Patent Illegality Ground Unavailable To Challenge Awards In International Commercial Arbitrations: Bombay HC

The Bombay High Court has reiterated that an arbitral award arising from an international commercial arbitration seated in India cannot be set aside on the ground of patent illegality.

The court held that allegations that an arbitral tribunal ignored evidence or arrived at perverse findings fall within the ground of patent illegality, which is unavailable for challenging such an award. It dismissed Oil and Natural Gas Corporation Ltd.'s challenge to an award in favor of Malaysia-based contractor Sapura Fabrication Sdn. Bhd. (now known as VTEB Fabrication SDN BHD).

Justice Sandeep V. Marne held that the arbitration qualified as an international commercial arbitration because Sapura is a company incorporated in Malaysia, even though the arbitration was seated in India. The Court held that ONGC's challenge was largely founded on allegations of perversity and non-consideration of evidence.

Observing that such objections fall within the grounds of patent illegality, Justice Marne held:

“The ground of perversity is repeatedly pleaded in the Petition and the elements of perversity in the findings recorded by the Arbitral Tribunal are repeatedly sought to be demonstrated on behalf of the Petitioner during the course of submissions. However, the vice of perversity is relatable to the ground of patent illegality under Section 34(2A) of the Arbitration Act, which ground is not available for challenging the Award made in an international commercial arbitration.”

The dispute arose out of a contract awarded by ONGC on June 27, 2015 to Sapura's predecessor, Kencana HL Sdn. Bhd., for redevelopment works at the Mumbai High South Field offshore oil and gas project. The works were completed by April 30, 2017. ONGC accepted the works without levying liquidated damages.

After completion of the project, Sapura raised six claims seeking compensation for additional works and change-order works. ONGC accepted that two of the claims related to additional work but disputed the rates payable. It rejected the remaining claims on the ground that they did not constitute additional work or change orders.

Sapura invoked arbitration on December 28, 2021.

By an award dated May 4, 2024, later corrected on June 29, 2024, the arbitral tribunal awarded Sapura USD 1.927 million under Claim 1, USD 9.92 million under Claim 2, USD 2.229 million under Claim 3, USD 8.011 million under Claim 4 and USD 2.638 million under Claim 5. Claim 6 was rejected. The tribunal also awarded post-award interest at LIBOR plus 2% and costs of ₹1.87 crore.

ONGC challenged the award, contending, among other things, that the contract was a lump-sum arrangement. It also contended that several of the awarded items fell within the original contractual scope and that the tribunal had ignored material evidence.

Rejecting the challenge, Justice Marne held that patent illegality is unavailable as a ground for setting aside an award arising out of an international commercial arbitration seated in India.

“The legislature has consciously excluded the ground of patent illegality in relation of commercial international arbitrations. The Legislative objective is to give maximum possible latitude to the decision of the arbitral tribunal in an international commercial arbitration. This Court will have to respect the legislative objective of minimal interference with awards made in international commercial arbitrations. Therefore, though Claim No. 5 appears to have been awarded by ignoring evidence on record and the Petitioner may be in a position to demonstrate patent illegality in award of Claim No. 5, hands of this Court are bound by the language of Section 34(2A) of the Arbitration Act. Had this been a domestic arbitration, the ground of patent illegality would have been available for the petitioner by demonstrating perversity in the findings recorded in the Award qua Claim No. 5."

The court further held that perversity in an arbitral tribunal's findings constitutes a ground of patent illegality and does not fall within the scope of the expression "public policy of India."

The court upheld the tribunal's award on claims 1 and 2 relating to SCA Jacket V Bracing and additional work on the N23 platform. It found no reason to interfere with the tribunal's interpretation of the contract or its application of contractual rates.

With respect to Claim 3 relating to modifications to the SCA platform, the Court upheld the tribunal's finding that ONGC was not justified in insisting on a third pre-engineering survey after an earlier survey had already confirmed the suitability of the proposed deck extension.

Rejecting ONGC's submissions regarding hazard studies, Justice Marne observed:

“what is alleged to be not provided in HAZID/HAZOP meeting is 'data on alternative locations' and not 'hazard identification report'. This Court does not appreciate twisting of its stand by the Petitioner in this regard.”

The court also upheld the award under Claim 4 relating to the Intruder Detection cum Deterrence System. It held that the tribunal's findings on the claim did not warrant interference under the limited scope of review available in a challenge to an international commercial arbitral award.

As regards the claim relating to standby charges for the SK900 vessel, the court held that ONGC's challenge essentially invited a reappreciation of evidence. The court held that even if ONGC could demonstrate patent illegality in relation to the claim, that ground was unavailable in an international commercial arbitration.

Accordingly, the court dismissed ONGC's petition and upheld the arbitral award in its entirety.

For ONGC: Advocates Zubin Behramkamdin, Sana Khan, Sakshi Kashyap, Arundhati Korale and Paras Gupta.

For Sapura Fabrication SDN BHD: Advocates Naresh Thacker, Alok Jain, Samarth Saxena, Ria Garg and Vanshika Kainya.