Delhi High Court – Error of Fact constitutes Patent Illegality

Introduction

One of the foundations of arbitration is that awards rendered are final and not subject to appeal before the courts. In this respect, Article 5 of the UNCITRAL Model Law provides for minimal curial intervention, stipulating that “[i]n matters governed by this Law, no court shall intervene except where so provided in this Law“. As a result, the grounds upon which a court may set aside an award or refuse to recognise and enforce the same are limited. Article 34 of the Model Law and Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provide the restrictive grounds for such relief.

However, in a Delhi High Court case of Ogilvy & Mather PVT Ltd v Union of India, O.M.P 651 of 2007, delivered on 3 July 2012, the High Court held that an error of fact by the tribunal was grounds for setting aside the award and remitting the matter back to a fresh tribunal. In so doing, this High Court seems to have extended the ambit of “patent illegality” under Indian law and is a marked divergence from the approach adopted in other jurisdictions.

Facts of the Case

The claimants were two advertising agencies which had been hired by the Directorate of Income Tax (“DIT“) for the advertisement of a Voluntary Disclosure of Income Scheme (“VDIS“) introduced by the DIT. The DIT is a department under the Indian Ministry of Finance (“MOF“). Under the agreement between the parties, the claimants were to publish the advertisements in various newspapers but had to do so in newspapers which offered discounted rates to the Directorate of Advertising and Visual Publicity (“DAVP“) i.e. newspapers on the so-called DAVP panel. In other cases i.e. where DAVP rates were not offered, the agreement stipulated that the advertising rate would be negotiated and finalised only with the prior approval of DIT. The claimants’ remuneration was a 15% commission on the gross costs of the advertising bookings placed or work done by the claimants on the DIT’s behalf. In other words, the higher the advertising rate, the higher the commission the claimants would get in conjunction with the DIT having to pay more for the placement of the advertisements.

During a meeting on 18 June 1997, the DIT decreed that the VDIS advertisements should not be released in DAVP panel newspapers which did not offer DAVP rates for the publication of the ads. On 20 June 1997, the claimants were informed by two DAVP panel newspapers that those newspapers would only offer the DAVP rates where such advertisements were taken out and inserted by the DAVP itself. Instead, those newspapers offered discounted rates (though still higher than the DAVP rates) to the claimants.

The decisions taken at the meeting of 18 June 1997 were confirmed by the claimants by way of a letter dated 23 June 1997. Nevertheless, by a second letter of the same date, the claimants also explicitly sought the DIT’s approval to proceed with the advertisement in those two newspapers on the basis of the negotiated discounted rates. This second letter noted that the two newspapers were on the DAVP panel but were not offering DAVP rates.

The DIT approved the release of the advertisements on 7 July 1997 in writing. The advertisements were taken out and the claimants invoiced the DIT at the negotiated non-DAVP rates and were paid accordingly. In subsequent invoices, the claimants discovered that the DIT retroactively made deductions, being the difference between the DAVP rates and the negotiated rates, on the basis that the DIT were not informed that the two newspapers were in fact on the DAVP panel but were not offering DAVP rates.

During the arbitration, the arbitrator rejected the claimants’ claim for shortfall in payment on the basis that there was no evidence that the DIT had made a subsequent decision contrary to its decree on 18 June 1997 (see paragraph [14]). This refusal of the claim was the subject of the claimants’ application before the Delhi High Court.

Delhi High Court’s Reasoning and Decision

The claimants argued their case on two grounds. First, that the arbitrator made an error of fact in finding that the MOF had not subsequent to its decision on 18 June 1997 agreed to pay non-DAVP rates for DAVP panel newspapers. Second, that the arbitrator made an error of law and fact by reading into the Agreement a requirement that the claimants were required to formally inform the DIT about DAVP panel publications not offering DAVP rates if the ads were not inserted directly by DAVP itself. It was submitted that that no such provision existed. In any event, it was argued that there was in fact an admission on the part of DIT that they were aware that the (DAVP panel) newspapers were not in fact offering DAVP rates by way of the second letter of 23 June 1997. In this respect, the DIT denied that they ever received the second letter.

Upon considering the relevant provision in the agreement, the High Court disagreed that the arbitrator made an error of law. However, upon reviewing the evidence on record that was before the arbitrator, the High Court considered that the arbitrator had made errors of fact in finding that (a) the DIT had not been informed that the two newspapers were on the DAVP panel but were not offering DAVP rate and (b) the DIT had not agreed to the placement of the advertisements in DAVP panel newspapers at non-DAVP rates.

The High Court noted that the second letter of 23 June 1997 was in the evidential record of the arbitration and had not been objected to by the DIT. Furthermore, this second letter was in fact referred to by the arbitrator in his award. Accordingly, the High Court held that the DIT could not deny having receipt of this second letter and knowledge of its contents (see paragraph [25]). The High Court also further reference to other documents forming part of the evidential record which showed the DIT’s knowledge, post 23 June 1997, of the fact that the two relevant newspapers were on the DAVP panel but not offering DAVP rates.

The High Court therefore held that it was “satisfied that the two grounds mentioned in the impugned Award for rejecting [the shortfall in payments] are contrary to the evidence placed on the arbitral record. The learned Arbitrator also omitted to take note of much of the evidence placed on record by the [claimants] in support of that claim” (see paragraph [30]).

On that basis alone, the High Court held (without reference to authority) that “[a]n Award that omits to notice the evidence on record and erroneously rejects a claim cannot but be held to be patently illegal and opposed to the public policy of India” (see paragraph [30]). It therefore set aside the award and remitted the matter back to the arbitrator for determination solely on this issue.

Conclusion

Parties should note the following.

  1. As a preliminary point, this case appears to involve a domestic arbitration between two Indian parties.
  2. This case appears to have expanded the scope of “patent illegality” under Indian law, allowing arbitration awards to be set aside not just because of an error of law, but also because of an error of fact.
  3. The concept of “patent illegality” is derived from the Indian Supreme Court decision of ONCG v Saw Pipes, 2003 (2) Arb.LR 5 (SC), and is part of the ambit of public policy of India, violation of which entitles the Indian courts to set aside an arbitral award. This is in addition to the usual grounds for setting aside an arbitration under Article 34 of the Model Law or Article V of the New York Convention. However, the concept of “patent illegality” only applies to arbitrations under Part I of the Indian Arbitration and Conciliation Act 1996 (“Indian Arbitration Act“) i.e. domestic arbitrations and international arbitrations with their seat in India.
  4. Nevertheless, the Indian Supreme Court has extended the reach of Part I in Bhatia International v Bulk Trading SA (2002) 4 SCC 105 by holding that it would apply to foreign arbitrations so as to allow the Indian courts to grant interim relief in support of a foreign arbitration (the powers to grant interim relief being found only in Part I). Accordingly Part I would apply unless parties explicitly or implicitly exclude Part I from their arbitrations.
  5. Furthermore, the Indian Supreme Court has previously set aside a foreign international arbitration award on the basis that Part I applies and that the award was “patently illegal”. In Venture Global Engineering v Satyam Computer Services Ltd, (2008) 4 SCC 190 the Indian Supreme Court applied section 34 of Part I of the Indian Arbitration Act and set aside a London LCIA award on that basis.

It is unclear if the approach of the Delhi High Court in this case will have any application outside of a domestic arbitration in India. If so, it is submitted this would be contrary to the concept of minimal judicial interference as embodied in Article 5 of the Model Law. Such an approach would be very much at odds with the approach taken by other common law jurisdictions.

In Singapore, the minimal curial intervention and deferential approach was recently reiterated by the Singapore Court of Appeal. Citing its earlier decision of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA, [2007] 1 SLR(R) 597; [2006] SGCA 41, it was stated in the strongest possible terms in the case of AJU v AJT, [2011] 4 SLR 739; [2011] SGCA 41:

“In this connection, we would reiterate the point which this court made in PT Asuransi Jasa…at [53]-[57], viz, that even if an arbitral tribunal’s findings of law and/or fact are wrong, such errors would not per se engage the public policy of Singapore. In particular, we would draw attention to the following passage from [57] of that judgment:

… [T]he [IAA] … gives primacy to the autonomy of arbitral proceedings and limits court intervention to only the prescribed situations. The legislative policy under the [IAA] is to minimise curial intervention in international arbitrations. Errors of law or fact made in an arbitral decision, per se, are final and binding on the parties and may not be appealed against or set aside by a court except in the situations prescribed under s 24 of the [IAA] and Art 34 of the Model Law. While we accept that an arbitral award is final and binding on the parties under s 19B of the [IAA], we are of the view that the [IAA] will be internally inconsistent if the public policy provision in Art 34 of the Model Law is construed to enlarge the scope of curial intervention to set aside errors of law or fact. For consistency, such errors may be set aside only if they are outside the scope of the submission to arbitration. In the present context, errors of law or fact, per se, do not engage the public policy of Singapore under Art 34(2)(b)(ii) of the Model Law when they cannot be set aside under Art 34(2)(a)(iii) of the Model Law. …

This passage recognises the reality that where an arbitral tribunal has jurisdiction to decide any issue of fact and/or law, it may decide the issue correctly or incorrectly. Unless its decision or decision-making process is tainted by fraud, breach of natural justice or any other vitiating factor, any errors made by an arbitral tribunal are not per se contrary to public policy.

(emphasis added)

It should also be noted that under section 47 of the Singapore Arbitration Act which governs domestic arbitrations, the Singapore courts have no power to judicially review the domestic award except where provided for under the Act. In this respect, there is only a very narrow right of appeal on a question of law with the leave of the Court under section 49 of the Act and the court is not entitled to set aside or vary the award on an appeal on an error of fact (see section 49(5)(c)(i), note that an erroneous finding of fact is still a finding of fact).

Parties are entitled to exclude the right of appeal to the Singapore courts under the Singapore Arbitration Act pursuant to section 49(2). A forthcoming post will discuss a recent decision of the Singapore High Court which held that the parties’ reference to the ICC Rules in a domestic arbitration in Singapore was sufficient to exclude the right of appeal to the Singapore courts.

In the light of Ogilvy & Mather and the other Indian cases mentioned above, parties to an Indian international arbitration might want to seriously consider explicitly excluding Part I of the Indian Arbitration Act. In that regard, parties may wish to note that the default position under Article 32.6 of the LCIA India Arbitration Rules is that where the seat / place of arbitration is not India, Part I of the Indian Arbitration Act (with some exceptions) is excluded. However, to the best of our knowledge, such selective exclusion clauses have not been tested and determined before the Indian Courts.

In the absence of a selective exclusion clause, parties ought to weigh the benefit of obtaining the assistance of the Indian courts e.g. in obtaining interim measures in aid of their arbitration as against the interventionist stance that the Indian courts have played when deciding that Part I of the Indian Arbitration Act applies.

(UPDATE: The Indian Supreme Court has overruled its decisions in Bhatia International and Venture Global, please see this post.)

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
This entry was posted in Arbitration, India, Singapore and tagged , , , , , , , . Bookmark the permalink.

3 Responses to Delhi High Court – Error of Fact constitutes Patent Illegality

  1. Pingback: Indian Supreme Court Overrules its previous case of Bhatia International | Singapore International Arbitration Blog

  2. Pingback: Arbitration India: Technology, Media & Telecommunications | Singapore International Arbitration Blog

  3. Pingback: The End of Doctrine of Patent Illegality for Foreign Awards in India? | Singapore International Arbitration Blog

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s