2025 (11) TMI 430 - SC - Indian Laws

Arbitral award set aside for patent illegality; arbitrator rewrote contract, liable under Section 34(2A) and 34(2)(b)(ii)

Indian Railways Catering and Tourism Corp. Ltd. Versus M/s. Brandavan Food Products

The SC allowed the appeals of the government-run railway catering corporation and set aside the arbitral award (dated 27.04.2022, corrected 26.07.2022) ... Challenge to arbitral award u/s 34 and 37 of the Arbitration and Conciliation Act, 1996 - principal contention urged by the IRCTC is that the Arbitrator had no jurisdiction to re-write the terms of the contract contrary to the agreement entered into by and between the parties with their volition and their eyes wide open - whether the hermeneutical exercise undertaken by the Arbitrator, culminating in the Award dated 27.04.2022, warrants interference? - HELD THAT:- It is now well settled that Section 34 of the Act of 1996 provides limited grounds on which an arbitral award can be set aside. Section 34(1) makes it clear that recourse to a Court against an award may be made only by an application to set it aside in accordance with sub-sections (2) and (3) thereof. Section 34(2) details the grounds on which an award may be set aside. For the purposes of this adjudication, Section 34(2A) is also relevant. This provision was inserted with retrospective effect from 23.10.2015, vide Amendment Act No. 3 of 2016. It states to the effect that a domestic arbitral award may be set aside if the Court finds that the said award is vitiated by patent illegality appearing on the face of that award. The proviso thereto, however, adds a caveat that an award should not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence. Pertinently, Section 34(2)(b)(ii) provides that if the Court finds that an arbitral award is in conflict with the public policy of India, the Court would be justified in setting it aside. Explanation 1, as it presently reads, and Explanation 2 were inserted by the Amendment Act No. 3 of 2016 with retrospective effect from 23.10.2015. Explanation 1 provides that, for the avoidance of doubt, it is clarified that an award is in conflict with the public policy of India only if its making was induced or affected by fraud or corruption or was in violation of Sections 75 or 81 of the Act of 1996 or it is in contravention with the fundamental policy of Indian law or it is in conflict with the most basic notions of morality or justice. Explanation 2 provides that, for the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. In Ssangyong Engineering and Construction Company Limited vs. National Highway Authority of India [2019 (5) TMI 1879 - SUPREME COURT], this Court dealt with the expression ‘most basic notions of morality or justice’ mentioned in Explanation 1. It was opined that the breach must be of some fundamental principle of justice, substantively or procedurally, which shocks the Court’s conscience. On facts, this Court found that the award created a new contract by applying a Circular that was not even placed before the arbitral tribunal. It was, therefore, opined that a fundamental principle of justice was breached, viz., that unilateral alteration of a contract cannot be foisted upon an unwilling party nor can a party to an agreement be made liable to perform a bargain not entered into with the other party. This Court held that such course of conduct was contrary to fundamental principles of justice followed in this country and shocked its conscience. It is manifest that the Arbitrator erred in assuming that he was only interpreting the terms and conditions of the contracts/MLAs and was, therefore, at liberty to place a contrary construction on the express language used therein, which was actually reflective of the policy decisions of the Railway Board, Ministry of Railways, Government of India, in its circulars referred to supra. Merely because there was a subsequent change in the policy with prospective effect, based on the recommendations made by the IRCTC itself, whereby parity was brought about in the tariffs to be paid to the caterers for the first and the second regular meals, it did not have the effect of wiping out the policy decisions set out in Commercial Circulars No. 67 of 2013 and 32 of 2014, during the period that they continued to hold sway and were in operation. The caterers were not entitled to seek parity of tariff/apportionment charges for the second regular meal on par with that payable for the first regular meal during the period in question. Similarly, as the Railways was well within its domain under Clause 8.1 of the MLA in reinstating the welcome drink to be provided to passengers at the beginning of the journey, which was, in fact, contemplated in the bid document dated 27.05.2013, the caterers were not justified in seeking reimbursement on that count also - The errors committed by the Arbitrator were not noted in the correct perspective by either the Court exercising jurisdiction under Section 34 of the Act of 1996 or by the Court exercising appellate jurisdiction under Section 37 thereof. The Award, being patently illegal and in conflict with the public policy of India is, therefore, unsustainable in law and is liable to be set aside under Section 34(2A) and Section 34(2)(b)(ii) of the Act of 1996. The appeals filed by the Indian Railways Catering and Tourism Corporation are allowed setting aside the Award dated 27.04.2022, corrected on 26.07.2022, along with the judgments and orders dated 10.02.2025 and 13.08.2024 passed by the Delhi High Court, and the appeals filed by the caterers, viz., M/s. Brandavan Food Products, R.K. Associates and Hoteliers Pvt. Ltd. and Satyam Caterers Pvt. Ltd. are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the arbitral tribunal exceeded its jurisdiction and effectively rewrote the contract by construing policy circulars and contractual terms to award differential reimbursement for the second regular meal, such award being susceptible to setting aside under the limited grounds in Section 34 of the Arbitration and Conciliation Act, 1996. 2. Whether the arbitral award is vitiated by patent illegality or is in conflict with the public policy of India (including the doctrine that a tribunal cannot impose a term or create a new contract not agreed by the parties), attracting Section 34(2A) and Section 34(2)(b)(ii) of the Act. 3. Whether claims for past reimbursement were barred by limitation and whether exclusion of time spent pursuing a writ petition is correctly applied under Section 14(2) of the Limitation Act, 1963. 4. Whether the conduct of the parties (raising bills and acceptance of payments) amounted to waiver, estoppel or affirmation of the contractual position so as to preclude the caterers from claiming differential payment or reimbursement. 5. Whether claims for addition of an item (welcome drink) and its quantification can be denied on contractual/policy grounds or evidence deficiency, including whether the arbitral tribunal properly relied upon documents and testimony (including evidence under Section 65(g) of the Evidence Act). 6. Whether the arbitral tribunal had power to award interest as it did (simple interest on a lumpsum from a date), and whether the appellate court could set aside the interest component without otherwise modifying the award. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Arbitrator's jurisdiction and interpretation of contract v. rewriting the contract Legal framework: Section 28(1)(a)-(3) (arbitrator to apply substantive law and take into account terms of contract and trade usages); Section 34 (limited grounds for setting aside awards); Section 34(2A) (patent illegality); Explanation 1 to Section 34(2)(b)(ii) (public policy includes fundamental policy of Indian law and most basic notions of justice). Precedent treatment: Earlier authorities establish that a tribunal must decide in accordance with contractual terms and trade usages and cannot impose a new bargain; Courts may interfere where an award effectively creates a new contract or contravenes fundamental principles of justice. Interpretation and reasoning: The contractual regime incorporated and gave primacy to Railway Board policy/circulars (order of precedence in interpretation clause). The policy at relevant times (corrigenda) mandated reinstatement of a regular meal in place of a combo meal but simultaneously stated 'without any increase in charges', and such policy was reflected in the contracts. The Arbitrator construed the contract to permit recovery of the differential between a regular meal and the combo-meal tariff for the second meal, effectively disregarding the binding policy language and the expressly incorporated hierarchy of documents and thereby importing an obligation (or right to reimbursement) not founded in the operative policy/contract as it stood. Ratio vs. Obiter: Ratio - An arbitral tribunal cannot disregard or contravene binding policy documents incorporated into the contract and thereby rewrite contractual obligations; where it does so, the award may be set aside as patently illegal and against public policy. Obiter - observations on commercial fairness and superior party dominance are supportive but not primary legal basis. Conclusion: The Arbitrator exceeded jurisdiction by interpreting contractual terms contrary to extant policy circulars incorporated in the contract; that error justified interference under Section 34 as patent illegality and conflict with public policy. Issue 2 - Public policy, patent illegality and creating new contractual obligations Legal framework: Section 34(2)(b)(ii) and Section 34(2A) as amended (patent illegality; award in conflict with public policy where induced by fraud/corruption or contrary to fundamental policy or basic notions of justice). Precedent treatment: Decisions hold that courts may set aside awards that create new terms not agreed upon or impose unilateral alterations that shock conscience; only exceptional cases justify interference. Interpretation and reasoning: The Award applied an interpretation that produced parity retrospectively/effectively imposed a differential reimbursement despite the binding policy declaring no increase in charges for reinstatement of regular meal. That constituted an intervention inconsistent with the parties' bargained allocation and with policy decisions which remained in force (the writ challenge having failed). The Arbitrator thereby crossed the line from interpretation into rewriting, falling within the exceptional category warranting judicial interference. Ratio vs. Obiter: Ratio - Award that rewrites contract or imposes a new obligation contrary to incorporated policy is in conflict with public policy and may be set aside as patently illegal. Obiter - extent to which prospective policy adjustments may inform equitable interpretation. Conclusion: The Award offended public policy and disclosed patent illegality; it was therefore susceptible to being set aside under Section 34(2A) and Section 34(2)(b)(ii). Issue 3 - Limitation and exclusion of time spent litigating writ petition Legal framework: Limitation Act, Section 14(2) (exclusion of time when party is prosecuting judicial remedy); Section 21 notice and arbitral limitation principles. Precedent treatment: Courts accord leave for exclusion of time reasonably spent pursuing other remedies; tribunal's factual finding on exclusion ordinarily respected unless perverse. Interpretation and reasoning: Arbitrator excluded time spent pursuing writ petition (period when challenge to circulars was before High Court) and fixed limitation cut-off accordingly; this finding was affirmed by lower courts as supported by record and reasoning and not perverse. The cause of action calculation and exclusion were fact-specific and within tribunal's competence. Ratio vs. Obiter: Ratio - Exclusion of time spent in prior judicial proceedings is a permissible and fact-sensitive exercise; appellate court should not disturb such finding absent perversity. Obiter - none. Conclusion: The tribunal's limitation computation (with exclusion) was upheld and did not warrant interference. Issue 4 - Waiver, estoppel, economic duress and conduct of parties Legal framework: Contract law principles on waiver and estoppel; Clause in MLA negating waiver by delay; coercion/economic duress jurisprudence. Precedent treatment: Waiver and estoppel require clear proof; mere acceptance of payments may not extinguish substantive rights where contract or surrounding circumstances indicate compulsion; courts require evidence for economic duress. Interpretation and reasoning: The Arbitrator found the caterers continued billing under compulsion given advance license fees/security deposits and dependency on monthly payments; Clause 21.6 disavowed waiver by mere delay. The High Court Judge differed on applicability, viewing contractual clauses (empowering unilateral tariff change) as precluding a waiver argument. The Division Bench accepted the Arbitrator's inference that acceptance of payment did not ipso facto bar the claim given the power imbalance and contemporaneous representations made by caterers. Ratio vs. Obiter: Ratio - Whether acceptance of payment amounts to waiver is a fact question; absent conclusive evidence of voluntary relinquishment, inference of non-waiver may be reasonable and not amenable to appellate reappraisal. Obiter - discussion on economic duress as dependent on evidentiary factors. Conclusion: The finding that billing/acceptance did not constitute waiver was a permissible inference on evidence and not a ground for setting aside the award by itself; however, this conclusion is rendered moot where the Award otherwise rewrote contract contrary to binding policy (see Issue 1). Issue 5 - Welcome drink: contractual coverage, evidence and quantification Legal framework: Contract clauses reserving right to change menu; bid documents that originally contemplated welcome drink; evidentiary standard (Section 65(g) Evidence Act) for account computations. Precedent treatment: Additions to scope enforced if within power to change menu; tribunal's reliance on documentary and CA-certified computation ordinarily respected unless no evidence at all. Interpretation and reasoning: The bid documents had originally contemplated a welcome drink; subsequent circular formally restored/confirmed it. Clause empowering changes in menu covered such addition. The Arbitrator accepted chartered accountant's certified computations under Section 65(g); no contrary detailed computation was placed before tribunal. Division Bench and Trial Court accepted sufficiency of evidence for quantification though they differed on other legal points. Ratio vs. Obiter: Ratio - Addition of welcome drink fell within contractual power to change menu and claim for reimbursement required proof; tribunal's acceptance of documentary/CA evidence for quantification was permissible and not to be disturbed absent absence of evidence. Obiter - discussion of offset argument (reduction of breakfast item) requiring proof. Conclusion: The claim for welcome drink was, in principle, within the scope of the contract-change power and the arbitral tribunal's evidentiary acceptance for quantification was sustainable; but final outcome affected by finding that the Award as a whole was patently illegal on broader ground (see Issue 1-2). Issue 6 - Interest awarded by the Arbitrator Legal framework: Section 31(7) of the Act (arbitrator may award interest at reasonable rate); principle that interest on sums becoming due in instalments arises from respective due dates. Precedent treatment: Arbitrator has discretion to award interest; courts may interfere where award grants interest on amounts not yet due or on a lumpsum from an antecedent date without lawful basis. Interpretation and reasoning: Arbitrator awarded simple interest on the entire sum from a single date though amounts fell due in instalments over time; Division Bench correctly found that interest on amounts not due as on that date could not have been awarded as such and set aside the interest component. The counsel for claimants conceded error on interest computation. Ratio vs. Obiter: Ratio - Tribunal's discretionary power to award interest is subject to temporal causation of obligations; awarding interest retrospectively on sums not yet due is impermissible. Obiter - appropriate alternate cut-off dates for interest (e.g., claim filing date) are matter for tribunal or agreed computation. Conclusion: Interest component as awarded was excessive/incorrectly dated and properly disturbed; however, subsequent appellate findings on main award prevailed on other grounds. Overall Conclusion The Court concluded that the arbitral tribunal's core award (reimbursement differential for the second regular meal) rested on an interpretation that effectively rewrote the contract contrary to binding policy circulars incorporated into the agreements. That error amounted to patent illegality and conflict with public policy, warranting setting aside of the Award under Section 34(2A) and Section 34(2)(b)(ii). Ancillary findings (limitation, evidentiary sufficiency, and waiver) were fact-sensitive and largely permissibly made by the tribunal, but could not salvage an award founded on the fundamental illegality identified. The interest component was also improperly awarded in timing and was liable to be set aside. Parties to bear their own costs.