The Illusion of Finality: Patent Illegality as a Backdoor for Judicial Overreach in Section 34

[Palak and Aditya are students at NMIMS School of Law and Symbiosis International (Deemed) University, Pune, respectfully.]

The Indian legal landscape is at a crossroads. The gamut of India's arbitration has been fundamentally transformed through the Arbitration and Conciliation (Amendment) Acts of 2015 and 2019, which have come to be broadly hailed for their pro-enforcement orientation, aimed at curbing judicial intervention and making arbitral awards more final. Yet, despite these pro-enforcement amendments, subtle but significant subversion is underway. This article identifies and examines a critical problem: Indian courts have increasingly reliance on the patent illegality provision embedded under Section 34(2A) as a backdoor to conduct extensive judicial reviews, a practice that contravenes the legislative intent behind recent changes and jeopardizes the very goal of speedy dispute resolution.  

The doctrine of patent illegality, initially meant as a narrow safeguard against blatant legal errors, has gradually become a tool for comprehensive judicial scrutiny. Courts now interpret this ground expansively, turning Section 34 proceedings into de facto appeals, a trend that runs counter to the aims of recent legislative reforms. This article proceeds in three parts: Part I examines how courts have expanded their role in contractual interpretation; Part II analyzes the misapplication of the ‘perversity’ standard in evidence evaluation; and Part III proposes reforms to restore arbitral finality.

Judicial Overreach in Contractual Interpretation: Courts Usurping Arbitrators' Role

Recently, the Delhi High Court (DHC) in Union of India v VK Sood (Sood case) illustrated how courts, under the guise of limited supervisory jurisdiction, have expanded Section 34 review. Despite ultimately upholding the arbitral award notwithstanding, the DHC analysis demonstrates the problematic expansion of Section 34 review. The DHC conducted an in-depth re-examination of the terms of the contract, examining Clauses 17A/17B, 25.7, and 25.9, and considering factual determinations regarding delay and deductions, which exactly explanation 2 of the 2015 amendment clearly forbids “to entail a review on the merits of the dispute as to test the contravention with the fundamental policy of Indian law”.

The DHC demonstrated an appellate-style review of the contractual risk allocation and contemporaneous documentation by scrutinizing the arbitrator's decision to grant claims for reimbursement of bank charges for the extension of bank guarantees and insurance premiums, despite the petitioner's argument that these were beyond the scope of the agreement and specifically precluded by Clause 17A(iii) of the contract. Similarly, the court delved into the rejection of the petitioner's counterclaims for alleged overpayment of price variation clause and costs for fabrication defects, even though the arbitrator had rejected them.

The judicial expansion borrows categories from foreign jurisdictions that permit interference whenever courts are found to “ignore material which is relevant” or adopt “unacceptable” contractual interpretations. The rulings, based on Associate Builders v. DDA and MMTC v. Vedanta, extended the test of patent illegality to include violation of substantive law, contractual terms, and arbitral awards found perverse or not acceptable. 

To understand why this judicial approach is problematic, it is essential to examine the legislative framework that was intended to prevent precisely such intervention. Pertinently, the addition of Section 34(2A) through the 2015 amendment authorized the courts to set aside domestic arbitral awards that are afflicted with “patent illegality apparent on the face of the award.” A crucial part of this amendment embedded in explanation 2 to Section 34(2)(b)(ii) expressly states that the court’s determination should not be made “merely because there is a mistaken application of law or by reappreciation of evidence.” The 2019 amendment strengthened this restrictive approach further by establishing institutional arbitration machinery and restricting direct judicial intervention into the appointments of arbitrators. Consequently, these amendments demonstrated Parliament's clear intention to restrict court interference and facilitate enforcement of arbitral awards. This legislative intent stands crystal clear, which is to limit interference to instances where the illegality is so patent and thus requires no deep dive into the merits. 

However, judicial practice has deviated significantly from this legislative ideal. Courts have fallen back on interpreting patent illegality more expansively, effectively converting Section 34 proceedings into an extensive review of the merits, a tendency against which these amendments explicitly aimed to prevent.

Judicial Overreach in Evidence Evaluation: The Perversity Standard Misapplied

The problem of judicial overreach extends beyond contractual interpretation to evidence re-evaluation. The Supreme Court's curative decision in Delhi Metro Rail Corporation (DMRC) v. Delhi Airport Metro Express (DAMEPL) epitomizes an extraordinary expansion of judicial review powers. The Court concluded that its interference had “resulted in restoring a patently illegal award,” which has resulted in a “grave miscarriage of justice,” explicitly anchoring its decision in the tribunal's supposed failure to consider “vital” evidence. The court highlighted that the ground of patent illegality is available for setting aside a domestic award if the arbitrator's decision is found to be “perverse, or so irrational that no reasonable person would have arrived at it”. It further clarified that a “finding” can be set aside if it is “based on no evidence at all or an award which ignores vital evidence in arriving at its decision” (emphasis supplied). The court found the original award to be patently illegal because it overlooked the critical evidence of the Commissioner of Metro Railway Safety certification and adopted an unreasonable interpretation of the contract's termination clause.

This justification follows a disturbing pattern, as when "critical" content is supposedly overlooked, the award gets perverse / patently illegal, justifying a reassessment of facts and contractual performance milestones and an appellate-model inquiry in the guise of supervisory jurisdiction. The court's willingness to consider a curative petition against its own arbitration decision illustrates the extent to which “patent illegality” is an elastic doctrine facilitating successive rounds of judicial review. 

The three-pronged tests of the Wednesbury Principle – no reasonable view, unacceptable result, or perversity – are broad enough to allow close scrutiny. They are often used for detailed evidence analysis, despite legislation aiming to prevent this.

The interplay between “the public policy branch” and “the backdoor of most basic notions of morality or justice” has evolved into a backup channel to reconsider factual determinations and rebalance the record, effectively allowing contractual rewriting and vitiation of arbitral finality. Courts repeatedly re-value evidence in the name of perversity, permitting interference where tribunals supposedly take unacceptable contractual meanings. This flexibility accounts for the fact that courts may uphold awards yet continue to write exhaustive, appellate-quality analyses of contractual provisions and threads of evidence, reproducing merits review in all but name.

These judicial practices have significant systemic consequences. Explanation 2 to Section 34(2)(b)(ii) and Section 34(2A) together aim to limit domestic-award interference patent illegality “apparent on the face of the award,” while excluding re-appreciation of evidence or correction of pure legal error. But the existing jurisprudence offered as a means of correcting perversity or a violation of contract challenges the courts to microscopically re-read clauses and factual sequences, eroding the finality that Parliament entrenched in 2015 and institutionally fortified in 2019. Higher courts warn against deep record analysis in Section 34. Yet, they often allow intervention labeled as perversity, blurring oversight and merits review. Parties are exposed to extended, multi-tier review where “vital evidence ignored” and “unacceptable interpretation” characterizations can revive factual controversies well after the tribunal has adjudicated, affecting the efficacy of arbitration. Inconsistency between statutory terminology and judicial behavior, underscored by the DMRC curative turn, provides mixed signals to investors regarding stability in the enforcement environment for domestic awards. Contrarian decisions demanding strict restraint coexist with interventionist inclinations, generating forum and panel-level inconsistency that harms predictability.

The Way Forward: Restoring Arbitral Finality

Having identified the twin problems of overreach in contractual interpretation and evidence evaluation, it is indispensable to turn toward potential solutions as the Indian law of arbitration which is based on the UNCITRAL Model Law does not provide patent illegality as a ground for setting aside awards. Internationally, leading arbitration centers like Singapore, London, and Hong Kong restrict judicial review to uphold arbitral finality. Unlike these jurisdictions, Indian courts’ expansive use of patent illegality has created uncertainty and inconsistency, potentially undermining both domestic and foreign award enforcement and damaging investor confidence and potentially violating the New York Convention's standards of non-discrimination. 

To restore arbitral finality and bring judicial practice into consonance with the legislative intent, various reforms need to take place. Higher courts must clarify that “perversity” applies only to clear, egregious flaws like self-contradiction, ignoring admitted key documents without reviewing conflicting evidence, or wrongful reinterpretation of trade clauses. Rulings need to clearly trace any incursion into explanation 2's permissible limits and specify the reasons why illegality is facial, not a result of reassessment of probative value. Furthermore, courts must enforce the no-modification rule and restricted remit under Section 34(4) to prevent merits substitution that effectively turns Section 34 into an appeal. For instance, English law intervenes only in cases of "serious irregularity" causing substantial injustice, while Singapore courts, in cases like CEF v. CEH, have rejected the idea of reviewing arbitral awards for correctness of law. Hong Kong courts, too, showed restraint, with only a small number of successful challenges. Moreover, encouraging institutional rules and reasoned-sufficiency standards would reduce the risk of "no reasons" or "ignored vital material" findings, shrinking the space for perversity challenges.

Conclusion

The analysis incorporated in the Sood case, a detailed reading of certain clauses and fact matrices in the name of perversity and most basic notions of justice shows courts persisting with substantive merits review in Section 34 proceedings, despite the 2015/2019 amendments' unambiguous intent to prevent it. The DMRC-DAMEPL curative judgment extends this trend by endorsing intense evidentiary review under the “ignored vital evidence” doctrine, fostering an appellate approach within thin supervisory jurisdiction.

Unless patent illegality and perversity are confined to obvious, facial flaws, arbitral finality will remain illusory, and Section 34 will continue as a de facto appeal forum. Indian courts must choose between respecting minimal intervention and finality or expanding review, which reduces arbitration to a preliminary litigation stage. The future of Indian arbitration relies on judicial restraint recognizing efficiency and finality as central to dispute resolution. Only then can India fulfill its arbitration reform promise and become a reputable venue for domestic and international arbitration.