Patent illegality in arbitration arises when an award ignores express contract terms and a governing circular on supervision charges.

An arbitral award may be interfered with where it ignores express contractual terms and an applicable governing circular. The contract for sal seeds included State-incurred expenses such as handling and supervision charges, and also provided for supervision charges on delayed delivery. A government circular likewise contemplated such recovery, and the State had recovered the charges for years without protest. By treating the charges as indirect expenses and disallowing them contrary to the contract and circular, the tribunal committed patent illegality. The award was therefore set aside only to the extent it directed refund of supervision charges, while the remaining parts were left undisturbed.

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Issues: Whether the arbitral award could be interfered with on the ground that the arbitrator ignored the contractual clause and the government circular governing recovery of supervision charges from the respondent.

Analysis: The contract expressly provided that the price payable for sal seeds would include expenses incurred by the State, including handling and supervision charges, and also contained specific clauses for payment of supervision charges on delayed delivery. A government circular likewise contemplated imposition of supervision charges. The State had consistently recovered such charges and the respondent had paid them without protest for years. The award nevertheless disallowed the charges by treating them as indirect expenses and ignored the contract as well as the circular. Such disregard of binding contractual terms amounted to patent illegality and a contravention of the mandate that the tribunal decide in accordance with the contract.

Conclusion: The award was liable to interference to the extent it directed refund of supervision charges, and the challenge succeeded on that issue in favour of the appellant-State.

Final Conclusion: The appeal was allowed in part and the award was set aside only to the extent it had permitted deduction and refund of supervision charges, while the remaining parts were left undisturbed.

Ratio Decidendi: An arbitral award that ignores express contractual terms and an applicable governing circular, and thereby permits relief contrary to the contract, suffers from patent illegality under the Arbitration and Conciliation Act, 1996.

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