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Analysing The Perversity as a Ground for Setting Aside Arbitral Awards

The 1996 Arbitration and Conciliation Act (the Act) was passed in order to prevent excessive court involvement in arbitration. The Act restricts what the courts can do in matters involving arbitration and is based on the 1985 UNCITRAL Model Law on International Business Arbitration. The Act's Section 34 outlines the few procedures for challenging an arbitral ruling. One is when the award is in opposition to what the Indian government want.

For more than 20 years, persons in the US have been citing "public policy" as a justification for not presenting an award. The courts have gradually adopted a variety of additional defences. The "patent illegality" defence, which was formerly a part of this defence, was made into a separate and independent cause to reverse an award when the Act was modified in 2015. Even the terms "illegality of a patent" and "perversity of an arbitral decision" have generated a great deal of controversy.

The Courts invalidated a number of awards because they were unreasonable and unfair when the Act was modified in 2015. A list of various principles resulted from this. This blog post focuses on examining these concepts and how they contributed to the current distortion of legal thought.

Evolution Of The Perversity Principle

Pre-2015 Amendment Law
It was First in the case of Renusagar Power Co. Ltd. v. General Electric Co.(1993)it was examined whether a court decision might be overturned on the basis of public policy. According to the Supreme Court, there must have been a "violation of the fundamental policy of Indian law, the public interest of India, justice, and morality" in order for this defence to be employed in certain exceptional circumstances.

Final amendments to Section 34(2) of the Arbitration and Conciliation Act of 1996 included the same public policy defence. (b). (ii). The Wednesbury principle of Reasonability, natural justice, and other legal theories were added to the phrase "basic policy of Indian law" in Oil & Natural Gas Company Ltd. v. Western Geco International Ltd.(2014) (referred to as "Western Geco"). No matter how absurd or irrational a behaviour was, the Wednesbury principle made it plain that it was wrong regardless of whether it violated the criteria of reasonability.

A judgement was deemed "perverse" by the Supreme Court in Associate Builders v. Delhi Development Authority (2014) if it was supported by evidence that was so flimsy or incorrect that no sane person would believe it. Before the 2015 amendment, it was possible to determine what the law said about perversity using the third principle (as outlined in Western Geco) and how it was interpreted (as construed in Associate Builders).

Post-The 2015 Amendment Law
In 2015, Section 34 received paragraph 2A and "Explanation 2." (2). The first one stated that when determining whether an arbitral decision violates an important principle of Indian law, the Court shouldn't consider the case's merits. The latter, however, said that domestic arbitration judgements might be overturned if "patent illegality was obvious on the face of the judgement."

Because the modification rendered the Wednesbury standard of law far more difficult to apply, the erroneous and irrational judgements in Ssangyong Engineering & Construction Co. Ltd. v. NHAI (2019) were referred to as "patent illegality."

The Court emphasised in this ruling that even if the arbitral panel reached a reasonable conclusion after considering the evidence, that determination could not be modified simply because the Court disagreed with it. It was also established that the Associate Builders' "no proof test" for perversity was accurate.

The Court also concluded that the patent's illegality would be the basis for overturning the award rather than the award's unfairness. The Court did not specify, however, whether the perversity requirement may be satisfied in other manners.

Recent Judgments' On The Application Of The Perversity Principle

Indian courts will only declare an arbitrator's ruling to be incorrect if it addresses the "core of the matter." The definition of "source of the case," however, must be determined by the courts. The present corpus of law currently incorporates novel concepts that can be covered by its jurisdiction as a result of several courts increasing its purview. The writers discuss some of these concepts in the section that follows.

The Supreme Court first ruled in M/S Dyna Technologies Pvt Ltd v. M/S Crompton Greaves Ltd (2019) that judges cannot make an award based solely on the potential for a different interpretation of the contract's facts. The perversity provision in Section 34(4) of the Act may be used to overturn the decision if, on the other hand, a contract cannot be interpreted from a different angle and the arbitrators' reasoning exhibits intolerable irrationality.

Second, the Delhi High Court declared that arbitrators' decisions based on fabricated evidence created from actual evidence were unfair in MMTC v. Anglo American Metallurgical (2020). The Court therefore decided that an award is unfair if the arbitral tribunal's conclusion is not supported by a "plain, objective, and clear-eyed interpretation" of the unambiguous written evidence using Sections 94 to 98 of the Evidence Act.

In other words, circumstantial evidence can only be utilised to determine what the parties were discussing when they met provided it doesn't obstruct a clear and impartial evaluation of the other evidence.

The South Asia Marine v. Oil India Ltd. (2020) case served as the foundation for the Supreme Court's ruling on contract interpretation, which has been discussed extensively on this page. Where the facts suggested otherwise, the "Rule of Construction" could not be utilised to make a contract make sense. If it is implemented, the award may be revoked by the courts if they find it to be unfair.

The Supreme Court decided to reinstate the "no evidence" rule established in Patel Engineering v. North Eastern Electric Power Company Ltd. (2020) Additionally, the court ruled that an arbitral decision is unjust if the arbitrators reached a conclusion that no reasonable person would have made, indicating that it is not even a stance that would be reasonable after carefully examining the contract's provisions.

In the Most recent Case The Supreme Court in the case of Gemini Bay Transcription Pvt. Ltd. Vs Integrated Sales Service Ltd.&Anr. (2021) held that perversity or patent illegality not grounds to refuse enforcement of foreign arbitration award.

Although most people assume that the arbitrator would ultimately decide the facts, courts frequently reverse rulings because the arbitrator misinterpreted the evidence. It is simpler for the court to fault the arbitrator's approach or justification when it must determine how to interpret certain facts or clauses in a contract.

It could be challenging to use the "plain, objective, and clear-eyed interpretation" procedure outlined in the MMTC case since the agreements between the parties employ language that are challenging to understand. When this occurs, legitimate verdicts could be overturned because the Court felt that the arbitrators' reading of the ambiguous term wasn't a compelling enough alternative.

If there are any ambiguities in the contract, the arbitrator may decide after carefully reading it and determining what it means. Nonetheless, the court could rule that the arbitrator's method was incorrect and that the contract should be interpreted strictly. This justification can be at odds with the notion of an alternative viewpoint in the instance of Dyna Technologies.

Yet, a judge's capacity to distinguish between an option and an impossibility depends significantly on how they perceive the arbitrator's case and how they are feeling at the time. It is Therefore concluded that while the Court has offered numerous examples of how the perversity principle applies, some have gone too far. So, the Courts must exercise judicial restraint and only reverse an award in extremely unusual circumstances when evaluating a perversity award in light of the standards established by prior decisions.

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