There is a peculiar irony recently developing into India’s Arbitration Law. After years of judicial overreach, the legislature spent a lot of effort in building a clean bifurcation wall between domestic arbitration and International commercial arbitration. The ground of Patent Illegality that allows courts to dig into the merits of an award was deliberately logged out of international commercial arbitration seated in India. The idea is that if a foreign party comes to India for arbitration, they should not have to worry about an Indian court revisiting whether the tribunal applied the contract correctly.
That wall, as it turns out, has a hidden door. And the key to it sits inside the definition of what qualifies as an “international commercial arbitration” under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996.
This blog is about that door, why it exists, why the Draft Arbitration and Conciliation (Amendment) Bill, 2024 combined with the Supreme Court’s judgement in Gayatri Balasamy v. ISG Novasoft Technologies Limited (April 2025) has made it considerably more dangerous than it was even two years ago.
How Patent Illegality was supposed to work
The concept of patent illegality was introduced judicially by the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd., 2003, where the court held that an award could be set aside it if was patently illegal, meaning if it is contrary to substantive provisions of law or the terms of the contract. The problem was that the court applied this standard broadly. Domestic and international awards were treated almost identically, and losing parties in international commercial arbitrations had an opportunity to reopen their cases in Indian courts.
The Law Commission's 246th Report in 2014 diagnosed the issues and made recommendations (Law Commission of India, 2014). The 2015 Amendment to the Arbitration & Conciliation Act established patent illegality as a separate ground within the newly inserted Section 34(2A). Importantly, the Amendment does not apply to 'international commercial arbitrations’. Thus, it can be concluded that the legislation created a specific intention to prevent Indian courts from making a merits-based review of an award in an international commercial arbitration seated in India. That would render India an unattractive seat, which is inconsistent with the UNCITRAL Model Law, and contrary to the of the New York Convention's pro-enforcement philosophy. It is now established law (since 2015) that when your arbitration is a qualifying ICA under Section 2(1)(f), a challenge under Section 34 cannot invoke patent illegality. The ground is just not applicable.
This stance was unambiguously confirmed by the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. NHAI where the court counsel argued that the patent was illegally obtained against a ICA award actually abandoned the argument in the middle of the hearing when the court pointed out that it simply was not available. It has been settled law since 2015 that a challenge under Section 34 cannot invoke patent illegality, when the arbitration in question qualifies as an ICA under Section 2(1)(f).
The Definition under Section 2(1)(f) that Decides Everything
Section 2(1)(f) of the Act defines an International Commercial Arbitration as arbitration where at least one party is a foreign national or habitually resident outside India; a body corporate incorporated outside India; or a company, association or body of individuals the central management and control of which is in a country other than India. Practically this definition has been construed by the courts to mean that once the case has crossed the country then it has taken the case out of the field of domestic arbitration altogether.
What has received far less attention is the other side of this question: What happens when the classification is genuinely contested and all the losing party argues post award is that the arbitration was actually domestic all along? It has come up in cases where the Supreme Court dealt with the issue of whether a company incorporated in India, but with foreign shareholding qualified as a foreign body corporate for Section 2(1)(f) purposes. The court said that it did not and also determine that a company which is nonetheless based in India is an Indian company in these purposes, notwithstanding who may be a shareholder of a company. That may appear to put an end to the issue but it in effect leads to some additional problems that are yet to be solved.
The essence of the problem is that the time of the conclusion of the arbitration agreement or the beginning of proceedings is relevant in determining Sec 2(1)(f). However a foreign parent company which initially signed the arbitration agreement may transfer its interest to an Indian subsidiary before the award is rendered further, this is where it becomes serious, where a respondent who loses an ICA award may argue that the qualifying foreign party in the arbitration case was actually a shell entity which never had real foreign status, perhaps an Indian resident habitually operating out of India, which merely claimed to have UAE residence or an incorporated Indian company the entire management of which sat in Mumbai despite a nominal Singapore address.
If this argument succeeds, the arbitration is classified as domestic. And if it is domestic, Sec 34(2A) becomes available. Patent illegality, the very ground that was excluded to protect the award suddenly revives as a challenge tool in this case.
The Delhi High Court addressed a related question in Suresh Shah vs Tata Consultancy Services Ltd., where it held that the procedural defect in appointing an arbitrator did not change the character of arbitration. Sec 2(1)(f), being a definition clause, is non-derogable. The court confirmed that a procedural defect would not expand the grounds of challenge to an ICA award by classifying it as a domestic arbitration to expand the scope of challenge.
That is reassuring, but it only deals with procedure reclassification. It does not deal with the argument of substantive reclassification that a party who appeared to deliver the arbitration in its ICA nature was not really foreign. No Supreme Court ruling resolves this particular situation. In June 2025, the empirical study published in Arbitration International, which analysed 699 cases of patent illegality between 2016 and 2023, found a 29.38% success rate of such arguments in lower courts but did not specifically target post-award reclassification efforts. This data gap is telling the loophole.
Why the 2024 bill makes this worse
Section 34(2A) of the Arbitration and Conciliation Act, 1994 is an exclusion clause that is proposed to be removed by the Draft Arbitration and Conciliation (Amendment) Bill, 2024. The illegality of patents would be extended to all arbitrations with a seat in India, whether domestic and international alike.
The suggested amendment in effect reintroduces the regime which was created in ONGC v. Saw Pipes, instead of advancing Indian arbitration by removing the patent illegality test of domestic arbitration and aligning it with ICA, the reverse appears to have happened.
But there is a second-order consequence that is receiving almost no attention. If the ICA exclusion in Section 34(2A) disappears, the reclassification play described above becomes legally moot as a procedural tactic. Paradoxically, that would close the loophole. But here is the twist: the Bill is not yet law, it has attracted significant opposition from the arbitration community, and the Expert Committee that preceded it explicitly recommended against extending patent illegality to ICAs.
In the meantime, in the gap between current law and any future amendment, the definitional ambiguity around Section 2(1)(f) remains an active grey area. Losing parties in India seated ICAs have an incentive to contest the ICA classification post award, because reclassification as domestic is the only way to get patent illegality on the table under the current statute.
The judgement of Balasamy Complicates the case
The Supreme Court in April 2025 judgement in Gayatri Balasamy v. ISG Novasoft Technologies has amplified the reclassification problem in an indirect but significant way. The five-judge constitution bench, by a 4:1 majority, held that courts have a limited power to modify arbitral awards under Section 34 and 37, something the statute doesn’t expressly authorise. The majority held that “the authority to sever the invalid portion of an award from the valid portion was inherent within the court's jurisdiction under Section 34.”
That was supposed to decrease the amount of litigation since minor mistakes could be corrected by the courts without necessarily adjourning the entire award. The reality is that the reverse risk has become apparent. The court has reopened the greater question of what actually is permitted by Sec 34, by judicially, meaning powers not to be found in the statute. The minority judgement, written by Justice Vishwanathan clearly states that by allowing modification, even limited modification through judicial legislation, the court is using its powers as an appellate court, which was the reason why the arbitration system was established.
The connection of this judgement with the classification problem is that Gayatri Balasamy applies to all India seated arbitration, including ICAs. The Supreme Court was explicit about this. So now Indian Courts have a judicially created power to modify ICA awards, even though they cannot invoke patent illegality against them. If a court can modify an ICA award for a “manifest error” under Gayatri Balasamy, but cannot set it aside for patent illegality under Section 34(2A), what exactly is the distinction? Is a manifest error that justifies modification different from patent illegality that appears on the face of the award? These two standards are uncomfortably close, and no court has drawn a clear line between them in the ICA context.
A party challenging an ICA award might argue: even if this is technically an ICA, the court has a Gayatri Balasamy modification power and that power is not limited to domestic arbitrations. From there, the slide toward merit-review under the cover of "manifest error" is short. Effectively, a court inclined toward intervention can exercise quasi-patent illegality review of an ICA award by routing it through the Gayatri Balasamy modification framework rather than Section 34(2A).
The Gift City Wrinkle
This is one additional dimension worth examining. A special arbitration framework was proposed by the GIFT Committee, Gujarat International Finance Tech City under the IFSCA. that submitted its report in July 2024. The proposed alternative dispute resolution Centre in GIFT city envisages an International arbitration regime that is slightly out of mainstream arbitration act, and may be insulated against some of the domestic intervention tendencies.
However, the framework is not operational yet and its exact connection with section 34 is not defined. Provided GIFT City arbitrations are not explicitly exempted by the Parliament (which they will not be unless Parliament provides an explicit exception), the same patent illegality and reclassification issues apply.
The GIFT Committee’s recommendations for third party funding recognition, and International judges are recommendable, but they do not address the definitional grey areas around what constituted and ICA in the first place. An India seated GIFT City Arbitration could face exactly the same post award challenges as any other India seated ICA.
The Practical Stakes involved
Let’s consider a joint venture dispute between an Indian Company and a company incorporated in Singapore but where the Singapore entity is wholly owned by an Indian promoter group, has no operations outside India and has all its real decision making happening from a Mumbai Boardroom. The arbitration is technically an ICA because one party is outside India and patent challenges are therefore unavailable to the losing party.
Now imagine the losing party files a Section 34 application arguing that the Singapore entity should be treated as an Indian entity for arbitration classification purposes because its “central management and control” is effectively in India invoking the third limb of Section 2(1)(f) of the Act.
No Supreme Court judgement has definitely settled whether central management and control of the parent of an incorporated foreign body corporate can override the incorporation test. The TDM infrastructure decision focused on the incorporation test for Indian companies with foreign shareholding, not on foreign companies with Indian management. Now, this gap has not been filled.
If the court accepts this argument, the ICA character of the arbitration falls away. The award is now a domestic award. Section 34(2A) is activated. The losing party can challenge the award on patent illegality grounds. The entire protective framework of the 2015 amendment built to prevent exactly this kind of merit review by court, is bypassed through a definitional argument that the statute left ambiguous.
What needs to be done
The most immediate fix in the present case is that the Supreme Court needs to give a clear ruling that the Section 2(1)(f) classification for an arbitration is determined at the time the arbitration agreement is executed or proceedings commence, is non-revisable post award and cannot be contested in Section 34 proceedings as a back door to patent illegality review. The Suresh Shah decision by the Delhi High Court on procedural reclassification was a step in the right direction, but its logic needs to be extended explicitly to substantive reclassifications and confirmed by the apex court.
The draft bill should also address this directly. If the legislature is serious about the amendment and serious about India, becoming an incredible international arbitration seat, it should either retain the ICA exclusion from patent illegality or if it extends patent illegality to ICA, it should acknowledge that it is making a conscious choice to depart from the New York Convention, 1958 framework and must accept the consequences for India’s reputation as a neutral seat.
Foreign parties, choosing India as their arbitration seat, deserve to know exactly what standard of review applies to their award. Right now, on the specific question of post award ICA re-classification attempts, the honest answer is that no one knows for certain. That is the grey area and is one the legal community needs to start taking seriously before it starts producing adverse precedents.