Arbitral Award Patently Illegal If Arbitrator Failed To Act In Terms Of Contract Or Ignored Specific Terms Of Contract : Supreme Court

The role of the Arbitrator is to arbitrate within the terms of the contract, the Supreme Court observed in a judgment passed on Tuesday (1 Feb 2022)

The bench comprising Justices Indira Banerjee and Abhay S. Oka observed that an award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract.

Indian Oil Corporation Ltd.  took a plot of land on lease for a term of 29 years, from M/s Shree Ganesh Petroleum Rajgurunagar. They executed two agreements viz. Lease Agreement and Dealership Agreement. While the lease agreement provided for reference of disputes to the Managing Director of the the IOC for arbitration and if the Managing Director was unable or unwilling to act as a sole Arbitrator, then the sole arbitration of any other person designated or nominated by the Managing Director, the dealership agreement provided for reference of disputes to the sole arbitration of the Director (Marketing) of the Corporation who might either himself act as the Arbitrator or nominate some other officer of the Corporation to act as the Arbitrator.

By a letter dated 20th August 2008, the Corporation terminated the dealership and called upon it to vacate the retail outlet and hand over peaceful possession thereof to the Corporation and also to settle accounts with it. This resulted in appointment of an arbitrator who passed an award, by which he increased the monthly lease rent of the land in question from Rs.1750/- to Rs.10000/- with 10% increase after every three years w.e.f. the date of the termination of the dealership and to the extent the Arbitrator has reduced the period of lease from 29 years to 19 years and 11 months.

The issue in this case whether the adjudication of the dispute under the lease agreement was beyond the jurisdiction of the Arbitrator? The High Court, in the impugned judgment disposing arbitration appeal, noted that the corporation had not objected to the competence or the authority or jurisdiction of the Arbitrator to entertain and decide disputes with regard to lease agreement. 

In appeal, the Apex Court bench observed that the impugned award insofar as it pertains to lease rent and lease period is patently beyond the scope of the competence of the Arbitrator appointed in terms of the dealership agreement by the Director (Marketing) of the Corporation. Referring to various judgments, the bench noted the following in this regard:

An Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted. An award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract..

However, a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. An Arbitral Tribunal is entitled to interpret the terms and  conditions of a contract, while adjudicating a dispute. An error in interpretation of a contract in a case where there is valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within jurisdiction.

The Court does not sit in appeal over the award made by an Arbitral Tribunal. The Court does not ordinarily interfere with interpretation made by the Arbitral Tribunal of a contractual provision, unless such interpretation is patently unreasonable or perverse. Where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award, only because the Court is of the opinion that another possible interpretation would have been a better one.

An award ignoring the terms of a contract would not be in public interest. In the instant case, the award in respect of the lease rent and the lease term is in patent disregard of the terms and conditions of the lease agreement and thus against public policy.

The role of the Arbitrator was to arbitrate within the terms of the contract. He had no power apart from what the parties had given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction. An Arbitral Tribunal is not a court of law. It cannot exercise its power ex debito justitiae.

Case name: Indian Oil Corporation Ltd. vs Shree Ganesh Petroleum Rajgurunagar

Citation: 2022 LiveLaw (SC) 121

Case no.|date: CA 837-838 OF 2022 | 1 Feb 2022

Coram: Justices Indira Banerjee and Abhay S. Oka

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