Award is simply against them. Patent illegality requires a distinct transgression of law, the clear lack of which thereof makes the petition simply a pointless effort of objection towards an Award made by a competent Arbitral Tribunal.

The principle is that if arbitrators use the contract itself to determine a dispute, clauses should, in principle, be construed 'contra proferentem', meaning that they should be interpreted against the party that drafted it.

In the instant case, The Petitioner had drafted the Purchase Contract in which the Respondent was a signatory. The Learned Arbitrator having observed various interpretations of the contract, chose to endorse the interpretation that is favorable to the Respondent. The application of the rule of contra proferentem validates the learned Arbitrator‟s findings and observations regarding the interpretation of the contract so as to decide the question of breach of the contract.