Contractual price escalation must follow the agreed base-price formula for the actual grade of coal used.

An arbitral award applying a price-escalation formula contrary to the express contract was treated as patently illegal and liable to be set aside under Section 34. The Court held that where escalation depends on the coal actually used, the correct base price must be that of the same grade of coal, not a different grade, and using an impermissible base price cannot be sustained as a mere matter of interpretation. Escalation for supplies made after the switch to washery grade I coal therefore had to be computed with reference to the base price of washery grade I coal, and the erroneous computation was not upheld.

---

---

Issues: (i) whether an arbitral award granting escalation on the basis of an incorrect base price, contrary to the express price-variation clause in the contract, was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996; (ii) whether escalation for supplies made after the switch to washery grade I coal had to be computed with reference to the base price of the coal actually used.

Issue (i): whether an arbitral award granting escalation on the basis of an incorrect base price, contrary to the express price-variation clause in the contract, was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.

Analysis: The governing contract provided that escalation would depend on the increase in the price of the coal actually used, measured against its own base price as on 8.11.1991. A court can interfere where an award ignores the contract and becomes patently illegal. An award that applies the price of one grade of coal while using the base price of a different, inferior grade violates the agreed formula and cannot be sustained as a mere matter of interpretation.

Conclusion: Yes. The award, to the extent it adopted an impermissible base price contrary to the contract, was liable to be interfered with under Section 34.

Issue (ii): whether escalation for supplies made after the switch to washery grade I coal had to be computed with reference to the base price of the coal actually used.

Analysis: The contract did not bind the supplier to use any particular grade of coal, but once washery grade I coal was used, the escalation formula had to be applied to that grade alone. The correct comparison was between the prevailing price and the base price of washery grade I coal on 8.11.1991. Using the base price of washery grade II while calculating escalation for washery grade I supplies would give a higher and unauthorized claim, contrary to Clause 5.

Conclusion: Yes. Escalation for supplies after 14.7.1992 had to be calculated with reference to the base price of washery grade I coal.

Final Conclusion: The High Court's interference with the trial court was unsustainable, the arbitral award could not be upheld in the erroneous form in which it treated the base price, and the trial court's computation stood restored.

Ratio Decidendi: An arbitral award that applies a price-escalation formula in a manner contrary to the express terms of the contract is patently illegal and may be set aside under Section 34; where escalation depends on the coal actually used, the base price must be that of the same grade of coal.

---